Greetings. And welcome to the American Vanguard 2020 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's conference call is being recorded. [Operator Instructions].I would now like to turn the conference over to your host, Bill Kuser, Director of Investor Relations. Thank you. You may begin.

Well, thank you very much, Erica. And welcome, everyone, to American Vanguard first quarter 2020 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 assisting in answering your questions, Mr. Bob Trogele, the company's Chief Operating Officer.This afternoon, American Vanguard has filed or will file our Form 10-Q with the SEC, providing additional detail to the results that will be discussed in this call.Before beginning, let's take 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. Such information will not necessarily be updated by the company.With that, we turn the call to Eric.

Thank you, Bill. Good afternoon, everyone. We appreciate your continued support of American Vanguard. For those of you that have logged in via computer, we will be showing a brief webcast video. For those of you who've logged in by phone, you'll be able to hear the audio portion.Let me start by saying that we wish you the best during these challenging times. Many things have changed since January 1. And we have adapted to those changes while keeping our workforce healthy and our business strong.First, allow me to place American Vanguard within its proper context in light of COVID-19. We are fortunate to be operating within 3 of the 16 categories of essential businesses under CISA guidelines, namely food and agriculture, chemicals, and public health.As part of the country's critical infrastructure, we have, as President Trump called it, a special responsibility to maintain normal business operations. We've taken that charge seriously and will continue to do so.From the start of the pandemic, we have been operating continuously, both here and abroad, including all of our manufacturing facilities.However, answering this call has required a great deal of adjustment. And as we have reported in our proxy and report in our Form 10-Q, we took early action to understand, contain and mitigate the risk posed by the coronavirus.To that end, we formed a pandemic working group to coordinate remote working, to implement policies on social distancing and quarantine, and to keep the workforce up to date on a daily basis regarding COVID restriction orders, pandemic curves and testing trends.For the last eight weeks, I've been hosting a two-hour weekly state of the company teleconference with 40 of our key global managers during which we track business unit performance, workforce health, supply chain and logistics, and government actions in multiple countries. I'm…

Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we have filed our Form 10-Q for the three months ended March 31, 2020 today. 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 first quarter of 2020 were down about 4%, ending at $96 million as compared to $100 million this time last year.As Eric discussed, while our domestic was flat quarter-over-quarter, our international business was down about 9%. The drop in international sales was driven by four factors. First, we have seen reduced pest pressure and associated sales in Brazil, lower MOCAP sales as a result of regulatory changes in Europe. Further during the quarter, the Brazilian real, the Mexican peso, and the Australian dollar, all important currencies for the company, suffered significant devaluation, particularly during March, impacting the translation of their sales and their expenses into US dollars for inclusion in the company's financial statements. These dynamics were offset by strong growth in sales in Mexico and Australia.As you can see from our earnings release, international sales amounted to 36% of our business in the first quarter of 2020 as compared to 38% this time last year.With respect to gross margin performance, during the first quarter of 2020, our overall gross margin declined from 42% to 40% in comparison to 2019. This result is within our normal range of margin performance.Domestically, we improved gross margin in the crop business to 48% as compared to 47% in the first quarter of 2019. By contrast, gross margins for our non-crop business were down quarter-over-quarter because of two reasons.First, in the second quarter of 2019, we had strong royalty earnings for our natural oils business. This year, that royalty stream has shifted and we…

