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Text: American Vanguard will file our Form 10-Q with the SEC tomorrow.
Before beginning, we should take our moment for a usual cautionary reminder.
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.
We appreciate your continued support of American Vanguard.
In our last call, we gave you our first impression of the coronavirus pandemic, which had begun to spread into the United States partway through the first quarter.
As part of the critical infrastructure, we were permitted, indeed, expected to continue operating in the midst of a global pandemic, the likes of which we had not seen in over a century.
In order to operate without disruption during the first quarter, we had to adapt.
Where we could do so, we shifted from in-person to remote work.
Where we had to maintain physical operations as in our factories, we implemented COVID protocols to keep the workplace safe and healthy.
At the same time, we learned to do business remotely while constantly checking on supply chain stability, logistics and customer demand.
Fast forward to the second quarter, the pandemic has become the norm.
We, and our suppliers, peers and customers, have become more accustomed to doing business through Zoom meetings, webinars and email.
We continue our efforts to ensure that internal communication was frequent and continuous.
In fact, I continue to hold weekly 2-hour state of the company calls with over 40 of my key managers during which I solicit input on operational challenges, sales opportunities and regional developments to ensure that we are all moving in the same direction.
In addition, on a daily basis, our pandemic working group advises the workplace regarding COVID-related news, government orders, research and company protocols.
During the second quarter, the pandemic shifted from Asia and Europe into the Americas, where we do most of our business.
In spite of that shift, I am pleased to report that we have had a low very low incident of coronavirus infection within our workforce.
That nearly all of the cases were community transmissions outside of our facilities and that our operations have not been adversely affected by the pandemic to date.
At this point, I want to pause to note that given the circumstances where so many businesses are struggling for survival, cutting workforces, taking federal loans or filing free organization, we are generating stronger returns than what we did while operating in the normal course of last year at this time.
Specifically, even while quarterly net sales declined by 8%, net income increased by 25% over the period.
At the same time, and I hate to steal David's thunder here, as of June 30, we have strengthened our balance sheet by reducing inventory even with expanded product offerings, reducing debt and improving cash from operations by $38 million so far this year.
Before turning the call over to David, let me take a moment to focus on the future.
We are still constrained from making specific forecast because we do not yet know how long the pandemic will last nor how it may affect our business or markets.
Nevertheless, we have adapted to the coronavirus with increasing success.
As we look forward to the balance of the year, we continue to believe that we are poised to perform in line with our peers.
This is so for a number of reasons, including favorable conditions for our mosquito control products, larger supply of Krovar and Hyvar herbicides for use on citrus, pineapple and McCabe and expansion of our Vapam fumigant business in Mexico, Central America and Australia.
I will then return to give you an update on some exciting initiatives to grow our business through new products and technology innovation.
As Bill mentioned, we will be filing our Form 10-Q for the three and six months ended June 30, 2020, tomorrow.
Everything I'm covering here is included in more detail in that document.
As Eric indicated, 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 suppliers have all operated more or less without disruption during the pandemic.
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.
On the other hand, you will see in our financial statements the same restrictions have caused us to spend less on operating expenses.
Furthermore, the company has been able to operate normally throughout the first half of 2020 without the need to apply for any COVID-related federal stimulus package loans.
Looking forward to the balance of 2020, we do not expect to need to seek such loans resistance.
With regard to our financial performance for the three months ended June 30, 2020, the company's net sales decreased by 8% to $105 million as compared to sales of $113 million this time last year.
Within that overall decline, our U.S. sales were down about $6 million and our international sales were down about $2 million.
International sales accounted for 44% of net sales as compared to 43% of net sales this time last year.
Eric has already discussed the main factors that have affected our second quarter sales performance.
In addition, the sales and expenses of our businesses in Mexico and Brazil were affected by the devaluation of the related currency exchange rates with the dollar, as compared to this time last year.
We believe these exchange rate devaluations were caused at least in part by the COVID pandemic.
Without the adverse currency translation effect on our Brazilian and Mexican sales, our second quarter consolidated sales would have been $3 million higher.
For the quarter, our manufacturing performance was strong, with factory operating costs well controlled and activity improved as compared to 2019.
