American Vanguard Corporation (NYSE:AVD) Q4 2022 Earnings Conference Call February 6, 2023 9:00 AM ET
Company Participants
Eric Wintemute – Chairman and CEO
Conference Call Participants
Gerry Sweeney – ROTH Capital
Chris Kapsch – Loop Capital Markets
Operator
Hello, and welcome to the American Vanguard Business Update Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
It’s now my pleasure to turn the call over to your host, Chairman and CEO, Eric Wintemute. Please go ahead, sir.
Eric Wintemute
Thank you, Kevin. Good morning, everyone and thank you for joining this call.
Let me start by putting a point on what we had outlined in the press release that we issued on Friday. We expect our full year 2022 financial performance will exceed that of 2021 in all material respects. Furthermore, we expect to achieve significant growth and profitability in 2023 over 2022, and we will be giving you specific performance targets for the ’23 year in about six weeks on our March earnings call.
In the fourth quarter, we were forced to delay roughly $15 million of high margin sales due to a supply chain disruption. Now that we have fixed this supply disruption, we expect to largely recoup the sales that we lost in Q4, such that they will shift forward and benefit 2023 performance. With a strong balance sheet and favorable market conditions, we believe we are poised to enjoy strong growth in all metrics for this coming year.
I’ll show you — here is the safe harbor. Okay. So on Slide 3, the global supply chain has been an unsettled state for the past three years due to the pandemic and shifting buying practices. At one time or another, we have witnessed shortages in containers, ships, warehouses and trucks used to transport many goods across multiple sectors. Within our industry, these factors have interrupted production of raw materials and intermediates particularly those sourced in Asia. In spite of these conditions, our supply chain team had succeeded in sourcing virtually all raws, intermediates and packaging without interruption over the past three years of the pandemic.
I am proud of the work that we have done as this has required near constant attention and preplanning. However, in the fall of ’22, our domestic supplier of a key intermediate that is used to produce Aztec our leading corn soil insecticide was unable to start production due to capacity constraints. This persisted for several months.
Accordingly, we positioned one of our China based suppliers to commence production of that input. Synthesizing this intermediate involves a very complex multistep process. While technically capable of filling our requirements, the Chinese supplier was caught in continual lockdowns from China’s Zero-COVID policy, which once lifted resulted in nearly everyone in the facility contracting COVID.
This culminated with a mandatory closure of the entire industrial park during the New Year. With the return of its full workforce, our Chinese supplier has resumed manufacturing the key intermediate. Also our domestic supplier is back online. Further, we have started synthesis of Aztec at our own facility in Alabama. As we continue to receive this key intermediate, we will be producing Aztec over the next 75 days or so. In short, we have prepared the supply chain and are looking forward to returning to business as usual.
In parallel, let me focus on how we are managing this disruption with our customers. We are a leading manufacturer of corn soil insecticides. As you can see on Slide 4, the many brands that we market in the U. S. and abroad.
As it became clear that our inventory of Aztec was going to be impacted by supply disruption, we began working with our customers to meet the grower needs through increased supply of these other CSIs, especially Counter, Force and SmartChoice. While unable to make up for the sales of Aztec that we anticipated in Q4, consolidated net sales for the period were equal to those of Q4 ’21.
Further, we have now orders in hand at Aztec in the amount that is 3x to 4x higher than what we typically have during the first quarter. In short, subject to achieving full production, we expect the net sales and gross profits that we anticipated from Aztec in Q4 to shift forward into Q1s and Q2 of ’23 as we supply growers in time for the upcoming planting season.
Before looking forward, let’s take a quick step back to recap last year. As per our press release, we have revised our 2022 performance targets on Slide 5. The overarching point here is that despite the temporaries unavailability of our leading high margin corn and soil insecticide during the fourth period, we generated sound financial results on a full year basis. Bear in mind that the figures I’m about to discuss are based upon preliminary on audit financial data.
Going from top of the P&L to the bottom, our revenue is forecast to grow at about 10% which is within our targeted range. Similarly, gross profit margin at 40% and OpEx as a percent of sales at 33% are also in range.
Interest expense will be about 5% above the target for 2021, which given all of the rate hikes that occurred over the course of this last year is excellent. The debt-to-EBITDA target is within range and well below our 2.5x max rate. Net income is not yet known as it will depend upon tax and final accounting. And our adjusted EBITDA at 15% to 18% growth rate will fall below the range previously given.
Please be mindful that we are reporting on ’22 estimates versus our own targets. When we look at how ’22 stacks up against ’21, we expect that our financial performance will exceed the prior year in all material respects.
Before turning to the ’23 outlook, let me note that over the past several quarters, we have placed an emphasis on maintaining a strong balance sheet. As you can see on Slide 6, we ended 2022 cash with cash available in the amount of $198 million. Further, our debt net of cash was $31 million as compared to $36 million at the end of ’21. In addition, our net average which is debt net of cash divided by EBITDA, was 0.42.
