American Vanguard Corporation Price & Performance (AVD)

Audited financial documents shortly. It is now my pleasure to turn the call over to CEO, Dak King. Thanks, Anthony. Hello, everyone, and welcome. My name is Douglas Kay. Throughout my life, my family, friends and colleagues have referred to me as Daphne. So please feel free to call me Daphne in the future. This is my first conference call as CEO. So before discussing our results, I would like to take a moment introduce myself and answer the question. I have received most frequently during my three months on the job. Why did you join American Vanguard? I've been on the job as CEO for three months, but have known competed against and admired American Vanguard for many years. I started my career in finance, but have spent the second half of my career managing and growing large scale crop protection businesses. It was not an easy decision to leave my last role but I saw a tremendous opportunity at American Vanguard to build upon a business that provides high quality, irreplaceable products that our customers value and needed by growers. This company has a resilient revenue base we can build upon. We must improve margins. Right size the balance sheet, and get back to growth.

As David will discuss in a few minutes, the one time charges taken quarter are part of a broader strategy to improve this business. The magnitude of the charge is substantial. These steps are necessary to reposition the company for long term growth and profitability. We have a lot of ground to cover on this call, but before we get started, I wanted to emphasize that I plan on having a culture that stresses the importance of safety. Ensuring the safety, health and well-being of our employees and the environment is an important part of my role here and one of my goals is to ensure that our employees return home safely after every day of work. From the attached chart, you can see our safety performance has improved over the last twelve months. One of my goals as CEO is to ensure that this trend continues to improve. While we may never be the largest agricultural company, I will strive to make this one of the safest. [indiscernible] Now turning to the full year 2024 results. To be able to compare our '24 results with previous periods, I will reference adjusted numbers. American Vanguard generated approximately $42,000,000 of adjusted EBITDA in 2024, within the range of we previously communicated of $40,000,000 to $50,000,000 Adjusted revenue was approximately $563,000,000 slightly below our target of $565,000,000 to $580,000,000 We acknowledge that in the past, American Vanguard has had history of missing its targets going forward, we want to be a company that sets achievable goals and consistently meets or exceeds these benchmarks.

That is a commitment we want to make to our stakeholders. Our customers, regulators, employees and shareholders and all other constituents. While we are pleased to achieve to have achieved our 2024 EBITDA target, target, the result is just the starting point for what is possible at this company. In my opinion. With an adjusted EBITDA margin of 7.5% in 2024 we would view this level of profitability as being approximately half of what our full cycle earnings power can be. On a percentage basis, we believe that we can achieve double digit EBITDA growth over the next three to four years as we simplify, prioritize and deliver. This is a mantra that I have been repeating since the first day I've joined the company and will continue to repeat the foreseeable future. For a relatively small business, I have noticed a significant amount of complexity and I believe that simplifying many of the things we do will allow us to better understand what is important and being able to deliver against the highest priority task. The Board of Directors has taken the right initial steps to fix the business over the past seven to eight months. [indiscernible] cutting costs and looking to install an ERP system with the right initial steps to fix the business.

I had a deep understanding of what the Board was looking to accomplish before I joined the company, but I believe the transformation plan was a starting point for what is possible, not the ultimate destination. I don't think anything revolutionary is necessary to improve upon the business transformation that is well underway But deploying modern management techniques that I've implemented in several prior positions should build upon the targets we've already established. Before I turn the call over to David, I can provide some details on what we are seeing in the pharma economy. Since taking this role, I have met with many of our largest customers. With whom I've had longstanding relationships. These customers are indicating that the slight improvement in the sentiment since the low points experienced in the summer of twenty twenty four has created a more positive environment amongst rovers. But they remain conservative in their buying patterns after enduring the recent cyclical downturn and facing the uncertainty of continuing high cost of capital and now the specter of increasing tariffs. It seems the channel is purchasing in season instead of ahead of the season as we have seen historically. It does not appear that customers are looking to rebuild inventories which have largely been depleted.

Instead, they are buying just in time for the season. I firmly believe that 2025 will be better than 2024. But the improvement will be gradual. And interest rate environment coupled with the uncertainty of potential tariffs lead to farmers remaining cautious for some time. Taking into consideration these factors for 2025, have an adjusted EBITDA target range of $45,000,000 to 52,000,000 and expect sales to fall in the range of $565,000,000 to $585,000,000 dollars We expect CapEx of approximately $10,000,000 for 2025. So free cash flow should be meaningful, which we will allocate towards the pay down of debt. As we continue to transform this business, believe that future margins will continue to improve and we believe there will be further margin enhancement in 2026 and beyond. Now, I'll turn the call over to David to discuss financial results before returning for my closing remarks. Thank you, Dak. Good morning, everyone. Turning to our financial performance. I'd like to reiterate that our comments today are based on unaudited numbers.

