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Edited Transcript of AVD earnings conference call or presentation 5-Nov-18 9:30pm GMT

Q3 2018 American Vanguard Corp Earnings Call

NEWPORT BEACH Dec 21, 2018 (Thomson StreetEvents) -- Edited Transcript of American Vanguard Corp earnings conference call or presentation Monday, November 5, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David T. Johnson

American Vanguard Corporation - CFO

* Eric G. Wintemute

American Vanguard Corporation - Chairman & CEO

* William A. Kuser

American Vanguard Corporation - Director of IR & Corporate Communications

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Conference Call Participants

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* Joseph George Reagor

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

* Neil Yost Van Horn

Guyasuta Investment Advisors, Inc. - MD, Equity Investment Analyst & Portfolio manager

* Peter Osterland

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Bruce Winter

- Private Investor

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Presentation

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Operator [1]

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Greetings, and welcome to American Vanguard Corporation Third Quarter 2018 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. Thank you. You may begin.

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

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Well, thank you very much, Sherry, and welcome, everyone to American Vanguard's third quarter and 9-month year-to-date earnings review.

Our speakers today will be Mr. Eric Wintemute, Chairman and CEO of American Vanguard; Mr. David Johnson, the company's Chief Financial Officer; also assisting in answering your questions, Mr. Bob Trogele, the company's Chief Operating Officer.

After today's call, American Vanguard will file our Form 10-Q with the Securities and Exchange Commission, providing additional detail to the results that we will be discussing in this call.

Before beginning, let's take a moment for 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 can 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 said, we turn the call over to Eric.

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

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Thank you, Bill. Hello, everyone, and welcome to our third quarter and 9 months earnings call. As always, we thank you for your continued interest in American Vanguard.

As you can see in our press release, we have continued to perform very well during the quarter and year-to-date. In the third quarter, we recorded net sales of $112 million, which were up 24% over Q3 of 2017. Quarterly net sales of our international business were up 66% and our domestic business rose 9%.

While strong, the increase in quarterly net sales was about $7 million below analysts' expectations. That difference arose primarily from reduced sales from our adverse weather conditions in Central America. As David will report later, however, our net income and EPS for the quarter exceeded analyst consensus. Thus, we recorded higher-than-expected profits on lower-than-expected sales.

For the 9-month period, our overall net sales expanded 35%, with international growing 81% and our domestic business increasing by 18%.

The primary drivers of these gains are 4 acquisitions that we completed in 2017 that included AgriCenter, OHP and a slate of products in the U.S. and Mexico that came to us through government ordered divestments. We continue to integrate and grow these businesses and expect to obtain even greater efficiencies and improve market penetration in the coming years.

Growth by acquisition has been a successful business model for nearly 3 decades, and it continues to be a viable and profitable growth strategy, particularly in light of the high level of divestment activities that we are seeing in the sector.

Our preacquisition business was stable for both the 3 and 9-month periods. As you will read in the Form 10-Q, this was the result of mixed performance across many crops and product lines, offset by reduced sales of Dibrom, following a record year in 2017.

We expect the preacquisition businesses to rise slightly or on a full year basis. The combination of our solid traditional business with new acquisitions has us on track to post full year 2018 revenues in the range of between $450 million and $460 million.

Our manufacturing performance during the third quarter and the year-to-date has been outstanding. We have focused on efficient utilization and reduction of costs, while bringing more intermediates, finished products and tolling activity in-house. Interestingly, approximately 50% of all pesticide products used in the United States come from China. By contrast, we source closer to 10% of our chemicals from that country. We continue to navigate through the supply and tariff issues with China.

At this point, the only product we've identified at risk for us in the near-term is Bromacil, for which production had been halted several months ago. We are told that the Bromacil plant in China should be back online this week. At a time of uncertainty in the supply chain, we continue to benefit from both our 4 efficient domestic plants and reliable third-party sources in many countries.

On a related note, we expect that our year-end inventory level will be about $145 million, which will be $21 million higher than the year-end level of 2017. Nearly 70% of that increase will come from new businesses and another 10% will be from our expedited procurement of goods to get ahead of potential tariff increases.

We will continue to optimize the balance between factory efficiency and building inventory, whether through procurement or manufacturing, to meet demand and to convert into cash for ongoing operations.

With that overview, I will now ask David to give you his analysis on our financial performance. I will then return to talk about my outlook going forward, the acquisition of TyraTech, our collaboration with Procter & Gamble in consumer pest sprays, progress on SIMPAS development and our share repurchase program. David?

