Yahoo Finance American Vanguard Corporation (NYSE:AVD) Q1 2024 Earnings Call Transcript
American Vanguard Corporation (NYSE:AVD) Q1 2024 Earnings Call Transcript May 11, 2024
American Vanguard Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the American Vanguard First Quarter 2024 Earnings Conference Call and Webcast [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Young, Director of Investor Relations. Thank you. You may begin.
Anthony Young: Thank you, Jessie, and welcome, everyone, to American Vanguard's first quarter 2024 earnings review. Our speakers today will be our Chairman and CEO, Eric Wintemute; and our CFO, David Johnson. Also joining us to answer your questions will be our Chief Operating Officer, Bob Trogele; our Chief Information Officer, Tim Donnelly; and our Chief Transformation Officer, Don Gualdoni. Before beginning the presentation, let's take a moment for our cautionary reminder. The company from time to time may discuss forward-looking information. Except for the historical information contained in this release, all forward-looking statements are estimates by the company's management and are subject to various risks and uncertainties that may cause results to differ from management's current expectations.
Such factors include weather conditions, changes in regulatory policy and other risks as detailed from time to time in the company's SEC reports and filings. All forward-looking statements, if any, in this release present the company's judgment as of the date of this release. With that, I will turn the call over to Eric.
Eric Wintemute: Thank you, Anthony. Hello, everyone, and welcome to American Vanguard's first quarter 2024 earnings call. We appreciate your continued support and interest. As you will note from Slide 4, I will be covering four topics today. Our Q1 '24 financial performance, current market conditions, our '24 outlook and our transformation efforts. Moving to Slide 5 on Q1 performance. We recorded a 35% jump in adjusted EBITDA during the period. In addition, our operating income rose by 87%. This improvement in operating leverage is evidence that the cost control initiatives that we have started in the second half of '23 are having their desired effect. As I've mentioned in prior calls, our cross-functional teams remain focused on controlling expenses while maximizing operational efficiency.
In that vein, we recorded lower operating expenses as a percent of net sales while increasing sales by 8%. Further, all three of our businesses grew during the quarter. Within our consolidated sales results, US crop was up 9%, US non-crop, 28% and International 2%. Now let's turn to our sales during Q1 as per Slide 6. In US crop, we experienced strong results across multiple crops. Sales of our granular soil insecticides rose, which is indicative of continued strong demand from corn growers. Further, we experienced strong sales of our liquid corn soil insecticide index. Similarly, herbicides rose during the period, due in part to Dacthal which was not available last year due to supply issues. Also, Thimet sales rose with demand driven by increased peanut acreage.
These increases were partially offset by a drop in soil fumigant sales as wet conditions in the Northwest truncated the application window. Within US non-crop, our mosquito adulticide sales were up in anticipation of stronger-than-normal tropical storm activity. Also, our sales of pest strips were up significantly as consumer and technical markets recovered from the prior year. In addition, our ornamental and nursery business, OHP, recorded stronger sales led by its biorational and pre-emergent product lines. Our International business was up slightly at the top line led by Mexico, where most product lines grew and APAC aided by favorable weather conditions in Australia. Our LATAM business was about even for the quarter with the addition of sales from our recently acquired business in Ecuador, partially offset by generic pressure in Central America.
All told then, all three of our businesses demonstrated improved performance and on a consolidated basis, we continue to grow. Before moving on to current market conditions and our '24 outlook and details on transformation, I would like to turn the call over to David for his financial analysis. David?
David Johnson: Thank you, Eric. I will begin my comments with a recap of our first quarter 2024 performance during the course of which I will present important metrics for the period and we'll close with comments on working capital. As you will see from Slide 8, our overall sales for the first 3 months of 2024 increased by about 8% from $125 million to $135 million for the reasons that Eric has already outlined. It is worth repeating here that all 3 of our businesses, US crop up 9%; US Non-crop up 28%; and International up 2%, grew at the net sales line. Turning to Slide 9. While sales were up 8% overall, gross margin dollars improved by 10%, driven by stronger sales of some of our higher-margin insecticides and herbicides and the strong factory performance.
Overall, price volume actions, mix of sales and factory performance resulted in gross margin that improved slightly from 30.8% to 31.4% of sales. As you can see on Slide 10, our operating expenses in the first quarter of 2024 edged up to $36.3 million from $35.3 million in the same period of 2023. This increase was driven primarily by our spending of $1.2 million on developing our digital and business transformation plans. We plan to spend more in the next few quarters to invest in the long-term future of our business by implementing initiatives to achieve substantial improvement in business performance. We will see some initial improvements in 2024 that are expected to be largely offset by transformation spending and then primarily benefiting 2025 earnings and beyond.
In addition, we had increases in general and administrative expenses related to foreign exchange, audit costs, long-term and short-term incentive compensation and investments in initiatives to improve both our information technology systems and our human resources infrastructure. These cost increases were offset by cost control efforts in selling, regulatory, product development and R&D. With respect to cash flow, as per Slide 11, the company has a pronounced annual cycle of building inventory at the start of the calendar year in order to fuel global sales, particularly during the second and third quarters. It is usual for working capital to expand in the first quarter and Q1 2024 is pretty much in line with the same period of the prior year.
We use our revolver debt to fund working capital expansion at the start of the year and pay down as swiftly as possible as the cash cycle completes usually later in the year. We have been carefully managing the inventory build as we monitor industry demand trends. At the end of the quarter, we had $13.7 million in cash as compared to $19.6 million this time last year. This improvement in reduced amounts of cash held in order to pay down debt is a result of significant effort at the end of the quarter to pull cash back to the corporate center to reduce debt and interest expenses as much as possible. Looking at our statement of operations on Slide 12, you will note that our sales grew by 8%. Our gross profit increased by 10% and our operating expenses increased by only 3%.
