American Vanguard Corp
NYSE:AVD
Earnings Call Analysis
Summary
Q4-2023
Despite a 33% decline in Brazil's Ag Chem industry, our sales in Brazil only dipped by 4%. While Brazil's adversity might affect the industry in 2024, it shouldn't materially impact our global results. We're bracing for a drag on herbicide sales due to low-priced generics but believe our diverse portfolio across various regions will mitigate specific market challenges. We project inventory procurement changes to stabilize in 2024, leading to a normalization in order timing. Our transformation initiatives are set to yield $15 million in annual operating profit through optimization and cost reductions, although additional costs will affect the full-year impact. We aim to strengthen operating leverage by 2025 with systematic efficiency improvements. Our 2024 outlook remains steadfast, and we're on track for Q4 and full-year 2023 targets, eyeing growth and profitability through ongoing transformation.
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Hello, and welcome to the American Vanguard Announces Preliminary 2023 Results and 2024 Outlook 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 the Director of Investor Relations, Bill Kuser. Please go ahead, sir.
Thank you very much, Kevin, and welcome, everyone, to American Vanguard's Preliminary 2023 Financial Performance Review. Our speakers today will be Mr. Eric Wintemute, Chairman and CEO of American Vanguard; Mr. Don Gualdoni, the Chief Transformation Officer of the company; Mr. Tim Donnelly, our Chief Administrative Officer; and to assist with your questions, Mr. David Johnson, the company's Chief Financial Officer. Before beginning, let's take a moment for our usual cautionary reminder. 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 policy, competitive pressures, and a variety of other risks that are detailed 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, and such information will not necessarily be updated by the company. With that said, we turn the call over to Eric.
Thank you, Bill. Hello, everyone, and welcome to the American Vanguard January '24 financial update. Today, we want to hold a brief call to give your impressions of Q4 and full year 2023 ahead of our formal 10-K issuance, as well as to revisit our '24 outlook. We presented Slide 4 in our Q3 '23 earnings call to show our financial expectations. Bottom line, while we have not completed the full pilot cycle, we are broadly on track to meet our previously forecasted '23 numbers. Further, we remain positioned to meet our 24 targets. In short, our outlook is unchanged. With respect to '23, in our last call, we outlined that we had secured a supply of 2 important high-value products, namely Aztec and Dacthal, both of which experienced availability constraints in early '23, due to supply chain issues. During the fourth quarter, we were able to produce volumes of these products sufficient to meet grower needs. Consequently, our quarter-over-quarter sales were up by about 8% in '23 as compared to '22. Further, we made up some of the ground that we had lost early in '23 such that our full-year net sales declined by only 5% compared to the prior year. During '23, gross margins held up as I have predicted and while still subject to completion of audit also appear to be in line with our forecasted range. The same can be said for our adjusted EBITDA. Let's turn to working capital, which we have captured on Slide #5. With improved sales, inventory management, and robust prepaid collections, we generated enough cash and EBITDA to reduce debt to about $139 million and inventory to about $220 million, while increasing our borrowing capacity to about $100 million. In other words, we do leverage the balance sheet significantly, such that based upon initial numbers, we were able to achieve our debt-to-EBITDA target ratio of 2.75x. As you may recall, our lenders had boom covenants during Q4 to give us sufficient room to meet working capital needs. This relief included an uptick in interest rates. If we are able to maintain our current trajectory, we should be able to return to lower rates and reduce interest expense. We will, of course, provide greater detail on Q4 and full year '23 financial performance in our March earnings call and within our Form 10-K. Before turning to our full year '24 outlook, I want to report on our transformation efforts. With me today is Don Gualdoni, our Chief Transformation Officer, who will cover our plans to improve operating profit through cost, margin, and revenue initiatives. Also with me is Tim Donnelly, our Chief Administrative Officer, who is spearheading our digital transformation effort. At this point, let me turn the call over to Don and Tim, after which, I will return with my thoughts on the '24 year. Don?