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

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Thank you, Eric. Good afternoon, everybody. As Bill mentioned, we will be filing our Form 10-Q for the 3 and 9 months ended September 30, 2018, after the call. Everything I'm covering here is included in more detail in that document.

With regard to the financial results, as Eric just detailed, the company's sales for the third quarter of 2018 increased by 24% to $112 million as compared to sales of $90 million this time last year. Within that overall improvement, our international sales continue to grow in importance and represented 36% of net sales in the third quarter as compared to 27% this time last year. While discussing our quarter's sales performance, there are 2 factors that resulted in us falling short of the consensus of $119 million.

The first was that we experienced unusually wet weather in the Central America region, which impacted AgriCenter sales by approximately $5 million. Second, we made decisions not to compete on price on one of our product lines, preferring instead to sacrifice some revenue and to maintain margins. Our third quarter gross margin ended at 41%, which exceeded the range we indicated in the last call of 38% to 40%. In part, the shortfall of sales just mentioned, which are lower margin, and their absence, contributed to the slight improvement in our third quarter margin performance.

During the quarter, our operating expenses ended at 30% of net sales compared to 35% this time last year. On an absolute basis, our operating expenses increased by 7% due to several factors. The main driver is the addition of businesses acquired in the final quarter of 2017, which were not part of operating expenses in the comparable prior year financials.

In addition, we have recorded increased legal and incentive compensation expenses. As an offset to these increased operating expenses at September 30, 2018, we reassessed the fair value of liabilities for deferred consideration and reduced the company's expected future earnout payment by $4 million, covering both OHP and AgriCenter.

With regard to the effective tax rate, during the third quarter of 2018, we completed the assessment of the transition tax, which was introduced in December 2017 as part of the 2017 Tax Cuts and Jobs Act. In the process of completing our review, we have changed our original estimate for the tax due on historical international earnings and recorded a onetime expense of $1.1 million as a consequence. Our effective rate for the quarter, including the onetime expense was 33%.

The underlying rate, by which I mean, excluding the onetime transition tax expense, was 23.1% for the quarter, which compares well with the guidance we have given in previous calls for a rate between 25% and 27%. Our rate was better than the range because our 3-month international performance was stronger than we used as a basis for our guidance. In comparison, our effective rate for the 3 months ended September 30, 2017 was 32%.

Overall, net income for the quarter increased by 60% to $6.5 million or $0.22 per share as compared to $4.1 million or $0.14 per share this time last year. For the 9 months ended September 30, 2018, net sales ended at $323 million, a rise of 35% when compared to the same period of 2017. Further, gross margin continued at 40% as compared to 43% for the same period of the prior year. The gross margin level of 40% reflects the solid strength of our brands, our strong manufacturing performance and the inclusion of the businesses and products acquired in 2017 that drive high sales and lower average margins as compared to our preacquisition product portfolio.

Our operating expenses when expressed as a percentage of sales were 32% of sales for the first 9 months of 2018 as compared to 35% for the same period of the prior year. The reported operating expenses are net of adjustments of $5.4 million, following the reassessment of the fair value of deferred earnout liabilities that we have made at each balance sheet date as required by U.S. GAAP.

Our net income for the first 9 months of 2018 amounted to $16.8 million or $0.56 per diluted share as compared to $11.8 million or $0.40 per diluted share in the same period of 2017, a 42% period-over-period increase.

From my perspective, the key financial issues for the company remain consistent. First, we continue to follow a disciplined approach to planning our inventory activity, balancing overhead recovery with demand forecasts and inventory levels. In both the 3 and 9 months ended September 30, 2018, our factories have performed strongly and helped us generate the 41% gross margin performance I just discussed.

In managing our factory operations, we were judicious about building inventory to meet the needs of the season. As you will note from our financial statements, inventory remains flat with the level at the end of the second quarter of 2018 and is up approximately $40 million, when compared to December 2017. Of that increase, approximately 75% or $30 million of the increase was for inventory that we purchased not inventory that we manufactured.

The level of purchased inventory increased during the 9-month period for 3 reasons. First, the products we acquired during 2017 were at a very low-level at the end of 2017 as we were resolving supply chain challenges. Secondly, at the end of the third quarter, our newly acquired distribution businesses are at the high point of their annual seasonal cycle as compared to a low point at December 31, 2017. And third, the company has purchased certain products from China ahead of any potential tariffs.

