Greetings, and welcome to the American Vanguard Third Quarter 2020 Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded Monday, November 9, 2020. And I'd now like to turn it over to Mr. Bill Kuser, Director of Investor Relations. Please go ahead, sir.

Thank you very much, Keith, and welcome everyone to our third quarter and 9-month earnings call. A few orders of business before we proceed. We are providing to the SEC our 10-Q report today. There has been some delays on the part of the SEC. But we will get that done today. Also in our press release, you took note of the fact that we are providing some slides to accompany our conversation today. They deal with the quarter and they deal with our strategic growth initiatives. So if you're all online, you will see them scrolling across your screen. If you are on audio, telephone only, you can see such slides by going to our website. There is an icon on the very front page that allows you to see those slides. Our usual cautionary reminder, which we will do before beginning. 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 include weather conditions, changes in regulatory policies, competitive pressures and other risks that are identified 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. In today's call, we will first be starting with our Chief Financial Officer, David Johnson, who will review the quarter and the 9 months followed by Mr. Eric Wintemute, Chairman and CEO of the Company, who will talk about our strategic growth initiatives. We also have Mr. Bob Trogele present to answer any questions you may have. So with that, I will turn the call over to David Johnson.

Thank you, Bill. For a change of pace during this call, I will lead off with my remarks on our financial performance during the reporting periods and my analysis on issues of greatest interest to our investors, financially speaking. I will then turn the call over to Eric, who will give you his thoughts on our 3 to 5-year targets for growth. Going forward, we intend to keep you apprised on how we are doing against these targets, just as I do with respect to matters that are key to investors, understanding our business performance such as inventory and borrowing capacity. With regard to our public filing, as Bill mentioned, our 10-Q document for the 3 and 9 months ended September 30, 2020, is presently in queue to be filed today. I do understand that the agency that assists us with our filing has a large number of documents in the queue at this time. Everything I am covering here is included in more detail in that document. As we have noted in previous calls, the Company is fortunate to participate in industries that are considered part of critical infrastructure in all countries in which we operate. As a result, our customers and our suppliers have all operated more or less without disruption during the pandemic. This has continued through the third quarter. Having said that, the pandemic has impacted us in a few ways, including our ability to present new sales and marketing ideas such as new products face to face with customers in the field. We have also seen customer buying patterns that appear to have been moderated in the face of pandemic-related uncertainties. On the other hand, the same restrictions have caused us to spend less on operating expenses. These marketplace changes have been challenging to manage.…

Thank you, David. Many of our investors have expressed an interest in our strategic direction and longer-term prospects, particularly in light of our increased emphasis on technology innovation. In that spirit then, rather than getting into the weeds on market conditions over the past reporting periods, I would like to look forward to where we hope to be in the next 3 to 5 years. We have 3 primary growth platforms within our business: our core business, our green product lines, and our precision application technology led by SIMPAS. There are synergies between these platforms. For example, SIMPAS is a market access tool for both core products and green solutions such as Agrinos biologicals. Also, there is some overlap between these platforms. But for directional purposes, it is useful to take each platform in order. Our core business consists largely of our synthetic chemistries. Using 2019 numbers as a reference, let's build a model using a baseline of annual sales of $468 million. We have grown our core business in 3 ways: First, organically, that is through additional market penetration; second, through our new product pipeline, that is making new formulations or getting new users for what we already have; and third, through acquisitions. If we were to grow at a rate of only 2% per year, we should be at $507 million by year 3 and $527 million by year 5 in organic growth. Let's add to that our new product pipeline. We regularly introduce several new products per year. For example, in 2020 alone, we launched 5 new formulations. As these new products get traction and we continue adding new introductions, we expect that we will add another $37 million by year 3 and $109 million by year 5. The core business plus new pipeline products puts us…

[Operator Instructions] The first question is from the line of Joseph Reagor from ROTH Capital Partners.

I guess first thing, thanks for providing this longer-term outlook. I know a lot of us has been asking a lot of these questions anyway. But kind of like just a base question on it. When the world return to normal, what would be your expectation for annualized number, like ex-COVID impacts without all the growth?

So you're talking about our core business?

Yes. Like currently the core business if it wasn't for COVID impacts around the world, what do you think the annualized 2021 revenue might be?

Yes. I think so -- probably in the range of $5 million to $10 million is, I would say, COVID-related. The growth part where we have -- again it is part of our core business, where we have our products that expanded -- again a lot of the products that we were looking to develop in the market this year we weren't able to accomplish because of not being able to go face to face in the fields. And so a lot of our product development and customer work was remote. So I think also what I see is that we've really been in a commodity down cycle since the prices collapsed in '14. And although they've stabilized, this is really kind of the first uptick that we're really seeing and I think with more normalizations and particularly the idea of this vaccine does indeed work, I think so many of the restaurants and that area of food consumption and more normalcy will increase demand for crops overall. So I think we're on an upswing as we go into this 2021 year.