Our fourth quarter revenues were approximately $169,000,000 a decrease of 2% as compared to the fourth quarter of twenty twenty three and our adjusted EBITDA was approximately $18,000,000 a decrease of 18% as compared to the fourth quarter of twenty twenty three. During the fourth quarter, we were able to pay down $22,000,000 in debt, In addition, the company is focused on improving its balance sheet and we are pleased to be able to report that inventories ended at approximately $180,000,000 which included some write downs for obsolescence and slow moving. In 2025, the bulk of the free cash flow we generate will be allocated towards paying down debt. For the full year 2024, the company recorded adjusted revenues of approximately $563,000,000 a decrease of approximately 3% as compared to 2023. [indiscernible] This excludes the credits we recorded to withdraw Dactol from market. Our reported revenues will be approximately $550,000,000 Adjusted EBITDA was $42,000,000 as compared to $53,000,000 in the prior period. We continue to make progress in our effort to drive down inventory. Before asset write downs, we decreased our inventory by approximately $47,000,000 during the quarter. But slightly missed our inventory to sales target of 34% While we had previously targeted inventory to sales, we are now adjusting this target to inventory turns as we believe this more closely aligns with the goals of the business.

Our average inventory turns for 2024 ended at 1.67. On an adjusted basis. And we should be able to push this metric towards about two turns by year end 2025. I would also like to mention that we received an amendment to our credit facility For over thirty five years, BMO and its predecessors have shown continued support for our business. We appreciate the vote of confidence they are showing in our transformation work. With our credit facility expiring in August of twenty twenty six, we aim to announce a new facility in the summer of this year. Let's discuss the one time charges impacted our performance In total for calendar year 2024, we have recorded $118,000,000 of non recurring charges. The magnitude of these charges highlights the amount of work that was necessary to reposition American Manganar. The one time charges fall into two categories, asset impairments and transformation projects. With approximately $76,000,000 in asset impairments during the fourth quarter, We consisting of the SIMPAS write down, which was approximately $22,400,000 a goodwill write down, which was approximately $27,000,000 the write down of slow moving and obsolete inventories, which was approximately $20,000,000 and the write down of a previous investment and other assets.

We had smaller transformation charges during the fourth quarter, [indiscernible] These expenses and the write downs are substantial, but they position American Vanguard for improved profitability and growth over the coming quarters. I would be happy to answer further questions about these charges in our Q and A. Finally, I would like to mention the delay in our financial filing. With a number of somewhat complicated assessments required related to the write downs especially goodwill, we have addressed in the fourth quarter we will end up filing our 10 ks after the statutory 12b25 with the SEC. We are working with our auditors in an effort to complete the open items with a view to filing the 10 ks soon as possible. With that, I would like to turn the call back to Dak.

Thank you, David. Before we wrap things up, would like to acknowledge two new members of our team one promotion. We have recently hired Mike DePaolo, as Senior Vice President of Strategy and R and D. And Jared Strayle, as Senior Vice President Operations and Supply Chain.

I also recently promoted Neltaneus Gillum to Senior Vice President, Manufacturing. Mike and Jared were hired to bring a skill set to American Vanguard while Altanius is getting a well earned promotion from within. I'm excited to have all three reporting directly to me and over time I look forward to introducing them to the investment community and I'm sure you'll be as impressed with them as I am. Looking forward to 2025, as we stated earlier, the agricultural economy is gradually improving. And we are making steady progress with our business transformation. We've analyzed the ongoing tariff situation and believe it will have a nominal impact on our raw material costs with less than $3,000,000 EBITDA impact if tariffs remain in place for a full year. Given the fluid nature of the situation, it is too early to tell how this may impact growers. But we are in a constant contact with our customers as we gauge how they're reacting to these developments. We have the capability to improve our profitability, through our business transformation and we look forward to even stronger results in the future periods driven by initiatives are within our control.

Before closing the call, I would like to say that I am more excited to date than when I originally joined the company. I have seen a lot of opportunities to improve and modernize the company, to drive improving results. As we look forward to 2025, our goals are straightforward. Operator manufacturing facilities as safely and as efficiently as possible. Achieve the financial targets that we have provided, further transform this business into a company that can consistently generate free cash flow to match the resilient revenue it already generates. And right size and strengthen the balance sheet. Which will entail decreasing net working capital and paying down debt. As we achieve these near term benchmarks, we will be moving towards our longer term goal of becoming the trusted provider of proven agricultural and environmental solutions. With that, will open the floor for questions. Operator?

Thank you. At this time, we will be conducting our question and answer session. Our first question is coming from Ben Kleeve with Lake Street Capital. Your line is live.

