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Edited Transcript of AVD earnings conference call or presentation 31-Jul-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 American Vanguard Corp Earnings Call

NEWPORT BEACH Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of American Vanguard Corp earnings conference call or presentation Monday, July 31, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David T. Johnson

American Vanguard Corporation - CFO, VP and Treasurer

* Eric G. Wintemute

American Vanguard Corporation - Chairman and CEO

* Ulrich G. Trogele

AMVAC Chemical Corporation - COO and EVP

* William A. Kuser

American Vanguard Corporation - Director of IR and Corporate Communications

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Conference Call Participants

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* Christopher John Kapsch

Aegis Capital Corporation, Research Division - Research Analyst

* Francesco Pellegrino

Sidoti & Company, LLC - Research Analyst

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jay Richard Harris

Axiom Capital Management Inc., Research Division

* Joseph George Reagor

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the American Vanguard Corporation's Second Quarter 2017 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bill Kuser, Director of Investor Relations.

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William A. Kuser, American Vanguard Corporation - Director of IR and Corporate Communications [2]

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Thank you very much, Hector, and welcome, everyone, to American Vanguard's Second Quarter and Mid-Year Earnings Review. Our speakers today will be Mr. Eric Wintemute, the Chairman and CEO of American Vanguard; Mr. David Johnson, the company's Chief Financial Officer. And also to assist in answering your questions, Mr. Bob Trogele, the company's Chief Operating Officer.

This afternoon, American Vanguard filed our Form 10-Q with the SEC related to the second quarter and mid-year results that we will be discussing in this call. Before beginning, let's take the 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 various 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, I'll turn the call over to Eric.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [3]

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Thank you, Bill. Hello, everyone, and welcome to our mid-year earnings call. We thank you for your continued interest in American Vanguard. Before getting into the details, I want to give you my broad impressions of our recent financial performance and future prospects. As you will have read in our earnings release, we recorded healthy top and bottom line performance for the second quarter and first half of 2017. Sales were up 7% for the quarter and 4% for the half year, while earnings were up 33% for the quarter and 28% for the half year. This was due largely to the diversification of our base business and disciplined operating and financial management.

As I'd mentioned in the last quarter, we continue to show resiliency in being able to generate positive overall results across several markets, despite the fact that some markets, like cotton, are up while other markets, like our corn herbicides, are down. I'm pleased with our results, particularly when taking into account that industry as a whole is down during the first half of this year.

Looking into the future, and I will comment on this further, I'm optimistic. For the balance of the year, I expect to see stable performance overall from our existing product lines, both domestic and international. In addition, we should see incremental improvement in our top line sales, especially in the fourth quarter and carrying over into 2018 from recently completed acquisitions.

To the extent that we consummate deals on which we are currently working, these acquisitions should also confer additional benefit this year and have a greater impact in 2018. Also, and I will leave this to David for his reflections, we anticipate improved factory absorption for the balance of the year. This should serve to enhance near-term profitability.

Before turning the presentation to David, I wanted to give additional color on market conditions that supported our Q2 and year-to-date performance. During the reporting periods, we continued to see strong demand for our cotton products, Bidrin and Folex, driven largely by a 20% increase in planted cotton acres this year.

In addition, growers are anticipating increased pricing pressure following a year of unusually low pressure. Similarly, we experienced growth in our granular soil insecticide products in the quarter and first half.

These were led by solid demand for soil insecticides in the Midwest corn market, where channel inventories have been at extremely low levels. Sales of Thimet into peanuts, which also experienced an increase in planted acres and sales of Counter, are for nematode control. Our non-crop market also showed sales increases. In this segment, sales of Dibrom, our mosquito adulticide, rose as domestic customers replenished their supplies to combat vector-borne diseases such as West Nile and Zika virus. We also recorded increased income from Envance, as they closed on long-term licensing and development agreement with a major consumer company relating to our essential oil business.

Our international sales were stable, as were sales into various other markets such as fruits and vegetables. However, not all of our markets were at or above last year's level.