Thank you, David. Now, I'd like to update you on our strategic growth initiatives in product development, Envance technology and SIMPAS commercialization.As indicated in our March call, we've been very aggressive during the last several years in refining our process for developing a new product pipeline.In addition to new product acquisitions, which has always been part of our successful business model, our increased emphasis on technology innovation has resulted in a significant number of new formulations, which expand the application potential of many products in our existing portfolio.Our plans over the next three years involve the introduction of more than a dozen differentiated formulations of herbicides, insecticides, and fungicides for use on corn, soybean, canola, peanuts, rice, cotton, and turf applications.So, we are reiterating the forecast that we issued in March, namely, that these new products could contribute incremental revenue of more than $10 million this year, $25 million in 2021 and $65 million by 2022, with overall gross margins in the 50% range.Progress within Envance technology is also going extremely well. Our largest near-term revenue stream lies with Procter & Gamble's ZEVO brand for consumer pest control products.As we have discussed previously, the Envance formulations use in ZEVO interrupts specific neurotransmitters found only in invertebrates, such as insects, but not in vertebrates such as humans and pets. This preferred safety advantage allows ZEVO to command a premium price and should provide significant market segment penetration.On a note of personal experience, I have recently visited a number of Home Depot and target locations to get a gauge of P&G's retail marketing prowess. On numerous occasions, I have seen shelf stores fully stocked during my morning visits and virtually sold out during the revisits to those locations later in the day. Even at a 2 to 3 times premium price point,…

[Operator instructions]. Your first question comes from Joseph Reagor with ROTH Capital Partners

Hey, Eric and team. Thanks for taking my questions. I guess, first thing, on the foreign exchange front, what are some of the additional impacts you guys are seeing with the strengthening US dollar? Are there any end markets where you have concerns about being able to maintain profitability or anywhere the exchange rates have dropped so far that it makes the potential area that you may elect to not provide chemicals to for a period of time?

I don't think we would suspend supplying, but I will start with Mexico where 60% of our business is done in dollars and 40% in pesos. They seem to be pretty well situated to increase prices as dollar is widely used throughout Mexico.Canada is not a major concern. We don't have a great number of products there, although we are expanding that market.In Australia, which is strictly in the Australian dollars, we generally do look to kind of increase and the terms are not particularly long, but the valuations certainly can affect the business there.Central America is pretty much all done in dollars, and so it doesn't have an effect there. But that leaves us Brazil where we are purchasing in dollars, but we are selling in reais.So, that probably is the area that maybe we have the biggest concern. Of course, we're also watching credit terms closely. Again, as we get into the second half of the year, we're going to have to assess the health of not only the currency, but the government and how that looks it will play out. But for right now, we think we're in a position to put through increases as our peers do. But I guess that would probably be the area of biggest concern.

Okay. And just a fine tuning point there. Can you remind as roughly what percentage Brazil represented of either total sales or total international sales last year?

2% last year of our total sales, yeah.

Okay. All right.

We are calling for them to grow, I think.

Okay. Fair enough. And then, David mentioned the part of the balance sheet flexibility is so you guys can continue to operate the way you've been operating. And I believe he mentioned acquisitions. Are you guys still examining acquisitions? Are you guys seeing any interesting opportunities because of this current crisis?

I don't know whether it's because of the current crisis. We generally – our larger peers generally look to trim their sales every three to five years. But we continue to see attractive businesses, our product lines. We're, of course, mindful of our debt to equity ratio. And so, I think we will continue to look at projects, but we'll probably be more conservative in our approach as to whether we put an offer or close the deal in that sector. I think we want to be in a position that if a really great opportunity comes along that we would not have to pass on out at this time.

Okay. Then one final thing if I could. On SIMPAS, I know it's been a long road and you guys are kind of finally nearing the finish line in the commercialization of it, but it seems like the market doesn't give you guys a lot of value for it. Have you considered the possibility that once you go to the point of commercialization, it might be worth more to someone else than the market is giving you for it and that maybe the best way to monetize it would be to sell it?

I guess everything in business is for sale. That being said, I don't anticipate anybody coming along and putting a number down that we would accept. I think – and you say the market hasn't given us credit for it. I still think there is doubt as to how effective this is going to be and what kind of acceptance there is. Of course I, since the last 10 years, have felt this is going to be a game changer and I'm happy to report that many people inside of our company and outside our company are of that same mindset.So, I think we have been somewhat conservative in the numbers. I think from our internal standpoint, our people really wanted to see this particular last set of field testing. We actually did commercialize small amount of the containers. And now, I think are going to focus on what's our rate of acceleration here.So, with that, I would hope by the next conference call that we could probably share some plans and visions of what we think will happen for this upcoming season. I think we will be positioning both product and SIMPAS systems in the fourth quarter.