In other words, we started the year virtually debt free with ample cash and cash equivalents to meet working capital needs while funding R&D further commercializing technologies like SIMPAS and Ultimus and completing accretive acquisitions.
In addition, we achieved this very low debt position after having spent $34 million on repurchasing of 1,668,892 of our shares through two share repurchase programs, a $20 million accelerated share repurchase, which we have completed and a $20 million 10b5-1 plan, which still has $6 million of capital available for future purchases.
Further, we increased our cash dividend to shareholders by 25% thereby returning a portion of our profits to our shareholders. There are two key takeaways on this Slide 7 that I want to emphasize. First, our Q4 miss was due to a supply chain issue that is now resolved. This effect should boost our corn soil insecticide sales in the first half of ’23. As mentioned, our current Aztec orders are 3x to 4x times higher than they would be normally at this time of year. And second, we expect to achieve significant growth in revenue and earnings in 2023.
Finally, we are well positioned to address the market and expand our business. As you’ll note on Slide 8, the outlook for ’23 presents ideal conditions for the company’s strong financial performance. As mentioned, we anticipate higher sales of our corn soil insecticides during the first half. Second, we expect to benefit from lower cost of goods and an improved supply chain for raws and intermediates. This should enable us to build inventory to meet demand.
Third, freight costs, which peaked in 2022 has settled down and are returning to more reasonable levels. Fourth, the level of AMVAC products in the distribution channel is comparatively low.
In addition, our new formulations, expanded portfolio of green product solutions and improved market access, for example, into Australia and Brazil, should enable us to participate more fully in a strong global Ag economy.
In summary, we expect to achieve significant growth and profitability in 2023 and we’ll be giving you more specific performance targets in our March earnings call. Finally, thank you for your continued support of American Vanguard.
And with that, I will ask our operator to poll for any questions you may have. Kevin?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today is coming from Gerry Sweeney from ROTH Capital. Your line is now live.
Gerard Sweeney
Good morning, Eric, Bob, thanks for taking my call this morning. Just a couple of questions. It sounded like the shortfall is on the Aztec product is going to push. It’s going to entirely — I’m not sure if that’s your words, but those are my words, it’s going to push into the first half of ’23. I’m also just curious if there’s any impact on margin on that business just because you had to find alternatives or pay up for pricing or anything like that? Or is this just — we should just look at it as a push to — in the first half of ’23.
Eric Wintemute
Yes. As far as increased cost, the only increased costs, we have are air freighting, this — we’re going to be air freighting all of the material that’s being made in China and the material, obviously, domestic is — it’s up in Wisconsin, so that won’t be air freight. But we’ll have some additional costs, but it will be relatively immaterial in the overall margin.
Gerard Sweeney
Got it. And then you did touch upon this, I think, in your comments, but it sounds maybe just a little bit more commentary on supply chain overall. It feels like things are loosening up across the board. I know you’ve been fighting a lot of headwinds on that side and you’ve done pretty well. You can’t always bet a thousand. But is it a fair assumption to say things are loosening up across the board? Any commentary on maybe tightness in any markets or inputs for ’23?
Eric Wintemute
Well, one of the key areas since we do a lot of phosphate business is that the phosphorus supply chain was really, really bad in ’21 and not only increases but [Kazakhstan] shutdown, China was not supplying for P4 anymore. So a number of our phosphorus suppliers had filed or claimed force majeure. But yes, that’s probably for us specifically, that was maybe our biggest challenge, which phosphorus has come back down, everybody is back online and so availability of our raws is much easier than what we had dealt with last year.
So — and we’re seeing, again, with some being — some raws having a strong tie like methanol. Those prices were high. But again, those are coming back down as well. Natural gas is coming back down. So overall, yes, we’re going into this year, we’re feeling a lot more comfortable with our raw material chain.
Gerard Sweeney
That brings to my last question. Obviously, raw material price, it — looking at Slide 8, raw material pricing down, low inventory in the channel, transportation costs coming down. All big tailwinds. And obviously, you also had the Aztec pushing into this year, which will be a benefit, but sort of one time. But any headwinds, I mean you’re — in spite of the Aztec miss, you’re sort of painting a pretty good picture for ’23, even though you haven’t put official guidance out there, but I’m just curious if anything that concerns you for ’23.
Eric Wintemute
Yes. Right now, I think — I mean, there’s always the possibility of having shortages of different pieces. We’re — with our SIMPAS equipment, we’re installing equipment now. We’re getting things built. Different parts are — when you have something that has a lot of different components, there’s always concern that you don’t get everything on time.
But overall, optimism looks fine. I mean, obviously, there are factors that could happen such as escalations of conflicts that would be out of our control. But we — I mean, the farm economy is really strong. There’s — the food banks are low. The reserves are not there and talking with experts in the field, they think that this should continue into ’26. So I’m not identifying anything right now that is a major concern.