Second, our effective tax rate ended at 28.2% year-to-date as compared to 29.2% for the same period of the prior year. As discussed earlier, the current year includes the onetime charge related to the transition tax. But for the onetime charge, the effective tax rate for the 9-month period would have been 23.8%. Notwithstanding this first 9 month performance, we expect that our Q4 2018 tax rate will be in the range of 25% to 27%.

Third, with regard to liquidity, at the end of the third quarter, availability under our credit line stood at $105 million as compared to $125 million this time last year. This performance includes increased borrowings, which the company made in the fourth quarter of 2017 to buy the 2 distribution businesses, OHP and AgriCenter.

Indebtedness as of September 30, 2018 was $97 million as compared to $77 million this time last year. At December 31, 2017 debt was $77 million.

Finally, in an effort to further support investors' understanding of the business and its financial performance, in the earnings release, we have reported EBITDA for the 3- and 9-month periods ending September 30, 2018, and included a reconciliation statement between net income and EBITDA.

Our EBITDA improved by 45% in the quarter to $17 million, whereas net income improved by 60% as I just described. The difference in growth rate is caused by the economical prices paid by the company for the acquisitions in 2017, which results in amortization expense which hasn't increased in proportion with the expansion of the business generated by the acquisitions, offset partly by the interest expense resulting from borrowings made to facilitate those acquisitions. For the 9-month period, EBITDA improved by 30% to $45 million as compared to $34 million for the same period of the prior year.

In summary, when looking at our year-to-date financial results, we can say that we have recorded significantly stronger sales, achieved gross margins that are in line with our projections, better-than-forecast factory output and gained economies of scale for our operating costs. We have improved on the tax rate we predicted when we last spoke to you. This all came together in a 60% improvement in net income for the quarter and 42% year-to-date.

Furthermore, we have maintained a strong balance sheet, along with sufficient borrowing capacity to execute on our acquisition strategies as opportunities arise.

With that, I will hand back to Eric.

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

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Thank you, David. We expect the fourth quarter to be our strongest of the year at both the top and bottom lines. Upsides for Q4 should include sales from AgriCenter, soil fumigants and our Parazone and Equus brands. I will cover other forecasted full year metrics at the end of my comments.

First, however, I want to comment on the development of our SIMPAS, Precision Application System. As you recall, in 2017, we validated the operation of the system and found that the performance of our wireless control system, the accuracy of our meters and the durability of the system exceeded expectations.

In 2018, AMVAC worked with Simplot Grower Solutions to demonstrate large-scale prescriptive application of AMVAC's Counter 20G insecticide to address well-defined nematode management problems. Combining SIMPAS' variable rate application technology with Simplot's SmartFarm prescriptions enables growers to target crop protection and nutritional products in a precise manner. In all the trials, SIMPAS technology performed very well. Yield data is being analyzed by an independent third-party and those results will be available by year-end.

During the planting season of 2019, we are targeting additional customers for use of the SIMPAS system equipped with both granular and liquid meters dispensing multiple products.

Thereafter, we expect to be in position to begin commercialization of this proprietary technology in 2020.

We continue our collaboration with Trimble on synchronizing SIMPAS with their superior geopositioning software. Specifically, Trimble is helping to develop a universal interface that will enable SIMPAS to be plugged into most tractor displays. Additionally, we have conducted market demand and pricing assessment of this technology with Trimble's vantage retail network to determine a detailed commercialization plan for SIMPAS hardware by retailers who are experts in precision ag.

Also related to SIMPAS, we continue to expand our intellectual property portfolio. Recently, we received approval of a low-rate application patent from the European Union having claims similar to the patent that we have been granted by the U.S. Patent and Trademark Office. Further, we just filed a patent application that embodies our technology for applying both liquid and granular inputs in or near the placement of the seed during planting. This seed product placement technology will give SIMPAS users greater efficiency at lower rates with a higher level of accuracy, all at time of plant.

Also in the area of technology, we reported separately this morning, American Vanguard has agreed to acquire all of the outstanding shares of TyraTech at 3.15p per share or approximately $4.5 million. That deal is set to close on November 8, Thursday of this week.

As you may recall, we have been a minority shareholder in TyraTech since 2012, and both AMVAC and TyraTech have been partners in a related joint venture, Envance.

