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Text: 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.
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.
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.
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 nine 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.
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 three and nine months ended September 30th, 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.
However, we have succeeded in maintaining a profitable performance throughout this difficult period.
With regard to our financial performance for the three months ended September 30th, 2020, the Company's net sales decreased by 6% to $117 million as compared to sales of $125 million this time last year.
Within that overall decline, our US sales were down about $7.5 million and our international sales were flat.
International sales accounted for 43% of net -- of total net sales as compared to 41% of net sales this time last year.
The main factors driving our third quarter sales performance are as follows.
In our US crop market, sales were affected by reduced cotton acres, which according to USDA statistics, are down about 11% or 1.5 million acres in 2020.
Acres were impacted by cotton commodity prices that are down, driving growers to plant alternative crops.
Our market performance has also been impacted by extreme drought conditions in West Texas and frequent hurricanes in the Southeast USA, both affecting grower ability to apply our products.
On a plus note, we saw a stronger than expected demand for our fumigant products, which are sold into the potato markets.
The better than expected performance is attributed to cautious reopening on schools and restaurants across the United States.
In our domestic non-crop market, there were small quarter-over-quarter changes with some decline on our pest strip products which are used in bars and restaurants that were impacted by pandemic restrictions.
With regard to international sales, which were overall flat, there were really three factors.
First, we had a very strong performance in Mexico, Central America and Australia.
By contrast, our Brazilian sales were down in real terms as a result of reduced insect pressure and challenges getting in front of customers because of pandemic restrictions.
In addition sales translated from local currency to US dollars were further negatively impacted by a decline in local currency exchange rates quarter-over-quarter.
Finally, whereas we saw Mocap and Nemacur sales lower in Europe, both products recorded significant sales increases in other parts of the world.
As you can see from the table, the US crop market was where we recorded reduced sales.
This is pretty much in line with other market participants that have reported Q3 results.
Our international business increased as a percentage of consolidated net sales and our comparatively low exposure to foreign currency rate movements was a strength for the quarter.
With regard to the nine-month performance, the various market dynamics described for the quarter are broadly the same.
Our US crop business was impacted by reduced cotton acres and by growers making cautious decisions with regard to input as the pandemic gradually revealed its impacts.
As an offset, we have done a bit better than expected with fumigants as schools and restaurants reopened.
And in addition, we've had the benefit of sales of products acquired in the fall of 2019.
Our non-crop business in mosquito control has been a little lower than we hoped given the storm intensity impacting our main markets, mainly due to vector control districts using existing inventory.
Finally, our international sales have performed well, given the challenges with currency devaluation in some of our key markets.
Moving now to cover our gross profit performance.
For both the quarter and the year-to-date, the trends are fairly similar.
In our US crop business the drop in gross profit was driven by our lower sales of cotton products and partially offset by strong fumigant sales.
In non-crop, the impact of reduced sales of Dibrom and pest strips were negative for the quarter and was somewhat offset by strong sales in our horticultural business which has slightly lower margins.
During the quarter, we also recorded higher royalty income on our Envance technology business.
For the international business, the decline in foreign exchange rates was offset entirely in the three-month period and to a lesser degree in the nine-month period by strong performances in Central America, Australia and Mexico.
As a result of these various dynamics, gross margin performance in the quarter reduced from 38% to 37% and for the nine-month period from 39% to 38%.
For the quarter, our manufacturing performance was strong with factory operating cost well controlled and activity improved as compared to 2019.
Generally speaking, over the long term our net factory costs amount to about 2.5% of net sales, reflecting some latent capacity in our plants should the need arise.
This kind of available capacity is necessary to help manage our production planning effectively.
In the third quarter our factories cost approximately 2.4% of sales as compared to 2% this time last year.
The third quarter is typically a strong manufacturing period for the Company.
For the first nine months, the net factory costs amounted to 1.6% as compared to 2.4% of net sales for the same period of 2019.
For the three months ended September 30th, 2020, our operating expenses decreased as compared to the same period of the prior year.
The underlying performance is greater than its parent from the published statements because in 2019 we benefited from an adjustment to earn out liabilities on past acquisition.
That benefit did not recur this year.
On the other hand, we did record a benefit of approximately $1 million during the third quarter because we completed an update to our environmental risk assessment related to the Brazilian business we acquired at the start of 2019 which led to a decrease in our liability in this regard.
As we have reported for prior periods this year, our operating expenses were reduced because travel and entertainment costs were lower as a result of pandemic restrictions in all jurisdictions in which we operate.
Our costs were also reduced because of the translation effect caused by devaluation of currencies that are important for the Company, including the Mexican, Brazilian and Australian currencies.
With regard to the nine-month period ended September 30th, 2020 compared to the same period of 2019, our overall expenses have reduced.
The reported reduction actually understates the real improvement because in 2019 we benefited from adjustments to earn out liabilities related to past acquisitions in the amount of $3.5 million that did not recur this year.
As a result, our underlying costs are down approximately $5.5 million or 5% for the nine months.
