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American Vanguard Corporation (NYSE:AVD)

Q3 2008 Earnings Call Transcript

November 6, 2008, 12:00 pm ET

Executives

Bill Kuser – Director, IR

Eric Wintemute – President & CEO

David Johnson – CFO

Analysts

Salomon Kamalodine – B. Riley & Co.

Jay Harris – Goldsmith & Harris, Inc.

Mark Gulley – Soleil Securities

Matt Hagerty – Pennant Capital

Norman Hayman [ph] – Technological Investments [ph]

Jim Bartlett – Bartlett Investors

Operator

Good day, everyone and welcome to American Vanguard's Q3 2008 Financial Results Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

I will now turn the call over to Mr. Bill Kuser, Director of Investor Relations. Please go ahead, Mr. Kuser.

Bill Kuser

Thank you very much, Rachel. Welcome everyone to American Vanguard's third quarter and nine-month earnings review. Our speakers today will be Mr. Eric Wintemute, President and CEO of American Vanguard; 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 the management's current expectations.

Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks as 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 will turn the call over to Eric.

Eric Wintemute

Thank you, Bill. Good afternoon to the east coast and good morning to everyone else. Thank you for joining us today. We are here to discuss American Vanguard's 2008 third quarter performance. We will cover financial matters and will also highlight several key points.

First, that this quarter's improved results again validate the balance in our business model between our mainstream crop business and new products additions, our international sales and expansion of our non-crop specialty items.

Second, what we are doing to maximize use of our manufacturing facilities, maintain our profit margins through cost savings and pricing. And third what we are doing to successfully compete in a changing marketplace.

There is a Chinese proverb "May You Live in Interesting Times". While the third quarter of 2008 will certainly go down in history as interesting, but at American Vanguard, we believe that our third quarter results reflected our business plans and operations can withstand the test of fire.

We endeavor to establish a business model that reflects broad-based stability while maintaining and even boosting steady performance in our main agricultural product lines. We concurrently sought to increase international sales, development of new product sales and development of our line of non-crop applications.

Over the last several years, our international sales increased from roughly 7% of American Vanguard's revenues to 15% for the full year 2007. Although we do not expressly breakout international sales on a quarterly basis, this year's performance has reflected a 35% improvement over last year's third quarter.

Our international team of sales and marketing is doing an excellent job in Mexico the vegetable crops with our Metam Sodium fumigants, in Asia, the vegetable and corn markets with our insecticides Thimet and Counter, and in Canada, with our turf products Terraclor and Turfcide.

We are continuing to capture growth opportunities in Central America with our establishment of a new subsidiary in Costa Rica. And through our own efforts and working with suppliers we are working to make Central America, a part of American Vanguard's success over the coming years.

Our non-crop business has also contributed to the continuing stability and success of our business model. This quarter increased sales of our mosquito adulticide Dibrom reflected our ready response to potentially massive insect infestation caused by hurricanes that battered the Gulf Coast States.

Dibrom has shown significant technical superiority to the more traditional ground application of Malathion and traditionally Dibrom has been used extensively in Florida and Louisiana. In the face of increased threat of disease, FEMA, The Federal Emergency Management Agency, this year initiated aerial application of Dibrom in Texas, where previously ground application of Malathion had been the norm. We expect that the indirect introduction of aerial applied Dibrom in Texas will open additional markets for American Vanguard and this product in coming seasons.

The performance of our non-crop products was also enhanced by expanded turf and ornamental applications, both domestically and internationally. Our acquisition of Chemtura's PCNB fungicide business performed well for AMVAC and reflects our continuing commitment to well differentiated branded products that can contribute to our growth.

We have begun commercial sales of our Nuvan posters [ph]. Our strips provide professional pest control operators with effective, economical, residual pest deterrents as a follow-up procedure to the primary treatment of residential and commercial buildings. Our penetration of this professional and commercial market should result in significant sales in the coming years.

We have also applied for registration of a bedbug label. This will allow hotels, hospitals, and universities combat a persistent and growing product -- problem in their hospitality and residential occupancy business. In short, these interesting times are exposing opportunities for American Vanguard and we are well posed to embrace them.

I will address more about our efforts to increase performance in a moment. But, at this time let me turn the call over to David Johnson, our CFO for a summary of the financials for this third quarter. David?

David Johnson

Thank you, Eric. Good morning and good afternoon to everyone. For the quarter ended September 30, 2008 our sales are up 19%. Eric, has already briefed you on the details, but I'll add a couple of points. Sales on our new product lines are performing slightly better than expected at approximately 3.3 million for the quarter, accounting for 30% of the sales increase.

Corn is always a key issue for the company and during the quarter we had two different dynamics. Our corn soil insecticides performed at the expected level in the quarter, marginally better than last year. Our impact product had lower sales than last year as customers managed their inventory levels. In fact, our field information, says that pounds on the ground have improved. We are anticipating a reasonable final quarter on this important product.