Okay. Fair enough. And then kind of looking backward a little bit, you guys then gave a ton of what I would call market commentary on the quarter. It seems like there was a lot of impact in Q3 related to weather and then related to crop pricing. Is there any way you or David could quantify that? On a sales number, what do you think that was as an impact?

Well, I think if we just looked straight at corn, and David, we were looking at just corn. So -- not corn, I'm sorry, cotton. So I think for the quarter on cotton -- sorry, just give me a second, that was -- that was about $6 million.

$5 million -- $6 million, yes.

3 x $2.5 million, so yes, just about $6 million. So that's probably kind of the biggest. The other, we had probably stronger cushion in Dibrom last year as a lot of companies -- a lot of the perishers were placing orders for fourth quarter. This year they're -- so far, they've been kind of chewing through some of those pre-orders that they placed with our main distributor. So we see inventory drawing down and would look probably at the end of this year to have lower inventories of Dibrom. So those are probably the 3 products that contributed the most.

I also mentioned pest strips were down a little bit and that was pandemic-related because of these in bars and restaurants.

All right.

Okay. And then one final thing. Any concept of how much revenue you might pick up in Q4 that was lost in Q3 for timing reasons or whatever? And then kind of like a brief outlook of how Q4 is going so far? It seems like prices are up and maybe demand is up, too.

Yes. We feel good about Q4 for a variety of reasons. One is, as you mentioned, there are some carryover, just timing that didn't happen in Q3. The soil fumigant business has been very strong for us. We're fortunate not to have much in the way of snow. So a lot of ground got treated, although we did -- we've got snow-capped mountains here in Southern California today. But then as we look into the 2021 season, we did hear during the course of '20 that corn rootworm pressure has increased, and I think people are a little more bullish now on the concept of treating -- treatment for corn rootworm. So I think we'll see an increase in our corn activity.

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

One follow-up on the impact of cotton this season. Just curious if this will translate into a headwind for 2021 not unlike what happens in -- for the Corn Belt when we have weak season and then sort of an overhang from excess inventories in the channel. Given that you then, I guess, couldn't apply -- they couldn't apply -- in the Southeast they need to apply your products in West Texas. Is that -- so are we going to see an overhang, a headwind from channel inventories in that key product line next year?

Yes. I don't think so. As we mentioned earlier, I think we saw orders being placed during this -- really since the pandemic started where you might get half a truckload or a truckload order pallet at a time. So we got a lot of orders but they were generally smaller as we saw everybody trying to preserve cash and watch their inventories levels -- level. So the sales that we see that didn't occur, we don't see an increase in channel inventory. We have more inventory then what we would like to have. But -- yes, I don't -- we don't see a headwind going forward.

Okay. And then you expressed some optimism about the fourth quarter and certainly into 2021 largely on -- while there's a lot of crosscurrents, but largely on firmer ag commodity prices. In terms of the channel demand that you're starting to materialize in the fourth quarter, could you just talk about which product lines is -- where is that most pronounced? Is it really products tied to corn or is it more across the board? Just a little bit more color on that would be appreciated.

Yes. I think it's across the board. I mean we were struggling for supply of Bromacil and that has resolved itself. We've had some tightness in a couple of the -- couples of the product lines. But yes, I think generally, if the ag industry can get back to a more normalized approach and again if we're -- if people -- I mean if today's reaction is any sign of that, I just -- I think, across the board, not just domestically, but globally we're going to see people pushing to meet the demand that should be up for this next year.

I appreciate your comments about the possibility that there is increasing corn rootworm pressure and your citing, the -- maybe the absence of crop rotation more recently. That seemed to be a contributor back in -- when corn prices spiked, what was that, '12, or I guess 2012 or '13 that big drought that 1 year. So I mean, are you suggesting that basically -- the farmers generally have adhered to good crop rotation practices stayed between then and up until now so that's diminished crop protection? Is there anything else that's contributed to diminished pest protection than pest protection by crop?

Yes. I mean obviously there is the trade as they advance or don't advance or the weather conditions certainly being conducive. I think all estimates are that corn will be up probably 2 million acres this year, this season versus last season and it was pretty strong last season. So I think those are the factors. Bob, I don't know if you've got any more color, you'd like to add on that.

So I would look at soybean market driving a little bit the corn market. I mean the stock and use ratios that are at a 23-year low. So the market is very tight in soybeans. So maybe corn may be up a little bit depending on demand coming out of China. But the big news really is that this year farm income is much more profitable than it was in 2019, 2020. So going into the spring, I think, you might see a little bit more of a loosening of the belt by the farm community. I think that's a plus going into the season. I think that I would say that there are -- right now Brazil and Southern Brazil there is a drought, which is going to hurt a little bit their production capabilities. I think the Chinese are coming back online with their purchases. So unless we really have another COVID-19 effect, and we all hope that it is not the case, I think next year things are shaping up nicely.