As a result of these various dynamics, we improved our gross margin performance when expressed as a percentage of sales to 39% of sales in the second quarter of 2020 as compared to 37% in the same period of 2019.
For the three months ended June 30, 2020, our operating expenses decreased by $1.9 million or 5% as compared to the expenses incurred in the same period of the prior year.
In the prior year, however, we had a benefit of approximately $1.8 million, primarily associated with adjustments to deferred liabilities on a past acquisition.
That did not repeat in the current year.
Making adjustments for that item, our underlying reduction in recurring operating expenses is greater and amounted to approximately $3.7 million or about 10%.
During the second quarter, we recorded reduced interest expense.
Our average debt was a little higher because of all the acquisition activity during the last year, but we got a benefit from reduced borrowing rates in the United States.
Finally, our effective tax rate remained approximately flat compared to the same period of 2019.
In summary, for the second quarter, though our sales were down, selling prices and overall mix of sales remain good, factory performance was improved compared to 2019 and gross margins as a percentage of sales increased from 37% to 39%.
Our operating expenses and interest expenses were lower.
And as a result, net income increased by 25% in comparison to 2019.
Now let us turn to the six-month period ended June 30, 2020.
Sales were down about $12 million or 6% as compared to the prior year.
Within that performance, net sales of both our domestic and international businesses were down about $6 million each.
The devaluation in key currencies resulted in about $4 million lower sales when sales originally recorded in the Brazilian real and the Mexican peso were translated to dollars for inclusion in our consolidated financial statements.
Our factory performance for the six-month period was excellent, with costs up only 0.006% and factory output up about 13%.
This resulted in a much improved rate of recovery factory costs.
Overall, gross margin when expressed as a percentage of net sales was flat period-over-period at 39% of sales.
Our operating expenses remained almost flat in the first six months of 2020 as compared to the prior year.
In the prior year, however, we had a benefit of approximately $3.3 million, primarily associated with adjustments to deferred liabilities on a past acquisition.
That did not repeat in the current year.
Making adjustments for that item, our underlying reduction in recurring operating expenses amount to about $3.3 million or about 5%.
Our net income for the first six months of 2020 ended at $4.4 million or $0.15.
This compared with $7 million or $0.24 in the same period of 2019.
From my perspective, the operating and financial focus for the company remains as follows.
We continue to follow a disciplined approach to planning our factory activity, balancing overhead recovery with demand forecasts and inventory levels.
At the end of June 2020, our inventories were at $180 million.
This includes about $5 million of inventory related to acquisitions completed since June 30, 2019.
An adjusted or underlying inventory of $175 million represents an $18 million reduction as compared to $193 million this time last year.
We are highly focused on our balance sheet as we navigate through this pandemic period and having lower inventories at this point in the year is pleasing to report.
Looking forward, we expect inventories to reduce during the balance of the year.
Our present forecasts indicate that we will be below prior year numbers for both the remaining reporting periods of 2020.
The estimate of $145 million that we previously indicated remains a good estimate, excluding any acquisitions.
With regard to accounts receivable, as I noted earlier, our customers have continued to operate without significant disruption.
They are placing orders for our products and making payments when expected.
As a result, we have not seen any material change in the assessment of our credit risk exposure at the end of the second quarter of 2020 in comparison to prior quarters.
The variation between accounts receivable this year and prior comparative periods relate entirely to mix of products, specific markets, individual customers and contractual terms.
Our business has a distinct annual cycle, and we routinely experienced expansion in working capital in the first half of the year and a reversal in the second half of the year.
Year-to-date, in 2020, working capital has increased by only $8 million as compared to $45 million in the same period of 2019.
This careful management of working capital is driving the improved cash generation from our operating performance.
In the first six months of 2020, we have generated $6 million from operations as compared to using $32 million in the first half of 2019.
Comparatively, that amounts to a positive change of $38 million period-over-period.
With regard to liquidity, at the end of the second quarter, availability under our credit line was $49 million, which compares to $31 million at the same point in 2019.
As we progress through 2020, we intend to continue to focus on both working capital and debt levels.