Thank you, Eric. It's a pleasure to be here with all of you on my 2-month anniversary at AMVAC. As you'll see from Slide 6, a robust and sustainable transformation has 3 core elements. First, it's multifaceted, not limited to a single area of the company or a single profitability lever. Second, a sustainable transformation is about accountability, which requires transparency. And lastly, transformation done right changes the DNA of the company, and that pays dividends well after the formal process completes. So where are we in this pursuit? We are drafting and implementing key performance indicators that will serve both as internal targets and as a set of vital signs for senior management and the Board. These will include factors such as sales performance against plan and compared to the prior year, raw material costs, gross margin, production to plan, inventory DSO, forecast accuracy, and the like. By driving these key performance indicators or KPIs into the organization, we'll be driving profitability and measuring it as we go. Beyond KPIs, we will take a deeper dive into our cost and capital structure, measuring fully burdened margins of our product lines, return on capital for our businesses, freight costs, selling expenses, and the use of cash across multiple entities. The structural transformation should enable us to realize material improvement in our operating leverage and yield a lean platform for growth. As is typical in these types of transformation, we will also define a specific target for additional profitability on a year-by-year basis. We anticipate that during our next earnings call in early March, we will have set the target for improved operating leverage for the balance of 2024 and full year 2025. I'm excited to be working with my AMVAC colleagues to set our course, deliver our plans, and see the results flow through into our financials. We will be reporting to you on our progress quarterly. I will now turn it over to Tim to update you on our digital transformation progress.
Thanks, Don. Let me start first by answering the question, why are you doing a digital transformation? The short answer is so that we can grow and remain competitive. Let's look back for a second, following the point on Slide #7. As many of you know, we have grown and diversified over the past 10 years or so, largely through acquisition. When I started here nearly 20 years ago, we had maybe half dozen businesses. Today, we have 33 businesses throughout the world. With that growth has come increased complexity, and we find ourselves at a stage in our growth cycle when it is necessary to step back, look at how we work, and ensure that our processes are standardized and their information is current, complete, and easily accessible. That in a nutshell is what we have been doing with Business Consultant, Carney and our enterprise resource planning or ERP vendor, QAD.We have convened to the owners of our major business processes, sales, forecasting, inventory, planning, and finance, and defined how we work today, how we would like to work in the future, and how we can work on the same ERP system globally. I just signed the services and subscription contract with QAD last Friday, and we are now poised to move into the implementation phase of this effort. Over the next 18 months or so, QAD and our internal team will do 2 things: first, bring our users up on QAD's latest adaptive ERP system; and second, implement standard processes for these functions, processes that our people have themselves fashioned. Through this process, we will be able to provide senior management, in fact, all users with a single source of truth through warehouse data that is gathered and rolled up in a fully automated manner. In this way, management will have a top-down view of business metrics in real-time. This, in turn, will enable us to make the best decisions in the shortest response time. These days, external factors seemingly change with the wind, and we cannot control them. We can, however, give our business leaders the tools to operate effectively in the face of change and in the process provide a platform for growth. In order to take the next step in our evolution, digital transformation is essential. With that, I turn the call back to Eric.