Yes, I would just add to that. I was down in Brazil a couple of weeks ago and one of the things they told me was that the Brazilian government is opening up import lines of corn from the US this year because they're out. The Chinese really wiped them clean as they shifted away from US. And so they don't have enough corn to meet their -- just their demand this year given the drought and the expected yields.

Interesting. And can -- just one last one on the corn rootworm, the -- you guys have probably the -- maybe the most efficacious, I guess, the soil-applied insecticides. But then there is the liquid variants that are maybe less robust. But there is also the possibility that Monsanto was going to have an RNA -- RNAi technology that was approved and relevant in that market. Can you just sort of talk about what the competitive landscape looks like today for -- if, in fact, we do see this intensifying corn rootworm pressure, what the landscape looks like for your product vis-a-vis your competition?

Yes. And one thing, too, just before I turn it over to Bob for this. So we are expecting to get into the prescriptive level. I mean we did it on a beta testing last year, but this year we'll actually have quite a few more systems out there. And also, we'll have what's called the -- what we call SmartBox Plus, which is essentially a SIMPAS system with a 50-pound SmartBox on it that would be able to apply prescriptively a corn soil insecticide. So I think we'll get a lot more attention in that prescriptive field. So anyway -- but Bob, you want to [indiscernible]

Yes. So I'd like to just confirm what you said that AMVAC has the best technical solution for high corn rootworm pressure. It's also the most expensive solution in the market. So we're the market leader in that. The market is really broken down into 2 sectors, granular and liquid. I would say that the granular market is holding both on price and volume. We've increased, I would say, in the last 2 years, our share marginally in that market. The liquid market seems to be more competitive and is looking to be a little bit more price sensitive. So hope that answers your question.

And do you know -- any visibility on the RNAi technology?

So yes, if I turn the clock back to 2015, I think it was supposed to be launched in 2020 and we haven't seen any progress. There seems to be that -- the case that they are still a long way off from the market, if it comes to the market at all.

[Operator Instructions] There is a follow-up from the line of Chris Kapsch.

I appreciate your sort of the -- trying to provide a bigger picture, longer-term snapshot of what your growth factors might look like. I'm curious on the organic piece of it, what do you anticipate sort of the mix and therefore margin profile look like? And two, if I understood you correctly and I have to back and look closely at the numbers you provided, but you said -- so the products -- the new formulations that you've launched that you anticipate, I think just -- you said, just 5 new products alone might contribute $37 million in revenues by year 3 and $109 million by year 5. And so that looks like a pretty steep hockey stick kind of adoption for those products. So I'm just wondering what the basis for that belief is and does that -- does the math that you provided in that piece of the 3 buckets, does it reflect that some of these new formulations might cannibalize some of the core sales that's baked into the 2% for your core sales?

Yes. So the 5 new products were just what we launched in '20. I think we did 10 or 12 the previous year. We've got several on target for '21 and '22. So it's kind of the cumulative effect of these new products that we're launching each year. So it's not based on 5, it's based on more than 20, I would think, at this point. So that's one piece. And I'm -- can you refresh me again with what your other question was?

Does your growth expectation there reflect some cannibalization from those new introductions of your existing legacy products? And then, in this sort of bucket of the 3 different vectors that you discussed, what is sort of the gross margin or mixed profile expected from the aggregate of that tranche of sales?

Yes. When we did this, we tried to pull the growth of core products out from the growth that we're talking about with the product -- new products. And I don't think we're anticipating cannibalization. We're looking at better market penetration. So I'm sorry, the last question again was what?

Any expectation on the gross margin profile of the mix of the products in that first bucket of sales that you described there as core with new products?

So I think where our margins, let's say, have gone from -- I mean, our margins in the US still are in the mid-upper, upper 40%s and have stayed pretty consistent. Our international sales, as they've grown, have brought our overall margins down. As we've mentioned that we were expanding our market penetration through acquisitions or distribution. But as we take kind of new products and particularly the biologicals, they have very high margins and as we position those globally, we see particularly in that green line area that our margins should increase well across the globe.

Okay. And then one last one, just in terms of funding this ambitious growth that you envision, so what sort of -- do you just envision the Company being completely self-funding that you'll be able to drive this -- these growth opportunities solely from free cash flow from the core portfolio?

Yes. As it stands now, that's certainly the case. Obviously, if there was a major acquisition, we're talking hundreds of millions that sort of thing that would probably require maybe partnership-type approach. But not nothing -- certainly nothing in this model reflect anything in that arena.

There are no other questions in queue.

Okay. Well, I appreciate again you guys have given input and asked for -- asked for us to put together a model. And I guess, what we'll be doing each quarter is we'll pull off different pieces and kind of give updates as we move through our quarterly growth expectations. So thank you all for joining us and we'll -- next call would be sometime in early March. Thank you very much.

That will conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.