Indebtedness ended at $159 million at June 30, 2020, as compared to $165 million this time last year.
During the last year, in addition to paying down $6 million in debt, we have funded more than $35 million in investments, including fixed assets, product acquisitions and technology investments from the cash generated from operations.
These investments are focused on developing our businesses for the future.
During the first six months of 2020, we have continued our normal business cycle of expanding working capital in support of our globally situated businesses.
However, we are focusing very carefully on every dollar of working capital, and our usual annual cycle expansion has been much more muted than in previous comparable periods.
In summary, though our sales are down in comparison to prior year, our product mix has remained strong, our factories have performed well and gross margins have remained solid.
We have performed well at controlling underlying operating expenses which are down.
Finally, our interest expense is down.
From a balance sheet and cash perspective, we are doing very well managing working capital, and our debt is lower than this time last year, notwithstanding our investments in long-term growth of our businesses.
Finally, availability under the credit line has improved.
With that, I will hand back to Eric.
I would now like to focus on the key strategic initiatives that will define and enrich our enterprise.
First, we continue to expand our product portfolio through core growth.
That is taking existing products and developing new formulations and mixtures tailored for use on new crops for providing greater views of application.
As we've reported in the past, at any given time, we are launching some of these solutions while several are in the pipeline.
We expect that these core growth products will generate over $100 million in high-margin revenues per annum within the next five years.
Beyond core growth, Envance technologies continues to broaden market opportunities with their insect receptor targeting technology.
As we've reported Envance technology and products are being commercialized by Procter & Gamble for their emerging, safe and effective Zevo brand consumer pest control products.
We are pleased that the Chief Executive Officer of P&G, David Taylor, mentioned Zevo in his recent earnings conference call last Thursday.
We see this as another positive sign for Envance's innovation partnership with P&G.
In addition to Envance's superior technology for households, we believe that this patented nontoxic alternative to traditional pesticides will be successfully leveraged into numerous consumer, commercial and agricultural markets to meet the increasing demand for low-impact solutions.
The Envance R&D team has also developed a new technology a new application for their technology to kill weed pests.
The company's new herbicide platform delivers broad spectrum efficacy that is safe for people and pets.
We intend to pursue all potential market applications to fully exploit the superior safety, functional performance and environmental sustainability of these herbicide solutions.
Of course, the Capstone of our technology innovation is SIMPAS, and I'm pleased to announce that the launch of this game-changing prescription application technology has arrived.
As we've previously discussed, SIMPAS enables growers to precisely target multiple crop inputs solely to the locations where they are needed in order to realize higher yields, significant cost savings and sustainable environmental benefits.
Having successfully completed multiple field trials this past spring, we'll be ready to commercialize the SIMPAS system in the fourth quarter of this year.
This launch represents a milestone for American Vanguard, and this is how we see it playing out.
Our market campaign will proceed on several fronts.
First, a group of the industry's largest distributors and retailers, including Nutrien, Helena, Simplot, Harvest Land Co-Op and Asmus Farm supply, all of whom participated in our 2020 spring trial, will use their positive experiences to promote the benefits of SIMPAS to some of their most valued customers.
Second, the AMVAC sales and marketing team, in conjunction with BEC Ag marketing consultants will identify progressive growers in each region who have analyzed their soil health and crop protection needs and can significantly benefit from the multiple capabilities of SIMPAS.
Third, SIMPAS will enable us to provide economically beneficial product solutions to a much broader segment of the corn market than we've reached with our SmartBox corn worm products.
For over 20 years, our current SmartBox users have recognized the benefit of using our granular insecticide products, primarily to address corn rootworm pressures which tends to be greatest in the I-70, I-80 corridor, where most farmers also grow soybeans.
As we expand our SIMPAS product portfolio to include soybean inputs, we'll be able to offer these same growers both corn and soybean solutions through SIMPAS.
In addition, unlike corn rootworm, nematodes are present and economically damaging numbers throughout the entire corn build.
By offering counter through SIMPAS for Nematode control, farmers throughout the entire region can significantly improve the return on investment as compared to the current practice of having to apply counter at a uniform rate across the entire form.