For example, in the first quarter, sales of our soil fumigants to fruits and vegetables and potatoes declined due to persistent wet weather, which prevented growers from applying these pre-plant products. In addition, sales of Impact, our corn herbicide, dropped as competitors cut their prices in response to mesotrione, an older herbicide coming off patent. We're working on some corn herbicide mixtures to expand our offerings in the 2018 season.

As David will report, our gross profit margins increased in this year's second quarter and half year, and we continued to generate positive cash flow and pay down debt, such that at just over $26 million, our debt level is the lowest it has been in a decade. With improved financial performance and cash flows, our borrowing capacity continues to grow and position us to take advantage of the most robust product acquisition market that I've experienced in my career.

Now I'll turn it over to David for his review of the financial details. David?

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David T. Johnson, American Vanguard Corporation - CFO, VP and Treasurer [4]

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Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we filed our Form 10-Q for the 3 and 6 months ended June 30, 2017 earlier today. Everything I'm going to cover here, in brief, is included in more detail in that document.

With regard to the financial results, as Eric just detailed, the company's sales for the second quarter of 2017 increased by 7% to $78 million as compared to sales of $73 million last year. Our second quarter gross margin improved to 44% as compared to 43% last year.

Operating expenses increased in dollars driven by higher legal costs, offset by timing-driven slightly lower expenses related to regulatory and product development studies. These costs decreased as a percentage of sales from 36% in Q2 2016 to 35% this period. Overall, net income ended at $4.3 million or $0.15 per share in the second quarter of 2017, as compared to $3.2 million or $0.11 per share this time last year, an increase of 33%.

Year-to-date, sales were up 4.5% to $149 million as compared to $142 million this time last year. Our gross margin has improved to 43% as compared to 41% for the first half of the prior year. Operating expenses increased, but remained flat as a percentage of sales, at 35%. Interest expense is down, as we have worked down debt, despite spending on product line acquisitions and other growth initiatives. The tax rate is pretty much in line with 2016, and net income has improved 28% to end at $0.26 per share as compared to $0.21 per share last year.

From my perspective, the key financial issues remain consistent with prior periods. First, we continue to carefully manage our factory activity, as we balance recovery of overhead costs with demand forecasts and inventory levels. In the 6 months ended June 30, 2017, our factories have seen about a 3% increase in costs, while factory activity has increased by 7%, adding $0.5 million to the pretax line. Our Q2 is historically a strong manufacturing quarter. This was the case in both 2016 and 2017.

Looking forward to the rest of 2017, our manufacturing plan looks very solid for the second half and should drive us closer to record levels of utilization and cost recovery for the full year. Second, as I mentioned, gross margin for the quarter was 44% as compared to 43% last year. This 1% improvement was mainly driven by sales pricing and mix. Our factory performance was broadly in line with the prior year, and though we have seen some movement up and down in different raw materials, our blended purchasing cost is pretty much flat year-on-year.

Year-to-date, gross margins improved to 43% from 41% in 2016. This improvement was, again, primarily driven by sales mix and pricing. However, our factory performance did account for about 0.5% of the improvement. Third, our factory performance is linked very closely to inventory levels. If you look back to this time last year, we had inventories of $151 million. This year, we are $24 million lower at a $127 million. We continue to follow a disciplined approach to managing demand, factory output and raw material purchasing. We are pleased with this second quarter performance which was slightly better than we anticipated when we last spoke to you. We believe we are on track to achieve a $110 million level at the end of 2017, excluding the effect of acquisition activities.

Fourth, our effective tax rate ended the quarter at 26.8% as compared to 26.5% last year. Our tax rate is driven by the balance of where we make our profits, specifically, U.S. or international, and the level of those profits. For the second quarter of 2017, we had both a strong domestic and a strong international performance.

Year-to-date, our effective tax rate is at 27.5% as compared to 26.2%, reflecting the relatively stronger year we are anticipating the domestic U.S. business will have.

Finally, with regard to balance sheet management and liquidity, we continue to carefully manage cash and working capital. We ended the second quarter out of debt domestically, notwithstanding funding the 3 product lines we acquired during the period. The balance of our debt reported at June 30, 2017, relates to international acquisitions made in the second quarter of 2015.