We are interested in TyraTech for a number of reasons. First, the proprietary technology involves the use of essential oils, such as thyme and geraniol, in various formulations that control insects by targeting specific nervous system receptors found only in invertebrates. Consequently, their products are safe for use in proximity to people and their pets.

Second, Envance has been a licensee of this technology for use in consumer, professional pest control and agricultural applications, so we know that it works. Third, by acquiring TyraTech, we will have the opportunity to expand this technology into the mosquito repellent and animal health markets.

On a related note, today, our majority-owned subsidiary, Envance, announced a global joint development and license agreement with Procter & Gamble to develop new consumer pest control products based on this essential oil technology. By entering into a collaboration with P&G, Envance has secured a world-class commercial partner with proven consumer product knowledge and a global go-to-market capabilities.

As P&G asserts, Envance's proprietary innovations facilitate insect control alternatives to the use of traditional insecticides, which addresses a rising consumer need to control insects with products that are safe and effective around people and pets. P&G has already begun commercialization of this technology for use in their new range of pest spray products, under the tradename Zevo. We encourage you to explore this exciting new product at zevoinsect.com.

From technology, we turn to shareholder value. Today we announced that our Board of Directors has approved the repurchase of up to $20 million worth of our common stock in the open market, depending on market conditions, over the short and midterm.

Why are we doing this? We believe that it is important for us to show support of the value of our equity, particularly when, as now, our financial performance continues to be strong, in spite of volatile conditions in the stock market. Our credit agreement permits us to make repurchases up to this level and our remaining borrowing capacity gives us ample resources for pursuing acquisition targets. While we intend to continue our long-standing dividend policy, which gives shareholders a share of our profitability, we believe that this repurchase initiative will further enhance total shareholder value.

Now an update on our target parameters for 2018.

We expect to achieve total net sales of between $450 million and $460 million; gross margins at the upper end of our 38% to 40% range; operating expenses around $150 million; a tax rate for all jurisdictions of approximately 27%; and as I mentioned, we expect the fourth quarter to be our strongest of the year both in terms of revenues and profits.

In summary, we are doing well, both top and bottom lines are up strongly for the 3 and 9 months. Our acquisition strategy continues to bear fruit, as we successfully expand into new territories and markets. We are deriving great benefit from our domestic factories in the face of supply chain uncertainty. Our financial discipline has remained firm, even as we invest in technology development and pursue exciting development like Trimble and Procter & Gamble.

With respect to 2019, we expect to be roughly in line with analysts' current expectations. We should see growth across most all product categories, continued strong manufacturing performance and controlled operating expenses as we invest in technology and remain active in the acquisition market.

Against that backdrop, we have sufficient confidence in American Vanguard that we are investing in our own share repurchase. We hope that you share that confidence.

Now I would like to open up to any questions you may have. Sherry?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Joseph Reagor with Roth Capital Partners.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I guess, first -- first thing, looking at kind of the sales mix during the quarter, it seems like the insecticides have continued to kind of lag last year's pace, at least on like a 9-month basis. Is that all being driven by weather? Is the China tariffs being an issue there? And like how should we think about that normalized heading into 2019?

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

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So in insecticides, I mean, the biggest difference year-over-year quarter was the Dibrom. But it was insecticides, right? So that -- we had a record year last year and so that was down -- insecticides were down in that. From cotton, our Bidrin, the pest pressure was not as strong as we expected.

And of course, we had Texas that kind of burned up in a drought and then, of course, later in the season, the hurricanes that hit the Eastern Seaboard. And I think those are predominantly the 2 factors on the insecticides.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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Okay. And then on the weather-loss sales in the quarter, the $5 million. Do you think you can make any of that up in the fourth quarter?

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

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Yes, the projections are stronger for fourth quarter for AgriCenter, as they do believe certain portions of that will occur in the fourth quarter. So a portion of that is timing.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Okay. And then shifting gears, on the $20 million share repurchase, can you give us kind of a framework of your thoughts of -- obviously, the company's valuation has pulled back with a number of your peers over the last, call it, 6 months.

But if we were to see a rebound in the share price for the short term, would you guys continue to exercise that? Or is that going to be a diligence process to see where your share price is at when you use it?

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [7]

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I think it would be more of the latter. We do -- we have, in the past, had programs under way to help with shareholder creep, as we have grants that occur and employees purchasing stock under our employee stock purchase program. This obviously is a bigger number.

So I think it'll be a combination. We'll look to repurchase the shares that might have caused dilution. But also, we'll look at the price and make determinations what's prudent. At some levels, we get back 24 and north, then we may scale back.