Raw material price pressures continue to be a major issue for the company. As previously reported, price pressure has been significant on petroleum, sulfur and phosphorus-based raws. We have worked with these issues in a number of ways including, long-term purchase agreements with key suppliers, decisions to purchase ahead of expected price increases, accepting inventory pressures and offsets, making selective product line selling price increases.

Overhead manufacturing costs have increased driven by three factors; labor costs impacted by inflation, various other factory costs impacted by inflation, capital spending or one-time costs. And furthermore the acquisition of two additional manufacturing sites when compared to 2007.

Overhead costs recovery performance is a major focus for company management. The business has previously reported that we operate with some spare capacity, which is inevitable when the business is growing and expanding its manufacturing footprint.

We are making progress in bringing in-house the manufacture of our own products now more than 60%. And we are working on a small number of tolling agreements to manufacture products to third parties where the chemistry involved is familiar to us.

Gross margin for the quarter is up 43% in 2008, unchanged from 2007. This emphasizes the success we have had with mixed management, purchasing, inventory actions, cost control and working the overhead recovery issue.

Operating expenses in the quarter are 28% up, compared to 2007. Increases in advertising programs, intangible, amortization, product defense and product developments are offset by a long outstanding claim as an insurer related to the recovery of legal costs, previously expensed.

Freight expense is up significantly compared to prior year; the main dynamics are overall volume up 19%, including international sales of 35%. Significant expense in Q3 responding to the urgent demand for our mosquito products, a sales mixed shift compared to the prior year with higher percentage of our sales in large volume products like Metam and PCNB, will continue to impact or fuel price increases.

Interest expense has ended almost at the same level as last year's, and we have benefited from a lower LIBOR rate, down on an average of 1.9%. We have offset that with higher average indebtness of $20 million.

Our effective tax rate is down 37.5% for the quarter. This represents the catch-up to the forecast 2008 annual rate of 38.06%. Our improved tax position reflects our domestic manufacturing, and work on product development.

As reported in the earnings announcement net income up 11% and EPS of 10%. Eric has covered most of the factors in the nine months sales performance, but in addition we had a strong year on new products.

Sales were up approximately $12 million, accounting for 63% of our year-over-year sales growth. While our cost of goods sold is flat to Q3 as detailed earlier, for the nine months our cost of goods sold as a percentage of sales are up approximately 2%.

Having said that, the drivers are very consistent from significant pricing increases on key raw material, which we are handling with the same tactics detailed for the quarter; reasonably control factory expenses; and continued efforts to improve factory utilization. As a result of these dynamics, and the specific sales mix of our products, gross profit is down year-over-year by approximately 2% at 42%. The drivers for operating expenses are similar to those detailed for the quarter.

Our interest expense is significantly lower in the nine months period, compared to the prior year. Average borrowings are flat, but LIBOR has been tracking about 2.4% on average lower, driving a cost reduction to the company of approximately $1.5 million. As reported in the earnings announcement, net income is up 8.4% and EPS is up 7.3%.

Given the current turbulent conditions in the financial world and given the dependence the company has on its debt position, I thought it useful to give some relevant information. Our relationship with our bankers is of paramount importance at all times, but never more so, than in times such as this.

The company has been with the Bank of the West or predecessors for something near the 25 years. Bank of the West itself is a wholly owned subsidiary of French bank BNP Paribas. The bank is also main lender and the syndication manager for our loan facilities. We review the bank's credit worthiness on a monthly and quarterly basis and meet with key people at the bank regularly.

The syndicates involve six additional lenders. We have debated the current position and appetite of each of the lenders of the Bank of the West and directly with three of the main lenders. The view is that the syndicate is a strongly supportive of the company, and three of the biggest lenders have expressed an appetite to lend more in the right circumstances.

As you will see in the 10-Q statements, our borrowings at the end of September of about $81 million are higher than last year but are lower than the ends of Q2. Based on the covenants to our loans, we could increase our borrowings by 45% to 50%.

Having said that, I want to end with some comments, specific to our use of the cash flow and balance sheet. Our cash flow shows that during the current year we have generated $22 million compared to $19 million in 2007. However, we have increased our net assets and liabilities over the same period by about a same amount. We are effectively at breakeven for the year-to-date. This compares with generating $45 million in the same period of 2007.

There are two main dynamics driving this change. Our business is driving up the level of receivables we have at any point in time. Our average actual payments terms from customers, at the end of Q3 is one day shorter than at the end of September 2007, but our receivables are up $11 million compared to last year.

With regard to cash flow for the year, the collection performance is affected the introduction in Q4 of 2007, a program designed to incentivize customer to accelerate payments. It remains to be seen how the current economic storm will impact customer's decision in the run up to the end of the current financial year.