With respect to cash, we have generated $34 million from operating activities year-to-date as compared to $25 million in the same period of the prior year. This is the 10th straight quarter during which we have generated cash from operations, which, over the period, has amounted to $159 million. At the end of the second quarter, availability under our line of credit has increased to $143 million as compared to $93 million this time last year.

This further improvement in our liquidity position resulted from consistently working to reduce debt, coupled with the improved financial performance in the first half of 2017 versus the same period last year.

Furthermore, the company has just executed an agreement with our bank group to extend our credit facility for a further 5-year term and increase the potential borrowings under that credit line from $300 million to $350 million. At June 30, 2017, the company utilized $27 million of the line. Such improving liquidity leaves the company well positioned to take advantage of divestment opportunities from consolidation activity that is currently ongoing in the global ag-chem market.

In summary, when looking at 2017, we can reflect on a solid first half of the year with improved sales, factory performance, gross margins, net income and liquidity. We can also reflect that so far we have acquired 4 new products, and as Eric has mentioned, the list of acquisition possibilities has never been stronger. Our performance so far this year leaves the company well positioned to take advantage of those opportunities during the balance of the year.

With that, I will hand back to Eric.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [5]

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Thank you, David. Let me comment on factors that could affect our performance for the balance of the year, and then briefly review investments that we are making to foster American Vanguard's growth in the longer term.

In the second half of 2017, we anticipate the following: with a 20% increase in cotton acres planted this year, we expect demand for our Folex harvest defoliant to be solid through the third and fourth quarter. In the corn market, we have seen an uptick in demand for our granular insecticides and think that soil insect pressure may be on the rise in the Midwest, which could lead to a stronger year-end 2017 sales prior to the 2018 planting season.

As I had mentioned earlier, the corn herbicide market remains competitive. Accordingly, we are expanding our corn herbicide offerings and will work to maintain brand value of Impact, which continues to enjoy customer loyalty, in spite of the pricing pressure.

With predictions of a heavier-than-normal hurricane season this year, our Dibrom mosquito control business should continue to benefit. Although weather-related application delays have temporarily slowed our soil fumigant business in the first half of 2017, we expect to return to more normal sales levels this autumn and next spring.

Our international business continued to grow, with existing products like Mocap and Nemacur being supplemented by newer additions, Hyvar and Krovar. In addition to sales of existing products, we expect to benefit from newly acquired and about to be acquired products.

As you know, last month, we acquired 3 new active ingredients and 7 proven products from Adama that further diversify our portfolio. In recent years, these products have generated annual sales of about $30 million. And in U.S. market, that exceeds $200 million in sales per year. We have begun filling orders for these products and will continue to do so over the balance of 2017. As we enter 2018, we will benefit from full season sales of these products, which are used on multiple crops in many regions.

Also, as I had mentioned earlier, we're in the midst of negotiating and/or closing other product line acquisitions. As with the Adama products, we plan to begin making sales promptly after closing these deals and expect to see both top and bottom line benefit during the fourth quarter, with full season impact in 2018.

Some of these opportunities flow from industry consolidation while others are stand-alone divestments. We are finding that, in light of the number of divestitures within the industry, this has become something of a buyers' market. Nevertheless, it bears repeating that we only pursue deals that are accretive to the company, remain judicious about borrowed debt and keep our eyes trained on maintaining a strong balance sheet.

Turning now to the longer-term growth initiatives, we continue to invest in alliances that provide us with global market access. As we've previously reported, we have spearheaded our strategy in the Asia Pacific Region through the creation of the Hong Kong joint venture with Huifeng, one of the premier agrochemical companies in China. This partnership not only provides better market access to the region, but also technological, regulatory, manufacturing collaboration, and the potential for co-investment and acquisition opportunities.

In fact, we're presently bringing our 2 businesses together to strengthen our participation in the Australia and New Zealand market. In addition to market access investment, we continue to cultivate growth through innovation. Our SIMPAS precision application system has been field tested this planting season by a dozen growers, and the feedback that we have received about the ease of use and reliability of the system has been excellent. The performance of our wireless controlled system, the accuracy of our meters and the durability of the system have been remarkable.