Okay. Fair enough. I'll turn it over. Thanks.

[Operator Instructions]. Your next question is from Chris Kapsch with Loop Capital Markets. Chris, your line is open.

Yeah. Good afternoon. So, I had a question, Eric, on your comments about the new formulations that you've developed from existing products. Just curious about some of the metrics that you gave there. Is that truly adjacent markets that you don't touch currently or is there some element of cannibalization of existing sales for those products?

I think for the most part, it is our expansions of both where we are. And then, when we look at our Impact products that we introduced, they're segmented for different parts of the market. And so, I think we're [indiscernible]. Bob, do you want to add some color.

Yeah. ImpactZ goes into the early pre-market. The Impact traditionally goes into the post-market. So, we're looking at white space opportunities and we're engineering and designing differentiated product for those white space opportunities. The idea is to engineer products for incremental growth.

Okay. So, it sounds like primarily focused on incremental applications that's limited cannibalization, Bob. Does that sound fair way of characterizing?

Avoid cannibalization. We want to grow.

Right. Okay. And then, I just had a follow-up on some of the commentary about the color, how this year's progressing. And I think that – so domestic sales flat. There's some obviously cross currents in different crops. So, one thing that Corteva reported – when was that – I guess, last week, really strong corn acreage, probably more than a lot of the trade expectations were. And we'll see how much if we lose some of that acreage way north in terms of later planning. But just wondering, so what are you seeing in your corn business given what looks like really strong acreage across Midwest, albeit against tough comp? Is there some reason you would underperform the market in that particular segment? I think the narrative had been that your channel inventories were okay. So, it seems like – I get corn is a smaller piece of the overall portfolio, but I would've expected to see, given the year-over-year growth in corn acreage, that to move the needle a little bit for your domestic crop business. Thanks.

Yeah. I think we also thought along those lines. However, corn price has been where they are. [indiscernible] seen some pushback in insecticide treatment. But, Bob, if you've had thoughts on that as well.

Yeah. So, right now, where we are, it's a little bit early. From a Corteva perspective, you're talking primarily about seed sales, which the prediction – what I saw this morning is 96 million acres and 27% to this morning has been planted. So, there is still plenty to go. And while we track EDI, we think it's going to be a solid year and then maybe slightly up. But it's driven by pest pressure and it's driven by corn on corn. So, that varies from farm to farm. We had a good soil insecticide year last year. And so, I think that segment is relatively stable. It's a nice franchise for us. We don't expect any downsides, maybe some upsides.

[indiscernible] we're going to wind up with considerable upside.

That's correct.

Yeah. I get the commodity price environment. But they're planting corn nonetheless, like 96 million acres, give or take, right? So, is there – to the extent that growers are looking to [indiscernible], particularly those that are doing corn on corn, I get some of it's like – has had to shift to soy last year and then pivot it back to corn this year and so forth, but to the extent they're planting corn in the heart of the corn belt there, is there a way to, -- I guess they can just sort of take their chances and hope that there was light pressure, but we had a mild winter. Is there other ways for them to get that protection? I get there's light – but is there now traits that are influencing your demand trends there for that product line?

I would say that the balance between traits, insecticides, a mix of both, looking at the statistics when we looked at that in March for 2019, the market was flat.

Flat for the soil applied insecticides you mean, or…?

Yes.

Got it. Okay. And then, just one quick one on inventories. Do you have a goal in terms of where you would hope – I don't mean qualitatively lower, but like where inventories might be? How much cash you hope to get out of working capital on the inventories this year? Thank you.

Well, as far as inventory, we had started – I think the last time we were trying to get – lift the target to $140 million. I think now, we think that we can get down to $135 million, providing we're able to execute the forecast that our team has put together globally. So, that'll certainly generate a fair amount of capital. I think cash, we ended last year at, what, $155 million. So, there should be a $20 million reduction or cash generation from that.

Okay. Thank you very much.

[Operator Instructions]. And there are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Okay. Well, again, everybody, thank you very much for listening in. And we look forward in our next call giving you additional information. Thank you.

And ladies and gentleman, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.