Inventories increased by $26 million to a degree in support of our growing business, because of new products and because of strengthened market positions. Inventory is also up in value, because of the price increases discussed in the review of our profit performances. However, having acknowledged the reasons, management is working to reduce inventory levels. Furthermore we have spent $20 million on acquiring new product lines and investing in our facilities.

Finally, last quarter, I thought about hedging activities. During Q2, we established Euro-based forward cover contracts, which were favorable at the end of Q2 but it turned unfavorable as the dollar has strengthened. Furthermore, as LIBOR dropped away from our fixed rate interest derivatives on our real estate and term loans, we have also made market value based adjustment through other comprehensive income to reflect these rate changes. Both of these adjustments are timing and will reverse if either the purchase transaction occurs or the fixed interest rate derivative matures.

Now I'll hand back to Eric

Eric Wintemute

Thank you, David. Earlier, I discussed how we have embraced opportunities. Now, I would like to discuss our manufacturing strategy. This year, and particularly this last quarter, I think the problem with using foreign manufacturing sources come to a head.

Quality control issues which have been seen in contaminated baby formula, environmental compliance issues and worker safety issues; and of course the logistical issues and burning cost to transportation and fuel, have drawn focus on the appeal of our North American manufacturing capabilities.

A number of our peers in agricultural chemicals have announced additional investment in North American production, perhaps reversing a trend, towards dependency on foreign manufacture. And many have approached existing manufacturers like American Vanguard for contract manufacturing arrangements.

A Los Angeles Times article earlier this week stated, even before the global financial crisis, factory owners in China were straining under soaring labor and raw material cost; and appreciating Chinese currency; and tougher legal, tax and environmental requirements. Government statistics show that 67,000 factories of various sizes were shut down in China in the first half of 2008. And by years end more than 100,000 plants will have be closed.

At American Vanguard, we think this validates our commitment to our North American manufacturing facilities and reflects both a prudent strategy and ongoing strength. Modest capital investment has been required to acquire and maintain our four plant systems. The capabilities of our operations in Southern California, Alabama, Missouri and Idaho are extremely valuable to this company and our industry.

We intend to maximize the utilization of these assets to the fullest. We intend to continue to improve operating efficiency and fixed cost overhead absorption, by increasing internal production of some of our own products, and by performing contract manufacturing for others.

Escalating commodity raw material prices, rising utility rates, and of course, elevated duel costs have taken a toll on traditional profit margin levels. Of necessity, we've had to look for internal opportunities for discretionary cost reductions in both our operations and administrative functions. We have needed to selectively raise prices in a number of our product lines, to maintain levels of profitability, to remain a reliable supplier and to cover a continuing cost of product registration and environmental compliance.

David mentioned several steps that we've taken to deal with raw material volatility. It should be noted over the past month, sulfur, energy and other building blocks have decreased significantly in cost. We therefore expect some raw material cost reductions going forward. But certainly volatility will remain for some time.

Regarding our key -- our initiatives in key market segments. As you know, the cotton market in the United States has been shrinking in terms of planted acreage over the past two years. Nonetheless, we have managed to participate successfully throughout that period and with the addition of Orthene brand to our existing Bidrin position, we have become a domestic market leader for insecticides in the cotton segment.

With infestation rates that escalate for a variety of reasons, we expect that our franchise in cotton will continue to provide an important contribution to our overall sales in the years ahead.

As we have discussed before, American Vanguard has an excellent opportunity to expand its scope in corn through a series of initiatives. These key management programs include refuge acre management, dual technology, yield enhancement and our impact post-emergent herbicide for containing glyphosate resistance weeds and grasses.

In areas of moderate to high soil insect pressure, we have demonstrated that applying granular insecticides with efficient SmartBox equipment and conjunction with genetically modified seeds can result in substantially enhance yields. We are engage in another round of field trials to substantiate last season's impressive university result.

We will intensify our 2009 planting season’s promotions and we believe that on high infestation acreage this practice of using corn soil insecticide over trait seed will grow significantly in coming years. Our impact post-emergent herbicide for glyphosate resistance weeds and grass containments continues to gain in reputation for superior performance compare to all of the contenders in this category.

Once again we intend to intensify our promotion of this excellent product for use in the post planting herbicide market and as a so called rescue treatment for late season weed and grass growth.

We are enjoying success in the soil fumigant market for a number of crops our Vapam and K-Pam brands are market leaders and our recently installed production facility in Alabama extends our reach into the growing Southeastern region. We have been able to overcome rising raw material cost with necessary and appropriate price increases. We are introducing spray drift application equipment that reduces wasteful spray drift and we continue to lead the industry and educational training and stewardship of our customer's workforce. This is an important part of our business and we are dedicated to it.

This is the time of volatility. Our past has shown that we have taken advantage of the opportunities that present themselves in times of change. Those steps have been taken in the past that we have taken in the past have secured our future. In this tight financial market, we have been assured by our banks to have an appetite to grow with us. It's the right opportunity to rise today. We will continue to build upon our solid foundation for the future.