As we announced this afternoon, AMVAC has entered into an agreement with Simplot Grower Solutions to continue the development of this advanced soil treatment technology. The opportunity combines SIMPAS' variable rate application technology with Simplot's SmartFarm prescriptions and post-harvest analysis will give participating farmers the ability to target crop protection and nutritional products in a precise manner. We'll be featuring this system next month at the Farm Progress Show in Decatur, Illinois and expect to be making additional announcements regarding other collaborations related to SIMPAS over the coming months. We also are driving forward with a pipeline of new product candidates that could provide additional portfolio expansion in the coming years.

And similarly, our affiliation with Bi-PA products screening efforts in Europe continues to offer possible new biological product offerings. In closing, I would say this. We continue to generate solid financial results in a challenging industry. The diversification of our base business, coupled with financial and operational discipline, has helped us to achieve a degree of consistency in our results. This, in turn, has served to enhance our borrowing capacity in the midst of a robust acquisition market. Consequently, we've been able to acquire accretive products, while improving our balance sheet. And through all of this, we continue to invest in our longer-term future, through market access and innovation.

In short, we're building something remarkable here and it's a pleasure to be part of it.

Now, I'd like to open this up to any questions you may have. Hector?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jim Sheehan from SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [2]

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With respect to the pricing pressure that you're seeing in corn herbicides, can you talk about how much lower your pricing was for Impact in the quarter? And also, talk about how much more pricing pressure you expect to observe maybe in the second half? Whether you think this is going to be extended through the rest of the year?

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [3]

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Jim, Bob Trogele here. Jim, the pricing pressure really came from our competitors. So with Syngenta reacting to their core molecule mesotrione, and there was a response then by Bayer and a response then by BASF, and we did not follow the price increases directly. We just mostly looked for margin opportunity for our customers.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [4]

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So we definitely lost market share in the process. So that part of our strategy is, we'll be offering combination products, and that's really where the pressure has occurred. It's not -- Syngenta didn't see -- on their combination products, they did not react on pricing there. But it's more the generic on the street product, itself. So our approach for this upcoming year will be to focus on combination product that we've obtained registration for.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [5]

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Okay. And now, could you describe what those combinations entail? What -- this is something that you formulate separately or differently? If you could expand on that a little bit?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [6]

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Yes. It's a combination with atrazine. So it's topramezone or Impact with atrazine, and I'm trying to remember the brand name. Bob, do you remember?

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [7]

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Impact Z.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [8]

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Impact Z. Yes.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [9]

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Right. And then on the Adama product sales, you said you had some sales of those in June. Can you quantify roughly how much you sold during the second quarter?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [10]

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I think it was -- $1.2 million in that 3-week period that we had the product.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [11]

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Okay. And then on some of the -- you outlined about 7 different product line opportunities or market access agreements that you were working on last call, and is the number that you're working on now higher or lower than it was last time? And anything -- any further color on some of those deals you were working on?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [12]

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So I think one has dropped off, and we've picked up a couple more that are early stage that are not part of the divestment piece. But there was one major piece, which I think at our last call was still active, which was the DuPont sale. But as was announced, this has wound up being a much bigger investment that DuPont was forced to make and they wound up picking FMC to do that with.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [13]

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Okay. And so you're expecting to make some announcements in the coming months on that group of opportunities?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [14]

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Yes.

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Operator [15]

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Our next question comes from Francesco Pellegrino from Sidoti.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [16]

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So in the non-crop, the non-crop margins were really impressive, and I would assume that it's due to Dibrom. I know you probably don't want to give us what Dibrom was up, but is there a way to almost quantify maybe like what the volume change was for Dibrom?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [17]

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It was up about 30%.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [18]

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Okay. So we're talking volume change up 30%, so it's the favorable product mix shift towards Dibrom. Okay. And then...

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [19]

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[Hold on] -- for the first half. I'm sorry, that's over the first half. David was correcting me. [That's over the first half, right. Right.]