Add in Southern soybeans and cotton akers and SIMPAS becomes a vehicle to help us increase product sales in all three of these major row crops throughout the United States.
As a bridge for SmartBox users who aren't yet ready to make the jump to simultaneous prescriptive application of multiple products, we'll be offering a lower cost system called SmartBox Plus by SIMPAS in Q4 of this year, featuring SIMPAS components such as meters, harnesses and an ISO-based prescriptive controller.
The SmartBox plus by SIMPAS will enable farmers to gain the benefits of prescriptively applying a single product like counter for a smaller capital investment.
Like SIMPAS, SmartBox Plus by SIMPAS supplies only what's prescribed precisely where it's needed.
That's good for the environment and for the farmers' bottom line.
Fourth, this year, we plan to introduce SIMPAS into the largest crop protection market in the world, Brazil, where we'll be conducting field development trials in the fourth quarter.
Having just completed a comprehensive study with our consulting firm, context of the Brazilian market, we believe there is robust opportunity for our technology in that region, particularly given the extremely large row crop farming operations in such states as and Mapitoba.
Our market approach in Brazil will vary from that of the U.S. as we will generate sales both through distribution and from direct sales to large growers.
We also expect that regional crop input manufacturers will market their own products through smart cartridges, thereby increasing demand for the SIMPAS platform.
Further, having Trimble as our global partner, will give us ready access for both sales and support in that country.
As an additional entree into Brazil, in 2021, we plan to introduce SmartBox Plus by SIMPAS as a way to prescriptively apply counter to control nematodes in soybeans, the largest row crop in Brazil.
This market access was one of the key reasons for our acquisition of Defense Agrovant earlier this year or early last year.
In preparing for our domestic Q4 SIMPAS launch, we are manufacturing smart cartridge containers to meet demand for all the SIMPAS applied solutions that will be sold in 2021.
The initial filling of these product cartridges will occur in our access Alabama manufacturing plant, and they will be refilled in Q3 and Q4 of 2021 and using Smartfill refilling equipment that we've positioned with select SIMPAS applied solution retailers.
We are also adding staff to provide sales, installation and support training to Trimble dealers who will begin SIMPAS sales activities in October of this year.
In addition, we are working under NDAs with multiple peer crop protection chemical manufacturers as they conduct application trials of their own products using SIMPAS equipment.
It is gratifying that industry leaders are recognizing SIMPAS as a technologically advanced application system.
From the outset, we have aspired to have other manufacturers package and sell their own proprietary products for use as SIMPAS applied solutions.
Access to products from multiple companies greatly increases the utility of SIMPAS equipment for farmers.
We'll be announcing some of these collaborations in the coming months.
On a related note, we have seen strong enthusiasm for our SIMPAS at plant seed treatment process.
Since seed treatments are generally liquid products, we are focused on expanding our liquid product portfolio offering.
Finally, we recently received a U.S. patent for our ultimate supply chain tracking software.
As crop inputs are applied via SIMPAS, Ultimas enables complete traceability of individual product containers through every step of the supply chain, from the factory to the farmer and to the geotag field location where the product is applied.
Ultimas makes it possible to know precisely when, where and how much product was applied to any given location in the field and to identify the product containers associated with the application.
With consumers and food marketers demanding greater transparency as to how food is produced, Ultimas answers those demands through automated and verifiable traceability of applied crop inputs.
So on closing, I'm encouraged by what we have accomplished over the course of the second quarter and the year.
There is in part to managing a business in the best of times, but the true test is delivering results in the hardest of times.
In response to the turmoil brought on by the pandemic, our team has shown discipline from top line to bottom line, selling higher-margin products, launching newer acquired product lines, improving factory use, driving down inventory and debt and generating cash.
All the while, we have continued investing in our future through self-funded technology innovation.
And from SmartBox insecticide applications to SIMPAS multiproduct prescriptive applications to automated and verifiable product application traceability through Ultimas, we are on the leading edge of precision ag.
And with that, we'll field any questions you may have.

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american vanguard corp qtrly net sales of $105 million, compared with $113 million.

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