Thank you, Tim. Turning now to our full-year 2024 outlook on Slide 8. Our assessment is unchanged versus our previously issued targets. That is, we are still expecting revenue to rise by 8% to 12% and adjusted EBITDA to increase by 25% to 35%. One of the primary reasons for the improvement is that we do not anticipate any material supply chain snags as we had experienced last year. On a relative note, many of you have heard of the shipping impediments caused by military activity in the Red Sea. While it may have an economic impact beyond the Middle East, this activity does not directly affect shipping lines that we use for either supply or delivery. We continue to monitor developments closely but at least for the present, have not been adversely affected. Fundamentals look encouraging for '24. Commodity prices, which are globally driven, have been relatively stable. Interestingly, while Brazil had record crops in corn and soybean in '23, the Ag Chem industry fell by 33% within that country. By contrast, our sales in Brazil were down only 4% year-over-year. With adverse weather, Brazil crop numbers are forecasted by some to fall slightly in 2024. While this may continue to affect some in this industry, we do not expect a material effect on our global results. With Brazil turning down, the U.S. farm economy should trend up or at least remain stable. We do expect some drag on herbicide sales for 2024 as the presence of low-priced generic herbicides within the U.S. and international markets will remain with us. We have taken this into account in our outlook. Our ex-U.S. crop businesses should generate good results. Bear in mind that we have a diverse portfolio in many regions. This breadth tends to blend the effect of product-specific market challenges. On the noncrop side, we expect the shift in procurement that occurred in '23, that is our customers shifting from building 4 to 6 months' worth of inventory to maintaining 40 to 60 days' worth of inventory, will stabilize in '24. Even though retailers may buy smaller lots with greater frequency, assuming unchanged demand, the retailers will eventually buy a similar volume of goods on an annual basis. In other words, we took a hit in 2023 due to a shift in timing on orders, but that timing should even out in this current year. That said, let me now connect up our outlook with the transformation discussion that Don and Tim had covered earlier. First, our targets for '24 that we will make a host of changes that should generate $15 million in operating profit on an annualized basis. These include manufacturing optimization, reduced raw material costs, lower selling expenses, and reduced freight and interest expenses. We have assigned these initiatives to our business leaders and are measuring them regularly. In the short term, however, we have to cover additional costs, for example, relating to the transformation and implementation that will reduce the full-year impact of these efforts into the '24 year. The idea here, however, is to improve operating efficiencies so that we have stronger operating leverage in 2025 and beyond. At the same time, working with our Head of Human Resources, Shirin Khosravi, Don is leading the charge in defining and implementing key performance indicators that will serve to keep our team focused on the things that matter most to maintaining profit, but giving me and the Board, a monthly health check. In addition, Don will establish targets for transformative benefit, this is called sizing the prize. We should have that in hand this March. While not intended as a solution for improving operating leverage, our digital transformation is an accelerant to growth and increased speed of decision-making. As Tim pointed out, we are a complex midsized operating company in many regions on many platforms. As markets and conditions shift, we need the most comprehensive, accurate, and current data to make the best decisions. It's important to note that our entire team is committed to these transformation efforts. They can see the benefit from having more efficient systems and better real-time data. Further, these changes will make us a leaner, faster supplier in the eyes of our customers. Finally, we are confident that we can conduct our business profitably and efficiently even while improving our cost and digital structures. In summary, we are on track to achieve target performance for Q4 and full year '23, subject to the completion of audit, are keeping our 2024 outlook unchanged, and are positioned ourselves to maximize growth and profitability through transformation. With that, I ask our operator, Kevin, to pull listeners for any questions. Kevin?
[Operator Instructions] Our first question is coming from Scott Fortune from ROTH MKM.
Big picture, just want to know if you can provide a little more color on the inventories and the different geographies and channels now that we're in through January here and the ongoing destocking process, we're still seeing that destocking taking longer down in Brazil. But just a sense of where we're at in that process as it runs its course? And are you starting to see the ramp-up to normalized inventories from that perspective? Just a big-picture view of that, that would be great.
Yes. I mean with regards to our specific inventories, we don't see that we've got any areas where we're way over inventory. I would say the only area is a little bit on the herbicide line, maybe more on the impacts that might have a little bit over what might be a normal inventory. But we've been pretty careful not to push. And this last year, it would have been difficult to try to push people anyway because they said they were destocking. So outside of the United States, yes, we know that there are different products that have higher inventory, but we're not seeing it with our inventory. If we look at demand, I mean, demand was relatively stable, but there was an effort by everybody to try to reduce their inventory. So I don't know if that's part of your question or not, Scott.