These factors together generated significant improvement in operating leverage, with operating income up 87% over the same period of 2023. Furthermore, the fair value of our equity instrument improved during the quarter. As a result, profit before interest and tax improved by 107%. Our interest rate increased from 6.8% last year to 8.3% this year, primarily related to movements in the Fed rate, but also as a result of the current modifications we have with our bankers. That includes more flexibility on leverage and fixed charge coverage ratios, but adds about 0.5% of interest rate. At the same time, our borrowings are up as a result of our current investment in working capital. As I just mentioned, our business cycle is such that we will normally see working capital and consequently debt increasing during Q1 and Q2, possibly leveling to slightly up in Q3 and then significantly -- significant reduction in Q4 as the growing cycle for our major markets completes its own annual cycle.
Our tax rate is higher this quarter, primarily as a result of the fact that our entities in Brazil made losses in the first quarter of 2024. Because of Brazil's past business performance, US GAAP does not currently permit us to take the benefit on tax expense that would normally be available. As a result of the increased interest expense and the changes in year-over-year tax expense, our net income is down slightly, even though our operating performance and consequently, adjusted EBITDA was up significantly. Turning now to working capital on Slide 13. You will see our inventory trends on a quarterly basis for the last several quarters. While inventory grew on an absolute basis in Q1 2024 as compared to Q1 2023, you can see that the increase since 12/31/23 is actually lower than in 2024 than in 2023.
Further, 39% of net sales are investment in inventory similar to the level at this time last year. And though we would like to see this balance come down more quickly, it is something we need to manage carefully down, ensuring that we have the right balance of products in inventory to meet customer needs in a timely manner during the 2024 season. During the later part of the year, we plan to move inventory levels down with the intention of reaching a 2024 year-end target of around 34% of net sales. That sums up my detailed comments. On the whole, the first quarter of 2024 showed improvement in comparison to the same period of 2023 in terms of both operating income and adjusted EBITDA. The company has embarked on an exciting phase of transformation and is managing to invest in a major initiative and still return a profitable result.
And as such, I'm quite pleased with the progress we're making in this regard. This initiative will be critically important to the business in the latter part of 2024 and into 2025 and beyond. With that, I turn the call back to Eric. Eric?
Eric Wintemute: Thank you, David. As per Slide 14, on news of an improving US economy, the Fed seems to have shifted away from making interest rate hikes and is now debating whether to cut or hold those rates. In addition, the U.S. dollar has begun to strengthen over foreign currencies. While helping consumers with purchasing power over foreign-made goods, the strong dollar, when coupled with high grain inventory stocks has served to suppress commodity prices compared to 2023. Nevertheless, even as current corn and soybean prices at current levels, farming still remains a profitable business. Further, while still observing conservatism and buying crop inputs, our distribution partners have relaxed their stringent destocking approach from last year, at least with respect to our portfolio.
In short, the farm economy is strong and we expect stable albeit more deliberate buying activity. The same is true of the non-crop market, where we are seeing further normalization of procurement patterns by retail and professional customers. Now let's turn to Slide 15 on our 2024 full year outlook. While market conditions remain stable, there's one factor involving our herbicide Dacthal that causes us to adjust our previous full year targets. In the course of routine registration review, US EPA has expressed concern over potential health issues of this product. Accordingly, out of abundance of caution, the company has voluntarily suspended sales of Dacthal and submitted a significantly narrow product label to the agency that we believe addresses their concerns.
We have committed to maintaining that suspension of sales pending UPH review and potential approval of that new label. The outcome of the agency's review is uncertain at present, but we are factoring the loss of Dacthal sales into our '24 forecast numbers. Accordingly, our full year '24 targets are as follows: we expect next sales to increase between 6% and 9% as compared to '23, while adjusted EBITDA will be within the range of $60 million to $70 million. The midpoint of this range would be a 16% -- I'm sorry, a 19% increase over '23 adjusted EBITDA. Further, at that midpoint, our stock is currently trading at a discount of nearly 50%, assuming a standard valuation metric of 10x EBITDA. Let me turn next to our transformation initiatives as per Slide 16.
On the digital slide, we are working with QAD not only to upgrade their current -- to their current adaptive global ERP system, but also to standardize our business processes. At the end of this initiative, then, all segments will be following the same processes using the same set of tools and drawing from one source of tool. This will give senior management a clear granular view into our business operations and both increase our ability to make real-time decisions and to plan and forecast with greater accuracy. On the structural transformation side, we are moving quickly, with what we call Project Accelerator. Working with clients' team over the next 16 weeks, we'll be doing deep level analysis and several sub initiatives in parallel. Within the commercial realm, we will focus on our sales and marketing strategy, pricing and product mix.
Within operation, we will do deep dives into material sourcing, logistics and manufacturing productivity. Within G&A, we will select and refine an organization design that best supports our future business plan as well as ensure that these many efforts are managed through a properly resourced transformation office. This broad initiative will generate EBITDA benefits through a range of results, including reduced costs, improved efficiencies, emphasis on higher-margin products and better defined roles and responsibilities. As I've stated in our last call, we are confident that we will gain at least $15 million of annualized adjusted EBITDA by 2026 through this investment. In closing, during the quarter, we navigated our business through complex markets while improving operating efficiencies and growing sales.
Further, the '24 market conditions are stable and I would argue, stronger than 2023. These conditions will serve to generate demand for our products and enable us to improve our inventory and working capital positions. In addition, having begun transformation initiatives in earnest, we are poised to generate even greater operating leverage. In short, we see promising opportunities for growth and are taking strong measures to ensure that we are positioned to capitalize upon them. So with that, I'll turn that back to you, Jessie. Thank you.
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