Thanks for taking my questions. First question around the preliminary nature of the earnings release. You noted in the prepared remarks that this would get as soon as possible. I'm wondering if you can, first of all, help kind of characterize your expectations for timing And then second of all, it sounded like the reasoning behind this was purely a function of just a kind of a more kind of complex dynamic around the series of write downs rather than anything that was necessarily surprising or concerning. I just want to confirm that that's the takeaway that we should have here for the reason behind behind the preliminary nature?

Yes, I think that's a fair a fair assessment. It's a little difficult for me to say exactly when in the next week or so that we'll file. But we're working as hard as we can with our auditors to finish up all the procedures.

Okay. But you're looking at days or weeks, not months Oh, certainly, yes. Okay. Okay. Perfect. Very good. Great job on the balance sheet here in the second half of the year and appreciated your comments on inventory turnover expectations for 2025. I'm wondering if you can further elaborate on how much you think you could potentially still get out of working capital in 2025, given how much progress was made in 'twenty four? Outside of inventory expect any other working capital net inflows? Or do you think that's going to be kind of a more static number in 2025?

Inventory is certainly our high focus item. It's the one that we see the greatest opportunity to move in working capital down. So yes, we're highly focused on it. We've got newly sort of refreshed version of our SIOP model and as Steph mentioned earlier, we've got Jared has joined and he's going to be leading that process It's a focus that we haven't had before.

Very good. Dak, a question for you. You noted the the complexity of the organization. And some how you're looking improve that dynamic. Can you talk about kind of the steps that are needed to to improve the complexity? How much of the complexity will be addressed you think by a modernized ERP system? Versus larger structural or organizational change that needs to take place Yes, I guess that's my first question.

Thanks, Ben. Yes, So it was extremely complex when I came in. It was on the path from an organizational restructuring with the Kearny transformation plan. So there was a lot of work done in 2024. We finalized that plan, the organizational plan, which simplified the structure so that we had some accountability and responsibility in the functions. Think that was the first necessary step to get the organization accountable and also at the same time reduce some of that complexity in the organization to identify The ERP system absolutely will help us reduce the complexity. The flow of information will be tremendous improvement over the next twenty over twenty '25. So the ERP system will greatly enhance or simplify, I would say, the transfer of information around the organization. The other on the simplifying as the SiOP process, along with the ERP system implementation of the SiOP or the re implementation, I'd say, that will greatly improve our efficiencies and managing inventory and procurement there's a simplification there. And I also would say, as we refocus the business on growing our portfolio organically, stage gate process of managing product new product development will simplify that process as well. So there are a lot of things ongoing inside the business today that will create that simplification and prioritization and allow us to deliver as well.

Great, great. We're looking forward to hearing progress on that throughout this year. Last one for me and then I'll get back in queue. You've flagged tariffs [indiscernible] impact on raw materials would be pretty negligible. As we understand the tariff situation to be today. But I'm curious your comments on revenue guidance, in the kind of cautionary note you have regarding tariffs. How are you seeing farmer buying patterns kind of impacted by this uncertainty? Is it a function of them just really wanting to have a just in time approach to buying crop protection products? Are they really [indiscernible] as a fallout of of this and not having end buyers for their harvested grain? What really are farmers looking at in the context tariffs right now that are impacting your guidance?

Absolutely. I mean, uncertainty in any business creates uncertainty. So that's what we're seeing around the tariffs right now. As you mentioned, I don't believe that the tariff impact on our raw materials is material in nature around $3,000,000 for 2025. When we're talking to our customers, who are the distributors or distribution in the channel, [indiscernible] relatively positive about the change from '24 to '25 in the ag industry. But growers are being cautious around this because of the impending impending tariff implications, not necessarily on their underlying cost, but as you mentioned, the potential on the reciprocal tariffs on their commodity products. So that's the concern there. But we do have a feel that the 2025 will be better than '24, that's a pretty positive indication in the marketplace. If we can get through these tariff issues, I think it'll be a very good year [indiscernible] Very good. Well, I appreciate you guys taking my questions. Best of luck here. With all these ongoing initiatives and I'll get back in queue. Thank you. Our next question is coming from Mike Harrison with Seaport Research Partners. Your line is live.

Was hoping just kind of piggybacking off the last response to the last question there. In terms of channel inventories in the marketplace, can you talk a little bit about what you're seeing in your your key regions? Are there still areas where distributors feel like they have elevated channel inventory and they're continuing to pull back on purchases. Or have you seen some improvement either broadly or in specific regions?

Yes, Mike. This is Dak. Thanks for the question. And it's a good follow-up question. To finish up on Ben's question. The channel inventories, we do see those down [indiscernible] In The U. S. And around the world. They are down. And then we hear that from our customers The issue is that the cost of capital now the channel seems to have gone to adjust in time servicing of the products. By the grower for the growers so that we see an adjust in time now So there's not a real indication of restocking as they were in previous years. Before the downturn. So it's more of the channels have destocked but the restocking is not going back to levels that they were pre-twenty twenty three.