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [20]

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Through the first half? Okay. And then I just wanted to quickly jump over to the acquisition. So the acquisition of the 3 products, is there any color into the inventory channel of what the channel looks like when you acquire the products? Was there aggressive selling into the channel? And maybe right off the bat, you might not get that $30 million annualized run rate for the third quarter?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [21]

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So let me just kind of discuss each of the 3 products separately. So the biggest volume is paraquat. That is a margin gain. So it has lower margins. It really is a function of buying correctly, and we feel we positioned ourselves to be in that position to have adequate product that had a profitable margin, let's put that way, that would be attractive for us to participate. The second one, chlorothalonil, that's really a product that's in shortage globally and has been short for some time. So that's just obtaining the material, and we have secured, maybe not as much as we want, but we have -- we took over with essentially 0 inventory, 0 in channel. And we have product that's coming in, in this quarter and in fourth quarter. So we feel like we've gotten that reasonably under control. And the last one, abamectin, availability is there, margins are good. It's just a matter of our ability to maintain and grow market share. So those are kind of the 3 colors on those 3 compounds.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [22]

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Given the acquisition price at $13.4 million, I know, I'm not going to get the EBITDA margins for these products from you. But if I assume an 8% EBITDA margin I get at 5.6x valuation; I assume 10x EBITDA margin, I get to a 4.5x; and then, if I assume they're in line with the company which they're probably not at 12x, I get a 3.7x valuation. You said it's a buyer's market and these valuations look really cheap. Going forward, why are the multiples so cheap? Are there not enough buyers out there? Are the products that are being divested for a very fragmented or a niche market? Why are you positioned so well to be acquiring these assets at such low multiples?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [23]

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It's a very good question. We've acquired -- we've been very successful over the year in making acquisitions. I think, we've got 40 or so that we've done. We have done deals with virtually everybody and certainly, those that are in the process of divesting now. Price is not the biggest issue in these divestments. Having a company that can market these products well, that can close a deal quickly, that does not make a lot of demands on the divestitures. And we've always kind of taken a position that we're the smaller player. If the larger company has some wishes on how they want to structure the deal, we're extremely flexible. So I think a lot of what we're seeing is the fact that we've got a reputation and have demonstrated it over the past 30 years of being able to take over products and market them successfully, while providing good stewardship and not having an issue with maintaining registrations. So I think it's really our track record that's giving us a nice advantage here.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [24]

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What's the sweet spot for deals? Is this $30 million deal or I know we're not going to see anything transformative, but given where your bank note just expanded to, how high would you go for a single product? Because I would think you wouldn't want the product portfolio having too much exposure to one item?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [25]

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We're open. I'll just leave it that way. We participated twice in the acquisition of Chemtura. We weren't successful either time, but those were big numbers. And frankly, we have partners that would like to be part of these transactions. So the bigger transactions, you probably have partners lined up that would work with us. So yes, I don't think we're -- I mean, again, they all have to be accretive, but I think we are able to participate in some of the bigger divestments.

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Francesco Pellegrino, Sidoti & Company, LLC - Research Analyst [26]

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And I know it might not be as sexy right now, but when we talk about some of the organic growth opportunities for the company, could you maybe just discuss a little bit in regards to, like for example, the glyphosate issue out in California or the dicamba issue down in Alabama, which of your products are well positioned to start, maybe, stealing back some share from these competitors' pesticides?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [27]

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I mean, Impact certainly has worked well with glyphosate and corn. The paraquat though is -- will be more universal. And I think we'll have some upside because of some of the things that you've mentioned. I don't know, Bob, you had any? Okay. Right.

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Operator [28]

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Our next question comes from Joseph Reagor with Roth.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [29]

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First, congrats on another strong quarter and, especially looking at your gross margins, to be able to grow them given that the herbicides traditionally have been the highest margin business and it's been declining this year, it's a real achievement.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [30]

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Thank you.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [31]

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On that note, you gave some color as to certain herbicide sales have been lagging this year. And year-to-date, you're looking at a 20% decline in sales revenue from herbicides, fungicides, et cetera. What are you thinking as far as the second half? Was that just -- not only just a decline but also a tough comp on the first half? Or should we expect similar levels of sales decline year-on-year for the second half of the year?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [32]

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At this point, we're not anticipating recovery of our Impact. I mean, that season is done and gone. We did see drawdown on inventory in the channel. So there will be less inventory going into the year than we've seen in recent history. We -- as I mentioned, we are looking to position our new product Impact Z to try and get some of the market share that we have lost back. But yes, I don't think we're anticipating a resurgence back to the sales that we'd lost in the first half of this year.