In conclusion demand for our agricultural crop protection chemicals remain sound. Global demand for food, feed, fiber and fuel will continue to exceed supply. And our valued added tools -- our value-added products are among the tools needed to improve agricultural productivity, enhance crop quality and defend against resistance development.

We envision a continual expansion of our market position. And in a world wash in equity and security, I believe that the long-term value of this franchise and the potential for us future growth are both very promising.

And with that Rachel I would like to open this up to any questions that our callers may have.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Salomon Kamalodine with B. Riley & Company.

Eric Wintemute

Sal, are you there?

Salomon Kamalodine - B. Riley & Co.

Yes, can you hear me?

Eric Wintemute

Yes, we can hear now.

Salomon Kamalodine - B. Riley & Co.mpany

Okay. My first question is on Dibrom wondering if you could maybe give us a sense of the incremental opportunity that's associated with the Texan market.

Eric Wintemute

Texas, there were really good four counties that had used Dibrom in the past and Texas was not in a position, I guess, they're not done a whole lot for nuisance type mosquitoes. This last round that came in I think based upon what a performance that Dibrom had done in Katrina, really opened up, FEMA came in and took all of the government Air Force planes converted them and started fairly masters spraying in fact that was probably the greatest area of spray in the season. Quantifying that which I know which you want to get to and I don't know that we can other than clearly Dibrom was called upon to treat what was expected to could have been a disaster situation and passed with flying colors. So I think some of the traditional mosquito personnel or responsible parties in Texas probably look at Dibrom in a more favorable way. It certainly have the large mosquito population that they deal with each year in Texas and our people that are on the ground they think we've expanded in Texas for coming years that in a way that all the sales efforts that we put in just haven't seem to grow as fast as we want to. So, you know with the significant portion of our Dibrom this year obviously its weather related and Florida and Louisiana have always been strong supporters of Dibrom and use the product regularly. I think we'll see Texas step up to a greater degree going forward.

Salomon Kamalodine - B. Riley & Co.

Okay. That's helpful. Thanks. Moving on to the comments surrounding higher input costs as you obviously pointed out those raw-material cost come down significantly. I'm wondering if you could give us a sense for what that would mean for your margins if current prices were to stick at current levels? And then, also if you could discuss whether some of the price increases that you put in place during the quarter, to expect those to be able to stick or if you may have to take some of those back particularly in the fumigant business?

Eric Wintemute

Well, in the fumigant business, we actually have moved prices up this month. In addition, we do certainly potassium which is in our K-Pam continues to be at a -- at high level. The sulfur has taken a turn. We haven't seen that reflect in our raw materials, but we do think that we'll see some relief there. A big part of Metam is freight and I'd certainly hope that the oil price and gasoline prices we're seeing reduction will reflect in our transportation cost in this quarter in this fourth quarter. Because I don't feel that, I mean we've been playing catch-up all along here trying to get ahead of the curve. And if we do see some softening, then we could have the position that we were hoping to get to, a little over a year ago.

Salomon Kamalodine - B. Riley & Co.

Okay. And then finally, on the non-crop side of the business, how weakened this pest control business be? And how much contribution would you expect as you sort of fill the channel with this new EDDP product?

Eric Wintemute

That's a very good question. We again offered this in third quarter. We saw a great deal of activity, a variety of orders that I'd say are not significant in contribution at there size, but what I'd consider trial orders. I think momentum will build for this. I think as people become more comfortable I mean it's an ideal situation. We produced a video, which I think we are going to post shortly up on our website, which you can see in two weeks I guess I've been told. That will actually -- obviously we distribute through the pest control and which you have a chance kind of see what are the key points for pest control operators as far as saving number of trips, return trips, fuel efficiency and efficacy they can get by having kind of a lead behind that can protect for up to four months, therefore increasing their profitability.

So, this will be a practice, which again the early interest is very strong and I think once they actually start using it and see how this becomes a part of their profitability going forward it is the base that we think will grow significantly. So, where is that, our pest strip business has been what I'd consider relatively modest in the 5 million range over the last few years primarily because of the uncertainty with regulatory. Now with this offer expanding -- it's been predominantly for the retail market, this will now be for professional markets and I think synergistically they will feed off each other and we should have some stronger – there is no doubt that this very efficacious, safe, effective way to deal with pest.

Salomon Kamalodine - B. Riley & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

How much were domestic revenues up in the quarter?

David Johnson

Domestic revenues relative if so international was 35% some 65% of the increased revenues and the increased revenues were--

Jay Harris - Goldsmith & Harris

11 million

David Johnson

Pardon me, what do we have 11.

Eric Wintemute

11.

David Johnson

Yes, we were up 3.3 and we are up to 11 million.

Jay Harris - Goldsmith & Harris

Yes, alright.