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Operator [8]

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(Operator Instructions) Our next question is from Jim Sheehan with SunTrust.

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Peter Osterland, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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This is Pete on for Jim. Looking forward, do you see any more areas where you might walk away from volumes just as a way to improve margins as you did during the quarter?

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

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Yes, I think it's more a timing issue. I think, this was more specific to our Parazone, where we saw prices fall. I think there's volatility that's occurring from expectations of tariffs equated with inventory that people might want to sell.

So I think for us, it was a little bit more of timing where we felt, moving into third quarter, prior to product coming in, we have product that we did not pay the higher tariffs with and that we felt, if we delayed, we'd be able to make more money on it. We don't have any plan going forward where we would hold back. That was an opportune system where we just said it makes sense for us to hold for a quarter.

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Operator [11]

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Our next question is from Bruce Winter, Investor.

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Bruce Winter, - Private Investor [12]

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Mr. Kuser does a wonderful job presenting American Vanguard at investor conferences. I think it would benefit the stock price if his work was more broadly publicized, like with links on your website. And my only question is, could you please repeat the commercialization plan you have for SIMPAS?

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [13]

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Sure, and just thanks for the compliment with Bill. Yes, he's a great asset to the company. We did, just this last week, redo our website. And so I think we're....

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William A. Kuser, American Vanguard Corporation - Director of IR & Corporate Communications [14]

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We redid the AMVAC chemical website and, henceforth, we will be reviewing and enhancing the AVD, the corporate website. So that's a work in progress, but I appreciate your comment, Bruce. That's always important to be able to communicate the message because we actually think that our message is a lot stronger than perhaps we're being given credit for. So thank you for that comment.

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Bruce Winter, - Private Investor [15]

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So next week at Dallas. Why don't you tell everyone about next week in Dallas?

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William A. Kuser, American Vanguard Corporation - Director of IR & Corporate Communications [16]

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I certainly will. I'll be there next Wednesday. Will you be there as well?

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Bruce Winter, - Private Investor [17]

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No, but it's on the Internet. So it'd be nice to have a link on your website, et cetera, et cetera.

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William A. Kuser, American Vanguard Corporation - Director of IR & Corporate Communications [18]

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Excellent, excellent suggestion. That is a conference that is going to be webcast, and we can certainly tie that into the website. Excellent suggestion.

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

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And with regard to SIMPAS, so the plan here is that, for the '19 season, we want to get multiple products going down, both liquid and granular and prescriptively, as I said. This year, we did a granular product down prescriptively. We want to now get multiple products.

Also, the target is to have Trimble's system. We originally were doing this with an iPad but, in collaboration with them, they indicated that they would be able to bypass the iPad and go straightly onto the screen in each of the cabs that were -- whether it was John Deere or CaseIH or Kinze, that it would adapt straightly into that.

So any growers -- growers have not minded having the SmartBox screen inside of their cab, but we're trying to improve every part of this and this would just be one less screen that they'd need to have in their cab.

With that then, we will be testing these multiple products, getting this linked into the cabs themselves, so that when you hit 2020, we should be able to do this without a glitch. And my people are -- I'm always pushing to go faster. Our people are quick to point out that you get 1 first launch, and so we have been a little more conservative. I think, 2019 was my original target and by 2020, we should be all set to go.

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Bruce Winter, - Private Investor [20]

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So who's going to figure out how to determine what to tell the machine to do? And who's going to manufacture and service and sell the machines?

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

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So the manufacturing of it, we have the same company that has been doing our SmartBox manufacturing, and it's called World Class. They'll be doing, initially, the assembly and selling the units, initially, to Trimble. Trimble has 90 outlets in the United States, retail outlets that sell equipment that are expected to begin marketing the products.

As far as who's writing the prescription, and that's really what we call it, telling the machine what to do. Simplot is the first company that has stepped up and said, we've got the agronomists capable of being able to write the prescription.

We have other companies that have expressed interest that I think will follow along shortly, that will also look to have their agronomists be able to write prescriptions to apply multiple products at time of plant, both on a prescription level and, as I talked about, this new patent that we filed for which would allow us to time the product that goes down with the seed.

And it doesn't mean it has to go on top of the seed or right at the seed, if there's any products that might have any sort of phytotoxicity that might affect germination, they can go as a side dress. The whole point is that we now are able to link the application of our products, time it with the seed coming out, and that's another big, big step forward for us.