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [33]

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And having said that, Joe, the other piece is that on our organic growth, we do have herbicide solutions in our pipeline which will be coming to the market that will fill that gap and probably even expand our portfolio.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [34]

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Okay, fair enough. And then on the acquisition front, can you give as much color of a breakdown as you could of how the revenue from the 3 product lines you just acquired, the $30 million, how that would break down from -- in segments? Is it all in one segment? Is it between a few? And what that breakdown would look like?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [35]

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We're not giving a specific, but I think what I was indicating before is that a good portion of those sales are paraquat. So that's the largest. The other 2 are -- well, are, let's say, kind of mixed, but I mentioned on chlorothalonil, if we had more volume, we would sell more. If we had the raw materials, but I think we're looking at maybe chlorothalonil based on what we've got in our pipeline of product coming in will be a little higher than abamectin. But I'm leery of giving you a breakdown of the percent of what the historic sales were on that $30 million.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [36]

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Okay, fair enough. And then, this is probably maybe a big picture question. Your international sales were up year-on-year. There is couple of people who had speculated that sales will be down for a number of people internationally. Europe was an issue, Latin America was an issue. Could you add any color as to why you guys have the strength where we might be expecting weakness for other players?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [37]

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Well, I think on the Krovar and Hyvar, I think we've been -- we still have upside to get there because we had some transitions in Asia Pacific, where DuPont was continuing the sale and essentially, we were getting just the royalty stream from it. So we see some upside coming from that. Mocap has been good for us, a healthy increase on Mocap. Nemacur has not been as strong but I think we see stronger growth in that going forward. David, from your perspective, anything? Or Bob?

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [38]

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I would just say we have very little exposure to Brazil, where some of our competitors would have reported issues in Brazil.

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Operator [39]

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(Operator Instructions) Our next question is from Chris Kapsch with Aegis Capital.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [40]

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Wanted to follow-up on the discussion around acquisitions and really focused on scope. So you mentioned that you looked at Chemtura, that was a deal that was done for $1 billion back in couple of years ago, I guess. And you mentioned that you're interested in DuPont, I don't know that bite size that -- with sales of $1.5 billion, I think, you suggested that maybe was a bigger chunk of assets than maybe you're interested in. But, I guess, the point is though that in terms of scope, those are -- any sort of deals with those kinds of targets would be something that would be construed as transformative for AVD. And then you mentioned the balance sheet capacity that you had the borrowing capacity, given what -- given it's a buyers' market and given that the multiples that we're talking about here, you can do some quick math and see that if the right opportunity comes along, you could more than double the size of company, it looks like. So my question though is like what are you comfortable doing, in terms of both the scope, whether it's -- and what's important, in terms of that scope? And then also, in terms of just bandwidth, in terms of integrating something that would be substantial enough to be construed as transformative?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [41]

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Good question, Chris. We're -- the acquisitions that we have kind of -- that we're working on right now, as you mentioned, if they do come to fruition, they are transformative to the company. We have strategic partners that we are working with on some of these acquisitions. We have acquisitions like the Adama acquisition that those potentially -- and we do those on our own. As far as our ability to absorb something large and be successful with it, I have complete faith in our team. This is what we do. We take over products, some of them that have real challenges. We've got an extremely talented team now that we've strengthened, particularly over the last 5 years that all have had experience with larger companies and managing businesses, larger than what we're talking about here. So I think we've assembled the right team to integrate, should we be successful in making these acquisitions.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [42]

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Can you make any comments on just geographic scope? What's important strategically? I would think your commercial infrastructure channel to the market is, obviously, most established in North America. What's important from a geographic standpoint for you, as you look at these opportunities?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [43]