David Johnson

Yes, 8 million

Jay Harris - Goldsmith & Harris

One-third, two- thirds.

David Johnson

Yes.

Jay Harris - Goldsmith & Harris

Alright, and where do you think you are likely to end up in terms of debt levels at the end of the year?

David Johnson

Well, as I said in the comments on not being able to predict what customers would do with regard to cash in the last quarter of 2008, it's a little bit difficult to predict at this point in time. We are running some numbers at the moment to try and look at that, but that's a –

Jay Harris - Goldsmith & Harris

So the -- in the third quarter, was the capital spending that prevented you from generating free cash.

David Johnson

Yes.

Jay Harris - Goldsmith & Harris

Does that continue into the fourth quarter?

David Johnson

The bulk of the capital spending this year, we believe is done but there is some residual spend on our excess plant related to the new facility we're putting in place there. So there will be some trail of spend through that.

Jay Harris - Goldsmith & Harris

And would you just explain to me what you -- what you were just saying in terms of the customer's use of cash?

Eric Wintemute

Yes, Jay, last year, I think we talked about this on previous calls. We offered a program essentially to if farmers or just real customers, distributors wanted to pay early for products that they had taken in the fourth quarter were normally their returns involved that we would offer them cash discount. And last year, I am going to say we collected somewhere in the vicinity of $20 million under this. This has been a fairly common practice as farmers try to pay for inputs in the calendar year. And we just hadn't participated in that market before and we did last year and it resulted in a lower end of our receivables. Well, the same program is out this year. We had some distributors come back and say, they are tired on participating, we have had others that say, they are going to hold their cash until January. It doesn't make a whole lot of difference to us. It's really kind of difference as far as we are –

Jay Harris - Goldsmith & Harris

It's just a couple of weeks difference, I guess. But last year, I think, during this same conference call you indicated that early order cash purchase program had kicked in September. So, have you seen that already or is it occurring later this year?

Eric Wintemute

Well, our primary focus is for fourth quarter this year. Last year, we positioned some impact in the second -- I mean in third quarter, that we did not offer this year.

Jay Harris - Goldsmith & Harris

Can you comment on how much growth you have seen in the use of impact this year, this last year?

Eric Wintemute

I think we were up about, "Pounds on the ground", we think we are up about 15% year-over-year.

Jay Harris - Goldsmith & Harris

And, are there -- programs that you can count on, that are likely to produce something like that or better next year?

Eric Wintemute

Well, we believe the product is superior to other products in the marketplace, as you know we did promote heavily in advertising. We do think some of the products that maybe did not performance as well, but we're promised that we make some of those. We saw Impact being used to basically rescue failures in other products. So, yes, we certainly have an intent to grow that market this year.

Jay Harris - Goldsmith & Harris

And coming back to cash management, you anticipate a reduction in -- a significant reduction in inventory levels in the fourth quarter versus current?

David Johnson

Moving inventory levels is of course quite challenging and we are working at as hard as we can, but I haven't got a prediction of what its going to be at the end of the year. I know you'd like one, but I haven't got that.

Jay Harris - Goldsmith & Harris

You have an exhaustive indication of my wish list?

David Johnson

I think that was an easy one to predict Jay.

Eric Wintemute

We'll certainly –

David Johnson

I'd certainly, I would like it to be lower.

Eric Wintemute

We will strive to make your wish list happy.

Jay Harris - Goldsmith & Harris

Alright, fair enough.

Operator

Your next question comes from the line of Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities

Good morning, guys.

Eric Wintemute

Good morning.

Mark Gulley - Soleil Securities

I had a couple of questions. One, Eric as you look back on your corn strategy, this past year it was between the corn soil insecticide and herbicide. How would you rate the success of your overall average corn? You think that you can take it to the next level next year or they are going to be superiors there?

Eric Wintemute

Well, our -- the real test will be as we get into December and we start seeing the results of all the university tests and tests that we have out and I think if we see the results that we saw last year. We have done on such a broader base this year that I think we will get enough recognition for this approach and strategy, we should see significant increase. If we see mixed results, then we'll probably see kind of similar or maybe slightly upfront from where we are this year. But we are tracking with new SmartBox systems ahead of where we were last year, and last year was our second biggest year. So, we have people that are signing up three year commitments and the work that we've seen more refuge systems last year than we are seeing in previous year. So far the new sales that we've is very little annoy of refuge in most people are going full systems. So I think its catching momentum, I think the second year of university trails showing similar -- will get the recognition that we would like to see. As you know, I mean, it’s difficult as us as AMVAC to swing the needle in a huge way by ourselves. But we do have -- last year Syngenta also came out with their results, which were similar to our results and with their product force and which we also sell in SmartBox. So there, I mean, this is definitely something that people are aware of. How big that market is? Where the infestations are, I think that’s going to determine where our growth will be in the future.