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Operator [22]

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And we now have a follow-up question by Joseph Reagor with Roth Capital Partners.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [23]

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Just thought of one more thing. Looking at working capital, it's consumed about $70 million so far this year, $75 million-ish. It looks like that's going to at least partially reverse in Q4. Is that the correct assessment? And is that also where the $20 million or so is coming from to target share repurchases?

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [24]

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You want to... I think that $70 million is what we're...right?

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David T. Johnson, American Vanguard Corporation - CFO [25]

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I mean, yes.

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [26]

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So the first question was about $70 million. We don't have that...

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David T. Johnson, American Vanguard Corporation - CFO [27]

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Yes, I'm going to have to check that number. I didn't think it was that big but...

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [28]

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So I thought you said we're at $15 million so far this year.

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David T. Johnson, American Vanguard Corporation - CFO [29]

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Well, the change in working capital is greater than that because we've got the cash inflow from the business, generated from the business. So the net was $15 million.

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

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So net -- yes, net, $15 million. We're expecting, as you said, strong cash flow in the fourth quarter.

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David T. Johnson, American Vanguard Corporation - CFO [31]

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Yes, we normally have. Inventory comes down and payments come in from customers, so that tends to finish the cash cycle. And we do tend to see a better final quarter for the year.

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Joseph George Reagor, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [32]

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Okay. And so that will give you guys kind of the extra cash you need to move things forward with the share repurchasing?

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David T. Johnson, American Vanguard Corporation - CFO [33]

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Yes, if you look at the change in working capital from December 31, 2017, it's $53 million. So maybe we need to just check.

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [34]

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But I guess, in looking at it your manner, yes, we would generate -- I think we'd expect to generate more than $20 million in the fourth quarter.

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David T. Johnson, American Vanguard Corporation - CFO [35]

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Yes.

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Operator [36]

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(Operator Instructions) And our next question is from Neil Van Horn with Guyasuta Investment Advisors.

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Neil Yost Van Horn, Guyasuta Investment Advisors, Inc. - MD, Equity Investment Analyst & Portfolio manager [37]

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Could you just summarize again the impact of the tariffs, either on chemicals you import from China or other countries, and conversely, tariffs that would be levied on sales from you to China or other countries, how that exactly plays out?

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [38]

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Sure, I mean, the easiest one is with China to date, we have not sold product and we do not have registrations for product in China. I will tell you that the Chinese companies and government are very interested in SIMPAS, so it's something that we do believe will happen. We do have some registrations that we are looking to get there. But for now, there is no impact, and certainly, in the midterm.

With regards to products that we have imported, and I mentioned about -- including raw materials, it's about 10% of the products that we purchase or manufacture. And the duties have been in that, I'll call it, 5% to 6% range historically. With the new act of tariffs effective October 1, that was increased by 10%. So you're looking at 15% to 16%.

And scheduled to go into effect the 1st of January would be an additional 15%. So that would put products that were in the 5%, up 25% to 30%, 31%. So a lot of companies are looking to India and other countries. And there's also decoupling, that a lot of supply out of China has been disrupted, largely environmental compliance issues.

So with regards to ourselves, we have purchased some products in advance of October 1. We have some products scheduled that we're purchasing in advance of January 1, which is certainly leading to part of why our inventories have increased because we think it's prudent to purchase prior to these duties.

On a go-forward basis, as I mentioned, the product Bromacil doesn't -- is not subject to those duty increases. It's a product that we purchase from China for our international business, but more recently, we did purchase Bayer's domestic business, of which, we are now in a position to service that market as well. So I don't know if that tied up all your questions or not.

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Neil Yost Van Horn, Guyasuta Investment Advisors, Inc. - MD, Equity Investment Analyst & Portfolio manager [39]

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Well, it certainly ties it up, but it's a screwed up mess, that's for sure.

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [40]

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Well, we tend to be politically neutral on phone calls, but it's...

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William A. Kuser, American Vanguard Corporation - Director of IR & Corporate Communications [41]

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But you may be right.

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [42]

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No, I mean, it's -- I think, what has occurred in the past isn't always necessarily a fair and balanced situation, and somebody's addressing that today.

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Operator [43]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Eric G. Wintemute, American Vanguard Corporation - Chairman & CEO [44]

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Okay. Thank you, and I appreciate everybody's participation in today's call. And we look forward to updating you on further progress as we look to increase shareholder value. Thank you.

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Operator [45]

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