Gerard Sweeney
Got it. So we’re looking at some good tailwinds for ’23. I appreciate that. That’s it for me.
Eric Wintemute
Okay. Thanks Gerry.
Operator
Thank you. Next question today is coming from Chris Kapsch from Loop Capital Markets. Your line is now live.
Chris Kapsch
Good morning. Just a follow-up on that last question, headwinds, tailwinds. The — given that raw material costs are easing supply chain generally, notwithstanding this Aztec issue, easing lower transportation. Just curious how ag chem pricing from your vantage is holding up juxtaposed against kind of what could be viewed as lower cost environment?
Eric Wintemute
Yes. So I mean, I think the biggest shift is fertilizer. That took the biggest increase as availability is coming. I think prices are coming down there. We’re seeing some downward pricing on some of the commodities such as glyphosate, glufosinate, some of the more generic insecticides, fungicides.
With regard to our products, we’re not seeing a position where we’re going to need to re-adjust our pricing downward. So I think that’s right now. We’re — in most of our products, certainly, we’re in a better position because we’re kind of the only supplier of that particular chemistry. And some of our distribution business, let’s say, in Central America and maybe in Australia, there may be maybe pressure on some of the products that they sell that are commodity. But again, we’re seeing lower costs coming through. So some of that lower cost may need to be passed through to be competitive.
But overall, yes, I think growers are a shift that has occurred for the ’23 season versus the ’22 season. As growers are going into the ’22 season, we’re just concerned about getting supply at any cost. And so the push was get everything in Q4, make sure it’s in the barn. For this year, I think people are seeing that prices softening are looking at — we’re looking at Q4 as, okay, we don’t have to have it right now, we can do more just in time and hope that prices come down before we actually purchase and plant.
So I think that’s kind of what we’re seeing. So as far as our margins, I think we feel pretty good about where we are.
Chris Kapsch
Got it. That’s helpful. And twice, you mentioned that Aztec orders are at this juncture in the first quarter, 3x to 4x “normal seasonal level.” So I’m just looking for some more context around that. Is that simply because some of the orders that were not fulfilled in the fourth quarter? Is there double ordering for — from certain customers to try to get safety stock? Or how much of this is a function of simply higher corn acreage this year. Have you — and a follow-up on that, maybe looking at the USDA forecast for higher corn, how much of that is in kind of the addressable market for these soil corn insecticides, which is really just the heart of the corn belt. Additional context might be helpful.
Eric Wintemute
Yes. I mean, going into the year, we did see growers stepping up for what they anticipated. One, be a strong commodity price, two, corn rootworm pressure seems to be increasing year-over-year. But the bulk of what I’m addressing is these are orders that didn’t get filled in fourth quarter. And we — our team went out to everybody as we had this Aztec issue and said, okay, here’s the amount of Aztec. We feel comfortable, we may get to everything that you need for Aztec. But for now, let’s place kind of supply chain. This is what H1 kind of allocated out would get for Aztec and then some additional orders for Counter, Force and SmartChoice that would make sure that they’re going to be able to meet customer demand.
So we’ll — as we go through the next 1.5 months, we’ll get a much better picture of what percent of the original Aztec will be met with Aztec and if we do all of it, great, but we produce more of the other corn soil insecticides to make sure that every grower out there gets corn soil insecticide in order to treat this field.
Chris Kapsch
Eric, what are the chances or the risk that because of this issue, you will have lost some opportunity or acres with an alternative to soil corn insecticides.
Eric Wintemute
I mean the alternatives are really us, right? I mean Syngenta has force and bag, but going through the SmartBox system and SIMPAS, obviously, that is our business. And so I don’t think — I mean I think growers will use the product they intended to use and so I don’t think they’re going to not use product. I think it’s more a function of what of our corn soil insecticides they will use.
Chris Kapsch
Got it. And last one, the — since you weren’t manufacturer, synthesizing or compounding this product, I guess, in the fourth quarter, — just curious if you — what — if you could quantify the impact to the absorption variances and gross margins? And does that carry through into ’23 at all? Or is it isolated in ’20 — in fourth quarter ’22. Thank you.
Eric Wintemute
Yes. So fourth quarter, there was the other half of the Aztec molecule that we were not able to make. But there’s another section that does get made, and we’ve — we continue to make that at the Axis facility in Q4. So though the second half of the molecule that then gets combined with the first piece, we didn’t make which is true. So absorption wasn’t as high. But again, we’re doing that in Q1 and into the beginning of Q2. So overall, we’re not seeing any major impact.
Chris Kapsch
Thank you.
Eric Wintemute
Thank you, Chris.
Operator
Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.
Eric Wintemute
Okay. Well, thank you, everybody, for getting on the call this morning. We’re looking forward to this ’23 year and we’ll be giving kind of the normal guidance that we do for the year at the next call, which I think we’re currently scheduled for March 13. So I look forward to updating you at that point and have a great day.
Operator
Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
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