Mark Gulley - Soleil Securities

What are the results available, maybe its tuff to answer this question, but is there a threshold corn price in your mind where these results are just pretty compelling and the low (inaudible) is just modestly interesting?

Eric Wintemute

Well, if the 12 bushels that we saw that were -- that was returned, then I mean, that's certainly a number regardless, I guess of where -- where corn prices wind up, because we are talking about an investment of $10 to $18 an acre and if you get 12 bush -- 12 bushels additional, that would be a return on your investment. I know what you thoughts are. I think corn prices will move back up for this upcoming season. But I don't know what your thoughts are on that.

Mark Gulley - Soleil Securities

That was another question. I think in some crop input areas, farmers are going to sit on their hands this fall, given uncertainty, given the uncertainty of the corn prices, given a lot of the things, I think there's considerable hands in wait. Do you expect the same sort of thing with respect to your crop protection chemicals or do you think that you're selling to a different type of a buyer for a different reason or are you going to be able to maybe dodge that.

Eric Wintemute

We're not seeing back off yet. I do know that given the volatility of fertilizer, I think people are real nervous about committing to today's dollar-- today's prices for delivery in the future. As far as our side, we haven't -- we haven't really seen a softness occur. And as I said, our indications are through SmartBox systems that are being ordered and the programs that we've got in place for fourth quarter, that people seem to be responding well too. So, Yes, I recognize that there is credit tightness as it exists in the farm community. But it hasn't, as I see taken a dramatic effect. I think the demand for corn, ethanol is still strong. And I just -- I don't see that this is that the bottom is going to move out of corn.

Mark Gulley - Soleil Securities

Finally, I want to wrap with pricing strategic for the next year. One of your larger competitors have signaled that they are going to get lot more aggressive on pricing next year, which still means of maybe only 6%, 7% price increases. Do you think you're going to have the ability to move prices up much more aggressively next year, irrespective of raw material movements, to get your fair share and perhaps to come under the radar of one of your large global competitors?

Eric Wintemute

Well, obviously -- the business, it's our mandate to maximize our earnings. We have to look at in some areas where we do increase prices and we lower our sales by unit, what that will reflect. I think, right now, going into -- I mean, certainly for last year inputs from chemicals were relatively minor increase, compared to fertilizer increases and seed increase, and fuel. So, I do think we have moved prices forward in some of our products in ways that we have not been able to do in the past. It is -- at some point we would expect to see margins increase. We’ll react to what occurs in the marketplace. If we have increased our prices for the 2009 year, those programs are out and so far we have not seen resistance.

Mark Gulley - Soleil Securities

Fair. I'll get back in queue.

Operator

Your next question comes from the line of Matt Hagerty with Pennant Capital.

Matt Hagerty - Pennant Capital

Hi, thanks for taking my question, actually I have three. The first, one could you go through the -- or respond for the non-crop increase year-on-year?

Eric Wintemute

Okay. It's in the Q and I'm just on that. David? You did certainly know -- I think, we intent to release our Q on Friday.

David Johnson

Yes. That's right.

Matt Hagerty - Pennant Capital

Yes, I was just --

David Johnson

And so and in the three months ended December, sorry September 2008, our non-crop sales were $16 million and in the same period of the prior year, they were $7 million. And on the year-to-date basis the nine-month sales were $36.4 million and the prior year it’s $22.2 million.

Matt Hagerty - Pennant Capital

Thank you. And then, during your commentary you spoke of, I think its $3.3 million increase in what, I think you called new products. I just want to clarify, does that mean acquire products or…

Eric Wintemute

We have products where we did not up sales of the similar products in the prior comparable period.

Matt Hagerty - Pennant Capital

So --

Eric Wintemute

So they're newly acquired products, yes.

Matt Hagerty - Pennant Capital

Well, I just -- as I read the press release here and the new AMVAC offerings such as Terraclor and Orthene and -- are those are acquired with this --

Eric Wintemute

And we’ve acquired -- we didn’t have Orthene or the Terraclor in Q3 of '07. We acquired them at the end of '07

Matt Hagerty - Pennant Capital

Okay. And then finally, you mentioned a reversal of legal cost, I think that impacted your operating expenses for the quarter. Can you quantify that a little?

Eric Wintemute

We had insurance company that was insolvent and we reached a settlement and they sent us a check. It is in the $0.5 million range.

Matt Hagerty - Pennant Capital

In the $0.5 million range? Is that right sir?

Eric Wintemute

Yes.

David Johnson

Yes.

Matt Hagerty - Pennant Capital

Okay. Thank you. That's all I have.

Operator

Your next question comes from the line of Salomon Kamalodine with B. Riley & Co.

Salomon Kamalodine - B. Riley & Co.

Yes, just a couple of follow-ups. I am trying to get some directional guidance on what your P&L may look like in the fourth quarter. Can you just discuss the seasonality in each of your main business line? So I can get a sense for what next quarter may look like relative to this September -- this September quarter I mean?