Yes, that's great. And just a follow-up with building supply and inventory in Aztec and Dacthal, obviously, supply issues last year, but where are we in that process to get back to those normalized levels as you were before for those 2?
I mean, we started production on Aztec in September. We completed the Aztec run in December. With Dacthal, we started the production in November and we still are in Dacthal, although I think we've produced, I think, at this point enough to get us into May, but we'll be going into another production run in April. So I think we feel good about the supply chain of those 2 products.
Okay. And the other big picture question is the Chinese generics as we saw pressure in more Latin American markets and down south. But just the sense of the supply coming out of China on the generic side. And is that starting to run its course as the impact on pricing and margins have been hit from that? Just a little more color on where the Chinese generics are ending up here.
I mean we track the import prices of the Chinese products. And as you noted, they fell fairly dramatically in the '23 year. We saw uptick on some of them, such as [ glyphosate ] start to move back up. Some of the products have flattened out. Some have trailed down even a little bit further. But I mean, there is pressure certainly on the Chinese producers, given the Chinese economy, to export everything they can. But then as far as what's in the channel, we don't deal on a lot of generics. We do have probably maybe Central America might be where we have more, but we're relatively flat year-over-year, down maybe 3 or 4 in 4% to 5%, I think, in Central America. So again, our emphasis is on the products that we manufacture. It's where we did our best margins. It's where the focus of our global team is. So not that we are unaffected certainly, for sure, by a lowered abundance of Chinese products, but it's certainly not anything that's core to us.
Appreciate the color. And then one last one for me. Just looking at your 2024 guidance. And you're looking to really drive growth in your SIMPAS and the Green Solutions segments there. I know you've had lofty targets there for the next couple of years. Obviously, that's probably been right revised down. But just put it in perspective where SIMPAS and Green Solutions fit in driving that growth in 2024? And any indications of expectations for those 2 segments over the next couple of years here?
Yes. So both of them are, again, technologies where we've got intellectual property that we're excited about. I would say Green Solutions didn't hit the expectations for growth that we were hoping, certainly, neither did SIMPAS. But we did have growth in both. But I think as people were dialing back investments, that certainly had a position. But yes, going forward, the commissions are sound. Again, from the farm gate economy, I think that may have been down, but things were near record high. So there's plenty of profit there. So I mean it will be us moving out and showing the return on investments that can be there with our Green Solution products. I think the demand continues to increase for Green Solutions as part of soil health, more efficient uptake of nutrients within SIMPAS, we continue to add to our portfolio of products. So I think we're adding several products here for this year and plan on more than for the '25 year. So as we add more products that just builds the demand for multiple products being applied at the time of plan.
Your next question is coming from Chris Kapsch from Loop Capital Markets.
I'll just pick up from the last question, I guess, on the growth platforms. Just curious if what you're saying just now, Eric, is do you think that the growth objectives and trajectory for these platforms is still valid? Or are you going to have to adjust the timeline over which you might achieve those targets? And then within peeling that back a little bit, which of the platforms are you -- based on the momentum or the commercial traction that you have, which are the growth platforms you feel most confident about in terms of the growth targets that you conveyed and which ones do you feel like maybe were set back because of this supply chain craziness and so forth?
Yes. So I mean, the growth that we're showing in that 8% to 12% is a combination of all 3 targets. Yes, we will, at March reset our targets over the '25 and '26 year that we have previously given. Yes, we obviously took a step backward in '23. And I think we'd like to go another month or so to see how things unfold so we can do maybe a little bit better update as to how we're going to look in our growth on all 3 platforms over the next coming 3 years.
Okay. We'll sit tight on that. But speaking of the March, I think you said that you would use that event to quantify some of the expected transformation targets in terms of sizing the prize and just the overall transformation program. But I'm just curious, based on your initial guidance that you're reaffirming for '24, how much benefit are you expecting just from the initial transformation efforts that are going to be in place this year?