But we are seeing favorable conditions in the marketplace as the the growers are and distributors are purchasing but just in time for the season.

Got it. And then a couple of questions on margins. [indiscernible] for the full year 2024 being about half of the earnings potential or that earnings power over the cycle. Can you just help bridge how you guys would would expect to get to a mid teens EBITDA margin How much of that is kind of volume recovery and operating leverage How much is related to the ongoing business transformation? And I guess are there any other key pieces or key drivers of margin improvement over time?

Yes. Good question. And the way we envision it we'll have the transformation process we've got ongoing with the commercial activities. That's one component of it. And we've I figured that around 3% we can go from 29% to say 32% Gross margins on products on sales. That will be that will give us a portion of the way The rest of the way, roughly, we need to come down from that OpEx as a percentage of sales of 26 to low 20s to around 20% is what I would say. Some kind of mix of those two The OpEx is being addressed ongoing with not only the transformation reorganization process, but also administering cost cutting cutting strategies as well initiatives as well. But the 7.5% plus the gross margin plus the OpEx reduction should get us in those mid teens full cycle.

All right. Very helpful. And then just in terms of trying to understand the earnings cadence for 2025, At the midpoint, your guidance is call it, 8.5% EBITDA American. You're coming off the Q4 where you did closer to 10.5%. So just kind of curious, should we expect EBITDA margin to kind of start lower in the first half and then show improvement and momentum, maybe even getting further into the double digits in the second half? Just kind of what are your thoughts on margin margin and earnings cadence this year? Thank you.

Great question. Yes, we are seeing the second second half of the year be more positive in the EBITDA margin. So we anticipate Q1 and Q2 being lower in that respect. And the Q4 is always been a strong quarter for us and we've seen that projecting that for 2025 as well. So H2, the second half of the year will be more positive than the first half of the year.

All right. Thanks very much.

Thank you. Our next question is coming from Wayne Pinson with Gabelli Funds. Your line is live.

Hi, Dech. Thanks for taking my question.

Congrats again on your first call as CEO.

Just wanted to piggyback on that question.

Just given everything that's going on in the industry and specifically at the company over the past couple of years, can you just further speak to your confidence in the 2025 guide and what could take you to the upper and lower ends of the range? I think that's a good question, Mike. Thank you. The lower range would be something slower than in the ag industry, slower than 2024. And the upper end would be a positive positive influence on 2025. In the ag industry, there will be lack of that the it'd be more positive and from the purchasing of the from the growers. But we anticipate that the lower end of the range would be something negative, I would say, in reflection as compared to 2024. So we anticipate doing better than 2024 in nearly all cases.

Okay. And then you mentioned a few of the things you're working on and the transformation plan being a starting point, is there anything substantial that you're going to be doing in 2024? And can you quantify if there's any any further substantial transformation costs in 2024?

In 2025, sorry?

Yes. So from the transformation cost will not be substantial. We've We've got those projected at around $5,000,000 for 2025. So way down from 2024. The largest pickups in 2025 from the from the transformation it will be around the commercial activities. We expect $4,000,000 to $5,000,000 around those. And then also in logistics and procurement, another 2 to 3 And then there's also some organizational pickups as well around $2,000,000 So we get it around $8,000,000 to $10,000,000 of transformation benefits in 2025. [indiscernible] Thank you. As we have no further questions on line at this time, I would like to hand it back over to Mr. K for his closing remarks.

Thank you, operator. I'd like to conclude by thanking everyone for listening and participating in our call today. I look forward to providing further updates on our ongoing initiatives and value your questions and support as we strive for the long term success and growth of the company. These interactions give us an opportunity to think in a disciplined way about how we are assessing our recent past performance and our prospects. And also to hear from you about what's on your mind and maybe the gaps in what we've explained to you and how we can better respond. Are committed to maintaining transparency and open communication So please feel free to contact us if you have any questions or need further information. [indiscernible] and see some of you in person in the near future, I'll be traveling to New York City next week to participate in the sixteenth annual Specialty Chemicals Symposium hosted by Gabelli Funds and perhaps I will have the chance to meet you meet some of you there. Importantly, as I stated earlier, I don't think anything revolutionary is necessary to execute and improve upon the business transformation that is underway at American Vanguard. My mantra is straightforward in this regard, simplify, prioritize and deliver.

Thank you again for the participation and we look forward to reporting our first quarter twenty twenty five results to you in May. Thank you. Thank you. This does conclude today's call. You may disconnect your lines at this time. And we thank you for your participation. [indiscernible] [indiscernible] [indiscernible]