Eric Wintemute

Well, if you look historically, our fourth quarter is our strongest quarter and I don’t think that we are sitting here today, thinking that will be any different. As far as seasonality, you know there are products that are purchased for the upcoming season. And traditionally, our fourth quarter is also fairly a strong for our soil fumigant, as people are applying right now, in getting ready for -- before the winter hits, so that they’re ready to plant come spring time.

Salomon Kamalodine - B. Riley & Co.

Okay. Would you expect the sequential increase that you experienced last year in the December quarter to be a good indicator of what we might expect this year around?

Eric Wintemute

I don't know the answer to that question. So I don’t -- I'd hate to give you recollection. There again are a lot of variabilities that occur. And with still a month and a half to go, I think we're unable to predict what our revenue and therefore earnings would be in the quarter.

Salomon Kamalodine - B. Riley & Co.

Okay. Then just finally, from your perspective, are you seeing any indications that your distributors -- your main distributors maybe impacted by what's going on with the tighter credit conditions?

Eric Wintemute

I know one of our peers, well one of our larger, has collected more cash in advance than ever before. I do know that our customers have said that they want to kind of hang on to their cash until after the first of the year. Again with that, others that have said, they are planning and have been participating in our cash position. I don’t have -- I think everybody is still kind of questioning where things will breakout, as far as, how well the growers -- the state of growers -- can't wait until more of the last minute. Our demand is still strong. So, I think this could become the question I referred to you, plant corn, you plant soybeans, you plant wheat, some of the same questions we had this year. But the reserves are still at very low positions and it's not like where our populations are decreasing. So to me it's a trend that will continue to grow.

Salomon Kamalodine - B. Riley & Co.

Okay, thanks.

Operator

Your next question comes from the line of Norman Hayman [ph] with Technological Investments [ph].

Norman Hayman - Technological Investments

Yes. Two questions. One, I think it is valuable to have those plans domestically and as you say there is unused capacity, I wonder, if you do talk manufacturing for others, whether you can still have plenty of them fairly (inaudible) in the new plant, and if these contracts are shorter-term, can you turn them off and does it really mean that much for you in terms of the operating margins, manufacturing margins? That's the first question.

Eric Wintemute

Okay. So the question is if we were to invest in capital to manufacture for a third party, Is your question, would we be doing this on a one-year basis or three years, or five years and would we be able to recover the capital we put in to the plants?

Norman Hayman - Technological Investments

Well, no. The question is that you kind of indicated that the people are approaching you.

Eric Wintemute

Right.

Norman Hayman - Technological Investments

For you to do some of their manufacturing. Am I to assume that, now meaning in the next year or two?

Eric Wintemute

Right.

Norman Hayman - Technological Investments

So therefore you're going to be using not some of your existing capacity and so does this become a temporary source of operating margin leverage or is it something that can become permanent? Because, I don’t know what the margins in that kind of business would be?

Eric Wintemute

Well, they are typically lower than what are our margins are that we have, but so… Temporarily in the next three to five years that's something we certainly will take. I think there is a philosophical shift from being a 100% dependent on Asia to doing some hedge manufacturing and having long-term agreements in different parts of the world. There were a number of disappointments that occurred this year due to the volatility that occurred in Asia, and I think people are saying you know what, as part of long-term strategy we need to have a footprint in another location. So, I would – of course from our own personal philosophy, we believe manufacturing here makes good sound sense for American Vanguard going forward. The difference now is that we're seeing – I've been stating this to our peers for quite some time, it just seems that now, in this last year they've stepped up and said okay, we think you're right.

Norman Hayman - Technological Investments

Okay. So this is though a program think that exist for – some extended period of time, which will allow you to put plan for your own capital expenditures, so it's not just a modest one or two year fix, it's a program that you consider something, somewhat strategic?

Eric Wintemute

Yes, that's correct, that is correct.

Norman Hayman - Technological Investments

Okay. And the second question, maybe I didn’t fully understand the implications of the Monsanto interface with you. That last year, when you talked about this, you kind of alluded to the generalization that they have an army of sales people out there and its extended application, on the main portion of the field that they would be out there "selling for you" and I know that’s not exactly true, because it’s a program, that didn’t had have any effect on what happened this year?

Eric Wintemute

I'm not 100% clear on what you we're alluding to there. I don’t that we said that Monsanto is going to be selling for us. But we did --

Norman Hayman - Technological Investments

Then probably it's not a direct sale, but I thought that they were going to advertise the benefit of using our materials with theirs.