Yes. So I mean the initial piece that we identified the $15 million that we did that really was not related to the transformation targets that we were looking to accomplish. So there were -- when you're looking at how to how to improve operating margin and costs and that sort of thing. Those were efforts that we did without what we are now implementing. So that would be something that we would look at, okay, and how much of this is going to occur in '24 and then what's more annualized on '25 and '26 going forward. So that's what we're in the process of pulling together. Now I mentioned 4. I mean, as far as improvements in freight, raw materials, interest and I'll say, manufacturing optimization, those are part of -- I mean, those will certainly be things that are going to be measured as part of the transformation process and the KPIs, but those are efforts that we began early in '23. So we think we made good improvements in Q4. Obviously, I mentioned earlier about the bank regency increase in interest. So of course, driving interest down is something that is key for us. We're doing a better job of collecting cash globally $220 million on our inventory, we'd like to step that down to maybe in that 200 or below at the end of the year. And getting our debt-to-equity ratio down, of course, that just lowers our interest rates with the bank. So I would say, we still have we still have, I think, to report -- and we've met with currently several times, and I meet with them once a week, but our team is meeting with them daily here. And they've laid out some initial targets, but we need to bake those a little bit as to how much benefit we're going to get from the system itself and having more clear data. But they've given us some targets that we are looking at now. We'll do see test to check on those and being in a position to give you some guidance in the March call.
Just to make sure I understand. So those opportunities that should manifest through the transformation process. Is that separate than the $15 million initial target that you referred to? I'm just curious about how much of the 15 might be expected to contribute to the bridge from, call it, $58 million in EBITDA to $75 million in EBITDA based on your guidance. That bridge is a little over $17 million. So some of that is just business recovery, but it sounds like some portion of it is from cost, taking out costs as well. So I'm just trying to...
Yes, in that $15 million, again, there were a number of pieces that we touched on, having us all rowing the boat in the same direction with the same information, being able to make better decisions. I mean our sales team spends a lot of time putting information in. We expect to be able to free up some of their time by having the systems automated. So that should result in more sales because we have a little bit more time with which to focus on customer interaction. So that would be an example of something that we've not put in play that we can quantify and then report that. So going back to part of what we're doing, say, with optimizing manufacturing, how well our yields are, raw material reductions, those are pieces that we have baked into that 15%. But we don't have things like I mentioned, benefits of sales and having better visibility, let's say, of our margins in real-time so that we're not -- I mean it's visible to the marketing team. Here's where we are. I think I mentioned also that we are making freight into the cost of goods. But getting them back available in real-time to any of our people will be, I think, a valuable tool as we look to optimize our margins globally.
Okay. If I could just circle back to 2 more. One is on the comments about the generic pressure from China and particularly in broad spectrum herbicides post -- so [indiscernible]. So you mentioned it doesn't really affect you directly. So I'm just wondering if there's an indirect effect on that, particularly in your Central America, Latin American operations. Is that aggressive exportation from China, is it affecting just the pricing overall? Because you mentioned that your margins have been maintained, but you also mentioned that this is a dynamic that's influencing the market. So I just wanted to reconcile that.
Yes. I mentioned impact, which is an adjunct to -- I mean like to steroid. It's a little bit of cover for [ hard-timed glyphosate ]. But we have broadened that into offering an impact-like glufosinate combination and atrazine combination at a cedar combination. So we've broadened the spectrum of what we can do with that molecule. But as I said, there was a lot of broad coverage herbicides that where the price came down. And that was probably, I would say, the biggest effect on pricing. So I mean we certainly have some effect. But I mean overall, they were down, again, 5% for the year, and we had 2 key products that we weren't able to provide in the season. And so we're not quite in the same realm as people that are more reliant on generic products.