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Again, we have -- there are a number of factors we look at, and if we make an acquisition then it helps our manufacturing, that gets a point. If it doesn't, that's fine. We look at -- if it's in our current sweet spot, great. We can grow stronger. If it's not, it's part of our plan to be a global ag chemical company. And we can use these opportunities to spring forward in markets that we're currently not strong with. So we basically have plans on how we're going to expand globally that we're unfolding, and these type of acquisitions, if they're in regions where we're not there yet, it gives us the ability to do so immediately. When we were offered SmartBox and Fortress from DuPont back in 2000, I said, you've got to be kidding. I said, we've never sold a dollar in corn. I mean, that's a whole different market. But they convinced us to make the acquisition, we did. And within 2 weeks, we had our team manned at the convention and started selling, hit the ground running and certainly from -- it became a major, major part of our business, the U.S. corn. So again, we're so much stronger today than we were back in 2000. And as I said, the team that we've assembled are all seasoned experienced veterans that will be able to make this transition, and I'm confident.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [44]

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That's helpful. Thanks for color on that. And I did have a follow-up really focused on David's comments around gross margin and a couple of the points that he made. But specifically, the anticipation that the gross margin from the factory performance did not improve in the second quarter, but the mix did help the margin improve. But going forward, as you achieve your goal of by year-end, I think, it was $110 million of inventory. I think that implies that, as you're weaning inventories now, that you're not optimizing the utilization and therefore, the unit absorption variances in the factory. So help me on that. And then I would assume that what you're implying is, once you've got into that sort of target inventory level then presumably, the factory can operate with better absorption variances starting in calendar '18. So just wondering if that's the case, and what sort of potential upside do you see in the gross margin line, all things equal just from not having this sort of overhang from the inventories?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [45]

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So I think -- I mean, our second half prediction for factory utilization is very strong. And so I think, we'll see improvement there. As we are ramping up for growth, both domestically and internationally, we do have headcounts that we're looking at judiciously, as certainly with the latest acquisition that we did announce last month that we will probably pick up 4 or 5 people to help grow that market for us. Internationally, as we expand in Asia and specifically down in Australia, we're looking at some headcounts there. We would look to start moving forward in Brazil. And then on top of that, we've got still investments, particularly, in the RFID chips for SIMPAS. As we have more products, our regulatory expenses will likely increase. So I think, operating expenses will move up some, but I think as far as margins, it looks healthy going forward. Right, David?

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David T. Johnson, American Vanguard Corporation - CFO, VP and Treasurer [46]

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Yes. I think, the big thing is the last couple of years we've seen a strong first half and a weaker second half, in terms of factory activity and recovery. And as a consequence, we've been predicting through those years that we would see recovery fall off towards the end of the year, and we're not seeing that this year. So we're seeing a stronger second half than we've had in prior years.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [47]

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And than we had in the first half.

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David T. Johnson, American Vanguard Corporation - CFO, VP and Treasurer [48]

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Yes. Well, yes.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [49]

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And can you just extrapolate on how that sets up for the performance in gross margin for '18? I know, it's a ways away, but I mean, it sounds like if you're -- the strong performance you expect in the second half is driven somewhat by the anticipated demand ahead of next year's growing season. So anyway, if there's any way you can extrapolate the gross margin expectations out of the factory, piggybacking off the strong second half performance, that would be helpful.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [50]

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I mean, I think the factory looks good, but we're bringing on, as I mentioned, a product like paraquat where the margins are historically, and we expect going forward, well below what our average margins are now. So to the extent that we're more successful with sales there, that will have some impact on our margins overall. And also internationally, because of the favorable tax structure we have there, we're more inclined to put effort behind lower margin products there. So there are a lot of factors that go into it. I think we have the positive side of -- certainly, factory performance. I think our raw material situation is very strong, as far as savings there versus earlier years. But then countering that, again, we have these sales maybe of lower margin products. But bottom line is, we're after the bottom line. So it's -- EPS is what's driving our decision, not just our gross margin.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [51]

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That's helpful. Can I just sneak in one last one? On your press release around SIMPAS, because I know it's near and dear to you, Eric, and also thank you for putting what the acronym stands for in the press release because I had kind of lost track of that. But the -- what I was curious about is the -- so this field test that you're doing with J.R. Simplot, can you just talk about like what's expected to come from that? And then how it affects maybe the adoption of this technology, over what time frame? That will be helpful. Thanks.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [52]