The drivers of the reduced costs are similar to the quarter.
We have spent less on travel and entertainment because of pandemic restrictions.
Both short and long-term incentive compensation is tied to financial performance and has reduced in 2020 compared to 2019.
Finally, operating expenses incurred in currencies other than the US dollar are reduced as a result of the devaluation of those currencies I have already mentioned.
I've mentioned adverse exchange rate movements in three key currencies for the from the Company's perspective.
I want to put some color on that comment.
If we had used the 2019 exchange rates for both the three and nine-month periods of 2020, our reported net sales would have increased for the three months by $3 million and for the nine months by $7 million.
When looking at gross margin, we would have recorded additional gross margin of $700,000 in the three-month period and $1.7 million year-to-date.
Notwithstanding these impacts we have been effective at putting in place some natural hedges.
That is that the majority of our operating expenses for the businesses in territory are also in local currency.
That mitigates the impact on sales and gross margin leaving relatively immaterial differences at the bottom line resulting from translation exposure.
The Company experienced some significant transactional related exposures during the first quarter of the year.
This has reduced as exchange rates have settled at new levels during the second and third quarters.
During the third quarter, we recorded lower interest expense than this time last year.
Our average debt was lower than the prior year and we got a benefit from reduced borrowing rates in the US.
In the nine-month period, our average debt was a little higher than the prior year, but we gained the benefit for the lower federal base rate resulting in significantly lower interest expense.
Finally, our effective tax rate continues to decline in comparison to the prior year as we are having a stronger international performance in jurisdictions with lower rates this year as compared to last year.
In the three-month period, we earned $0.10 per share as compared to $0.11 per share in the same period of the prior year.
For the nine-month period, we earned $0.25 per diluted share as compared to $0.34 per share last year.
From my perspective, the operating and financial focus of the Company remains as follows.
We continue to follow a disciplined approach in planning our factory activities balancing overhead recovery with demand forecasts and inventory levels.
At the end of September 2020, our inventories were at $176 million as compared to $186 million this time last year.
During the intervening periods we have made acquisitions and added inventory as a result.
The underlying period-over-period improvement in our base inventory before the impact of recent acquisitions amounted to approximately $14 million or 7.5%.
We are highly focused on our balance sheet as we navigate through this pandemic period and having lower inventories at this point of the year is pleasing to report.
As we look at the final quarter of the year and our target for December 31st, 2020 inventory, Eric will comment in a moment about acquisitions that we closed in the first and second week of the final quarter of this year.
As a consequence, our inventory forecast will now be amended to incorporate these new businesses.
In previous conference calls, we expected to end in the region of $145 million.
Given our latest operations planning assessment, we are expecting that our underlying inventory will increase a little from our prior forecast.
In addition, the new acquisitions that Eric will mention in a moment are expected to add approximately $15 million at December 31st, 2020.
Accordingly, our latest forecast is to end the year at approximately $160 million to $165 million, effectively flat with 2019, but including the addition of inventory from recent acquisitions.
Our business has a distinct annual cycle and we continue to experience expansion -- and we routinely experience expansion in working capital in the first part of the year and a reversal in the second part.
During 2020 we, like most businesses, have been highly focused on working capital and its impact on debt levels.
During the period of the year when we typically expand working capital, we have contained the increase to only $5 million as compared to adding $49 million in the same period of 2019.
This careful management of working capital is driving the improved cash generated from our operating activities.
In the first nine months of 2020 we have generated $19 million from operations as compared to using $21 million in the first nine months of 2019.
Comparatively that amounts to a positive change of $40 million period-over-period.
At September 30th, 2020 net indebtedness ended at $149 million as compared to $165 million this time last year.
During the last year, in addition to paying down $16 million in debt, we have funded more than $27 million in investments, including fixed assets, product acquisitions and technology investments from the cash generated from operations.
These investments are focused on developing our consolidated business for the future.
With regard to liquidity at the end of the third quarter, availability under our credit line was $45 million, which compares to $30 million at the same point in 2019.
In summary, for the third quarter and for the nine-month period though our sales were down, selling prices and gross margins in each territory remained good.
We are seeing a stronger international performance than this year and the mix of US sales, generally higher gross margin, and international sales, generally lower gross margin, is tending to bring the average down slightly.
Our factory performance improved compared to 2019 and our expenses for operating costs, interest and tax are all lower in 2020 than in the comparable periods of the prior year.
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 business.
Finally, availability under our credit line has improved.
With that I will hand over to Eric.
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 three to five years.
We have three 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 three 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 three and $527 million by year five 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 five 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 three and $109 million by year five.
The core business plus new pipeline products puts us at $544 million by year three and $636 million by year five.
But now let's add acquisitions.
It's hard to predict the acquisition market, but I can say that it is extremely active today.
As you may have read, we just completed two acquisitions; Agrinos, a biologicals company that I will talk about further in a moment and AgNova, an Australian company that gives us greater critical mass and market access in Australia and the surrounding region.