Okay. That's helpful. And the last one is just taking a step back. I mean, if you look at the share price has been halved over the last year. In what you've conveyed today, you're saying -- my interpretation, that, okay, there was obviously some industry issues and then some idiosyncratic issues that have affected American Vanguard's performance. But the fourth quarter should restore some confidence. Your guidance, if you hit it, suggests like, okay, this business isn't broken, we're just navigating some challenges. Now as you come through this, if you come out at 2.7x levered with that improving EBITDA trajectory, one could say by the end of this year, '24, they'll be overcapitalized. If that EBITDA level is hit, rough math here, the company is valued at 6.3x, which is pretty attractive, considering where these assets typically trade. So the question is does this lead to an opportunity for American Vanguard to put some capital to work and buying back stock at these Leger levels? Just what's your view on that? What's the right leverage level for the company to operate as you go through this transformation and navigating these issues?
I mean you're making the call that the stock is undervalued, and we certainly would agree with that. Now as far as stock repurchase, we did participate at a greater level previously. With the leverage that we hit, we're in a temporary suspension with our bank from acquiring, but we are in a position that we can choose to come out of that covenant. And if we do so, then we would be in a position should the Board agree that we could be back in the market purchasing stock. That being said, we're obviously looking at what's the best return on the money that we have. We obviously mentioned we've got a little bit more runway now with $100 million to work with. And we want to make sure that we deliver on our numbers because, frankly, we deliver on the numbers [indiscernible] but at these levels, stock is very attractive.
[Operator Instructions] Our next question is coming from Jeff Bronchick from Cove Capital.
So let's presume it's extremely doable and within the core of your confidence to reproduce your 2 products to see normal supply chain reversion and get inventories down as they have in the past and et cetera. But here's what I'm missing as someone who's followed the company for a very long time. I don't see anything different. I mean in other words, yes, a year, 18 months from now being a better organization and doing things today that maybe should have been done 5 years ago, okay, better. But for example, is this process and the 3 new board members that came on, is there a complete review of why this company exists as an independent company? Is there were review on really why are we still devoting time, effort, and attention in SIMPAS, which again, I would argue is just never going to happen. Is there going to be an announcement of some new strategic division or a vision for the next 5 to 7 years, which I would argue the company had 15 years ago and meander over the last 15 years? That's what I don't hear. Everyone on this call, I think, can assume you guys can mean revert back over and over the next 18 months, it'd be back where you were. But then what? And how does the company and a stock that's whatever been in the teens "for" 15 years get better?
So we've outlined the plan that has gone from what we say, our core business, which has been largely responsible for our growth for a number of years and going from a market cap of less than $10 million to -- and yes, we've gone through our down cycles in that front. But our core business has been acquiring products and growing those products that no longer or to our peers or through the combination of acquisition, consolidations, they've got an excess portfolio. So that part is still robust for us. Our peers order rationalization every 3 to 5 years. So that continues. But what we've done is we've grown from being a U.S. company to being a global company. We've acquired businesses as part of our core piece that would allow us to expand our strengths and leverage our manufacturing assets into other countries. Green Solutions happens to be 1 of the 2 biggest growth areas for our industry, which is something that we've seen strong investments and big investments from our bigger peers have put into getting into that space. We've had relatively frugal investments to acquire and have a position over 100 in that line deal patents as well. So that's a growth cycle that we and the board think is great. And with regard to SIMPAS, yes, the technology for precision again, is the other big growth area for the industry. So we have 3 growth platforms that are interrelated. And as the Board has reviewed and looked at it, the consensus is, we need to implement these growth patterns and feed upon them, and grow them. So yes, that's where the Board is now. And as far as looking at acquisitions, mergers, divestments, as a Board, obviously, we're always looking at the best opportunities to improve shareholder value. So I mean, that's the position. We're open to alignments with other companies, and we have done so in the past. But we've got a unique position here in the industry, and we think we're in a good position to exploit and execute on it.
We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Well, I guess we're talking about providing additional color, but we felt it was important that we give you an update of where we believe we are at this point rather than waiting until the early March period. So again, we'll touch with you shortly and appreciate the questions and the time that you people sat on the call. Have a good evening.
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.