Eric Wintemute

Right. And they did promote from a stewardships standpoint, on the refuge acre they put out in commercials that had testimonials from our SmartBox users, utilizing some of our soil insecticides through SmartBox and how this made good sense. It was an easiest way to comply with refuge and I've great performance. Those efforts as indicated will continue. They got a little late to start last year and that was probably in the February, March standpoint, I understand that they are going to be, during similar run this year, before the end of the year and into the 2009 season. An additional piece was to get impact added to the Roundup labels that occurred at the end of April in this year, which was just before the season to start application. Obviously our advertising will continue to promote that factor that but this is a product that is on both PowerMax and WeatherMax Roundup labels.

Norman Hayman - Technological Investments

So, in the sense, you're saying there is this probably -- I don’t know if it seemed immeasurable, but probably a modest impact, partly because of late starts and test results and therefore next year you probably would see some measurable result or hopeful or expect some sort of measurable results from that effort.

Eric Wintemute

Yes, again also and not as far as Monsanto is concerned, but certainly the overall advisor community have been, university and USDA and corn growers as a whole looking at the results of test, which we did on a much more expanded level this year to see how well this utilizing our insecticides through SmartBox over the top of denigrate enhances yields, and I think in some areas we're going to see some strong results that will result in a practice that would be just at the beginning.

Norman Hayman - Technological Investments

Thank you very much.

Operator

Your next question comes from the line of Mark Gulley with Soleil Securities.

Mark Gulley - Soleil Securities

There is couple of follow-ups, if I may. First of all with respect to what you just talked about, any idea when those results should be -- become public, become published and we're talking about results that you expect to see both on Impact and Counter?

Eric Wintemute

What impact is -- any studies that we've done with those we've already concluded and we have the results and we're very pleased. How we stepped up against other chemistries and the results for Impact. So as far as the corn soil insecticides that a yield position, we still have a lot of corn that has not been yield and once that does get harvested as kind of get written up, we are late in some of the harvest, so I'm hoping that by middle of December, we'll have a pretty good understanding and put those results look like. Given that universities, I think our people are saying they should have all the information by the middle of December. Last year, it was and we had some results by then, but we didn’t get all the results until almost end of February. So, we’ve had some commitment from the universities that they will get the result earlier this year, and that’s our wish.

Mark Gulley - Soleil Securities

I know that there is a big convention that held I guess some time in the October timeframe. What was the mood of that convention as far you are concerned regarding the outlook for crop protection chemicals and as you alluded to in your press release, what is the outlook for your increased ability to collaborate with other industry participants?

Eric Wintemute

I know at our Trade Biz [ph] we had a great deal of activity and excitement and there was a lot of awareness of what we are trying to accomplish. We had a full 36 row folded up system there and then we had a brand piece of genetically – genetic equipment and genetic type equipment. And then we had a tractor that I think was 7 years or 8 years old as SmartBox on it to and so we create a lot of awareness and we did get a fair amount of SmartBox new orders generated out of it. Generally the farmers seem optimistic obviously corn prices have come down, but these guys have made out pretty well in the last couple of years. So, I think, I think corn farmers and grain farmers the whole are in a pretty good position.

Operator

Your next question comes from the line of Jay Harris with Goldsmith & Harris.

Jay Harris - Goldsmith & Harris

My question has been answered. Thanks.

Operator

Your next question comes from the line of Jim Bartlett with Bartlett Investors.

Jim Bartlett - Bartlett Investors

Yes, you mentioned the impact is up 15%, Could you give us an idea of what the market share was and what kind of market growth that you saw during the same period?

Eric Wintemute

Jim, I’m sorry. You’re breaking up kind of every other word. I didn't hear you; you asked the question on market share. I don't know what product or crop you're talking about?

Jim Bartlett - Bartlett Investors

Yes, for impact.

Eric Wintemute

For impact, okay, what our market share was at impact?

Jim Bartlett - Bartlett Investors

And what's the growth for the category in the past year.

Eric Wintemute

I don't know that I have -- I don't know we had data that shows what our -- what our market share was. I do know that we gained -- we gained some ground on Callisto. But I didn't seem that (inaudible) which was very new launch, did reasonably well and this maybe a tab off before we were and I think status did fairly well. But I don't know that I have the numbers on the market share. We still -- I mean I will just say that, we have a long way to go in my estimation.

Jim Bartlett - Bartlett Investors

And could you give some quantification of the price reflected price increase you've done this year both up to a range of percentages and then the total impact on revenue?

David Johnson

Well, price increases in some cases obviously we weren't able to put through increases. We haven't up to maybe higher the -- even a percent in a couple of cases. Overall, I don't know if we've measured what percent of our revenue in so far this year is reflective in price increases. But I would say that it's probably more than $10 million of our revenue is a reflection of price increases.

Operator

(Operator instructions). There are no further questions. I will now turn the conference back to management.

Eric Wintemute

Okay. Well, I would like to thank you, everyone. We've spent a nice hour together and we look forward to updating you with further results, activities as we go forward. Thank you very much and have a great afternoon.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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Source: American Vanguard Corporation Q3 2008 Earnings Call Transcript
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