If out of conservatism, we cut that number in half to $20 million per year and extrapolate it forward, we find that our incremental acquisition growth that put us at $60 million by year three and $100 million by year five.
The core business plus new product pipeline acquisitions puts us at a three-year top line target of $604 million and a five-year target of $736 million.
Now let's turn to our green solutions platform.
Before we get back to the model, I would like to bring you current on a recent acquisition.
In early October, we acquired the shares of Agrinos, Inc. and its sister companies at a very favorable price as they were being sold in an auction by the Norwegian parent in a liquidation process.
Agrinos makes and markets unique blends of biological products into many markets and operates three factories.
The first located in Oregon ferments [Phonetic] a 22-species consortium of bacteria into an end-use product that enhances soil health and plant growth by, for example, increasing nitrogen update.
The second located in Mexico produces a microbially enhanced tightened base product that tightens a calciferous substance comes from shells of shrimps that are locally grown that has similar applications.
The third located in India producers biologicals for that region, including sales to the Government of India.
With this investment, we have created a biologicals team to manage these green product offering globally.
That effort will also include our management of the advanced TyraTech business.
So, let's get back to the model.
Now, admittedly some of the green solution businesses are already included in our core business.
For purposes of this discussion, we will focus on the incremental addition.
Through the end of the third quarter of 2020, we had already been on track to sell approximately $22 million in green products this year, including biologicals, bio-nutritional products through both our domestic and international businesses and essential oil products through Envance which are the active ingredients in Procter & Gamble's Zevo line of consumer products.
Let's use that number as a baseline for our green products platform.
And as mentioned, we are already in the consumer pest control space through the P&G's Zevo product line and we are expanding our essential oil product line into other areas, including lawn and garden, crop and public and animal health.
We expect that with the addition of Agrinos, the growth of our other biologicals and the expansion of Envance/TyraTech we should see incremental revenues in year three of $48 million and in year five of $118 million.
Let's take our prior graph of core, including product pipeline and acquisitions and now add green products.
That would take us to about $70 million in year three and $140 million in year five.
Now for the third platform, namely precision application.
We have been reporting regularly about our SIMPAS technology which we believe is at leading edge of prescriptive application systems.
We know of no other system that enables a grower to take an agronomist's prescription for multiple crop inputs based upon field conditions and prior-yield results and apply those products variably in multiple rose automatically in one path.
Further with our Ultimus technology, we can trance product from factory to field and as important, we can measure precisely what was used in any given application.
And now, we are enhancing this technology to permit seed treatment at time of plant.
After seeing positive results from field trials by growers in many states, a number of our peers are performing their own tests with the goal of making their products available in smart cartridges through SIMPAS.
That said, some investors are asking that we give them a better idea of where SIMPAS could be in three to five years.
In order to answer the question, we will consider the following elements; first, revenues from our existing portfolio of products, and I'm talking about increased users which would be dramatically enhanced by applied prescriptively; second, revenues from the sale of active ingredients, licensed from other basic producers to be sold under RNA; third, royalties from third parties for marketing their products through our smart cartridges under their name; and fourth, a share in the growers' incremental yield benefit.
Using conservative estimates of market penetration and domestic markets only, we are targeting top line contribution on the order of $35 million in year three and $131 million in year five.
In addition, we are confident that SIMPAS will be well received outside the US and are already planning to host SIMPAS field trials in Brazil in 2021.
Also, these figures do not include the potential for additional revenues from our seed treatment innovation.
In other words, these are conservative, domestic, in-furrow SIMPAS targets only.
Let's put all of the platforms together.
If we add Core plus Green plus SIMPAS we are in the neighborhood of $687 million in year three and $985 million in year five at the top line which is roughly double where we are today.
There are many moving parts of the equation.
We will continue to control the things that are within our control.
For example, exercising strict discipline on managing working capital and operating expenses.
Further, we are committed to maximizing our consolidated profit margin.
While our expansion into distribution within international markets has tended to lower our gross margin percentage, we expect that the introduction of newer technologies across these markets will create an updraft on profitability.
In future calls,I will be updating you on how we are progressing against those targets.
Finally, let me pull our focus to the present and the near term.
2020 has been an unprecedented year for this industry.
In spite of the pandemic, weather effects and farm economy as David mentioned, we have kept pace with Q3 of 2019 in terms of profitability, even with modestly lower sales.
Looking forward into the fourth quarter, we are already seeing greater optimism in the domestic agricultural sector, hurt in part by rising crop commodity prices for corn and soybeans and cotton which would tend to contribute to improved grower profitability.
In the Midwest with less crop rotation and more continuous corn over corn planting, we are beginning to see a resurgence of soil insect pressure.
In addition, demand for our soil fumigant products continues to rise.
Based upon these trends and current sales activity, we are encouraged by our prospects for the balance of this year and into the 2021 season.
We'll now take any questions you may have.

user
compname reports qtrly earnings per diluted share of $0.10.
american vanguard corp qtrly net sales of $117 million, compared with $125 million.
american vanguard corp qtrly earnings per diluted share of $0.10.

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