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Okay. I'll start and then Bob, if you want to fill in what I miss. So there are kind of 3 components here. One is the equipment itself, and to do what it needs to do, which is having the GPS ability to be able to apply a prescription. Also the RFID chips, which will ultimately be used to monitor the flow of product in this field specifically, as well as any material that -- partial containers that might come back. The piece with expanding the products that can go through SIMPAS requires some effort to get products that will work through the system, both granular and liquid, at the right rates. So the concentrations need to be set because we're trying to target where each product that goes out would last about a day of planting. So getting those pieces together, but -- and then this other piece again was -- okay, we need to find people who can write the prescriptions and that's Simplot's role. Tule through their SmartFarm, they're looking and have had good success at understanding where nutrients belong in the soil, where they're needed and where they are not. But now with this, they will be able to actually make those applications of their prescription and then of course, with that, they will build upon other needs that the field may need such as nematode -- spot nematode controller, insect pressure or disease, as well. So that's -- they are kind of forefront within the community, as far as being able to write prescriptions, and they see this as an ability to take that and move it to the next level. Bob?

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [53]

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I think, you said it all. Eric, unless there's a follow-up question.

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Christopher John Kapsch, Aegis Capital Corporation, Research Division - Research Analyst [54]

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I was just curious about how this field trial might affect the adoption time line?

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [55]

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Well, we had -- just to give you a little bit more color on that, we had -- we tested this year in the field, 5,000 acres. Simplot had it in their development farm also. So a number of customers, both at the retail side and at the grower level, tested the system and the feedback was very, very positive. And we're just now moving forward to get more users and then, the actual prescriptions into the system with innovative farmers for them to try it.

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Operator [56]

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Our next question comes from Jay Harris with Axiom Capital Management.

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Jay Richard Harris, Axiom Capital Management Inc., Research Division [57]

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Eric, I can't imagine you'll become debt-free. So I'm looking forward to some press releases.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [58]

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So is our bank.

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Jay Richard Harris, Axiom Capital Management Inc., Research Division [59]

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I'm going to make some statements, and I'd like you to pick them apart. Tell me what's wrong and perhaps give some insights. You've acquired products that have -- that looking backwards, had $30 million in annual revenues. You indicated that it will take a little time to step up so that you could maximize your selling position on these products. I'm assuming and -- that the $30 million is divided evenly between first half of the year and the last half of the year. Should we expect that we get $15 million or more in revenues in the last half of the year? Or $15 million -- slightly less than $15 million in revenues the last half of the year out of this position?

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [60]

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So I think -- Bob, correct me. These -- they are stronger. I mean, the paraquat is used year-round certainly, but there are stronger sales in the first half of the year, I think, overall with these products.

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Ulrich G. Trogele, AMVAC Chemical Corporation - COO and EVP [61]

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That's correct, Eric.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [62]

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And staffing up. I think, we're comfortable that we can offer a competitive position with these products. Currently, we just tell people they've got to work a little harder. But with the idea that okay, as we are looking to grow not just our acquisitions, but our existing product line. And again, mentioned that we've got a pipeline of new products, so we'll call them kind of internal idea products that we are pulling together that don't require acquisitions. So part of that is there. So I don't know if that answers your question, but I think it's probably weighted heavier in the first half. And then there is, of course, the supply ability of chlorothalonil.

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Operator [63]

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(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to management for closing remarks.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [64]

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Okay. Well, I'd like to thank everybody who took the time to dial-in and listen today. It's an exciting time for us. We're thrilled that you're looking to be a part of it. So thank you, and we will look forward to additional announcements as they come available in our next call, which should be around the end of September, 1st of October. So thank you all for participating.

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David T. Johnson, American Vanguard Corporation - CFO, VP and Treasurer [65]

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End of October. It doesn't go by that quick.

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Eric G. Wintemute, American Vanguard Corporation - Chairman and CEO [66]

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I'm sorry. End of October. Sorry, sorry. I keep pushing, David, to finish closing within a day of the end of the quarter, but we haven't gotten there yet. All right. Thank you all. Bye.

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Operator [67]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.