American Vanguard (AVD) Earnings Transcript

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DATE

Monday, Nov. 10, 2025 at 9 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Eric G. Wintemute
• Executive Vice President and Chief Financial Officer — David T. Johnson

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RISKS

• David T. Johnson reported, "we incurred an expense in the third quarter of 2025 related to the product liability claims," and noted, "at this point, we do not have sufficient information to be able to record the offsetting indemnification asset."
• Eric G. Wintemute highlighted that weather-related droughts in Australia and Central America, along with incomplete destocking in Mexico, resulted in lower sales in those regions.

TAKEAWAYS

• Operating Cost Reduction -- Operating costs decreased by 11% ($5 million) for the quarter and $18 million or 14% year-to-date, driven by restructuring, reduced selling, G&A, and research expenses, including the elimination of SIMPASS project spending.
• Transformation Spend -- Spending on transformation activities fell by approximately $11 million within the nine-month period, reflecting transition to in-house business improvement resources.
• Product Liability Expense -- The company "record a liability for the expected cost of settling" certain specialty segment product liability claims in Q3; reimbursement is anticipated but not yet recognized as an indemnification asset.
• Inventory Management -- Inventory was approximately $47 million lower and net trade working capital $24 million lower than at the same point last year, attributed partly to an improved SIOP process.
• Net Debt -- Net debt declined by $2 million to $165 million compared to the same period last year, as the company intentionally sought less early pay from customers in 2025.
• Credit Facility Extension -- The company secured an agreement with senior lenders to extend its credit facility to December 31, 2026.
• Capital Expenditure Guidance -- Capital expenditures are forecast at $5 million to $6 million for 2025, as previously indicated.
• Adjusted EBITDA Expectation -- Management reaffirmed its expectation for $40 million to $44 million in adjusted EBITDA for the full year, with most free cash flow targeted at debt reduction.
• Gross Margin Improvement -- Analyst Dmitry Silverstein noted "300 basis points on an adjusted gross margin year over year," and Eric Wintemute attributed the gain to manufacturing efficiencies, reduced channel incentives, and a more favorable product mix.
• US Crop Performance -- US crop herbicides "performed very well year over year," and overall demand was described as "more normal," reducing the need for incentive programs in Q3.
• Specialty Segment Recovery -- The product liability issue was described by Wintemute as a Q3 drag but "not a long-term impact," with specialty segment growth anticipated in Q4 and Q1.
• Transformation Accountability -- Management is shifting transformation oversight to the internal team for improved accountability and expects further gains in manufacturing efficiencies, particularly from the SIOP process.
• Generic Competition -- Existing generic pressure affected one product, but the company noted increased volumes for Folex and expects greater volumes in 2026, citing a production advantage as a "US domestic supplier and producer."
• Industry Consolidation Opportunity -- Management anticipates industry consolidation could create acquisition opportunities to expand the product portfolio within the next 12 to 18 months.

SUMMARY

Management confirmed a substantial year-over-year reduction in both inventory and net trade working capital, supported by enhanced SIOP operations. The product liability charge recorded in the quarter is expected to be reimbursed in the future, though no indemnification asset is currently recognized. US crop herbicide sales outpaced the prior-year period, attributed to normalized demand and less reliance on channel incentives. Credit facility maturity was extended, while transformation initiatives moved fully in-house with associated cost benefits. Free cash flow for the fourth quarter is projected to be similar to the previous year, driven by continued working capital improvements and disciplined capital expenditure.

• Wintemute said, "the pipeline is growing," and projected that new product contributions to sales will materialize "starting in 2028," following a multi-year development process.
• Net leverage reduction remains a stated management priority, with a goal to bring net debt to below three times EBITDA in conjunction with future refinancing efforts.
• Current pricing and raw materials pressures are reportedly offset by lower COGS, with no major input cost inflation expected in the near term according to management commentary.
• Inventory levels in the distribution channel are described as low, leading management to expect future sales patterns will reflect true end-market demand rather than channel destocking.

INDUSTRY GLOSSARY

• SIOP: Sales, Inventory, and Operations Planning — a cross-functional process for balancing demand and supply, optimizing inventory, and aligning operational plans.
• Early Pay: A program wherein customers pay in advance for product deliveries, often in exchange for incentives, affecting working capital and cash flow timing for suppliers.
• SIMPASS: Company-specific precision technology initiative for crop management previously under development by American Vanguard Corporation, referenced here as discontinued for cost savings.
• Folex: A branded defoliant used primarily in cotton production, produced and sold by American Vanguard Corporation.

Full Conference Call Transcript

David T. Johnson: In Australia, we are seeing significant droughts in key regions resulting in lower sales. Similar weather patterns have impacted some areas in Central America, and the market in Mexico has not fully destocked. We continue to have a tight grip on our operating expenses. We cut our selling expenses for both the three and nine-month periods primarily as a result of implementing a more streamlined global organization structure. General and administrative expenses are also down following the organization redesign. However, those cost savings are masked by increased accruals for incentive compensation, reflecting our year-to-date financial performance.

We have made larger cuts to our research, product development, and regulatory costs, focusing on return on investment for product development projects, and by cutting out the spending on the SIMPASS project. Overall, our operating costs are down 11% or $5 million in the three-month period and $18 million or 14% year-to-date. Looking forward to the final quarter of the year, as Dak mentioned, we expect most cost savings that we have achieved to stick. Although product development spending is historically higher in the fourth quarter, having said that, the R&D costs are forecasted to be below last year. Including in the nine-month saving just discussed, spending on transformation activities reduced by about $11 million.

That was a planned reduction as we are now driving business improvements from in-house resources. Offsetting that saving, we incurred an expense in the third quarter of 2025 related to the product liability claims. With regard to those product liability claims, which relate to the specialty business, the company made the decision that we have sufficient information to record a liability for the expected cost of settling the claims. We have set up the necessary resources to administer the claims process, and we have commenced with claims assessment and payment processes. We expect the expense we have recorded to be fully reimbursed in the future by a combination of funds from the at-fault counterparty and/or their insurers.

We have made an assessment and determined that it was in the company's best interest to proceed with settling customers' claims even though at this point, we do not have sufficient information to be able to record the offsetting indemnification asset. Now turning to the balance sheet. Our improved SIOP process has allowed us to operate with comparatively less inventory than we have had in the last two years. Our inventory is approximately $47 million less than it was at this time last year. And as is usually the case with our annual business cycle, we expect to meaningfully draw down our inventory during the fourth quarter of the year.

Our net trade working capital is approximately $24 million lower than this time last year. We keep a sharp focus on these balance sheet items as we seek to limit accessing our revolving credit line. We have decreased our net debt as compared to the same period of last year by approximately $2 million to $165 million. While our net debt only modestly reduced, we bought in less early pay during the quarter than this time last year. While customer interest was high, we made the strategic decision to seek significantly less early pay in 2025 than we did in 2024.

As usual, we will be working with customers on the early pay options during the fourth quarter of this year. Since our last conference call, we announced that we had reached an agreement with our senior lenders to extend the term of our credit facility to December 31, 2026. As we continue to improve the business, we will continue to work with both our current lenders and potential new lenders to restructure our debt. We believe that as we continue to deliver, lenders should be drawn to our improved profitability and cash flow profile. We look forward to providing the investment community with an update on this effort at the appropriate time.

As we said on the last call, we expect $5 to $6 million of CapEx in 2025, coupled with our expectation of $40 million to $44 million in adjusted EBITDA for the full year. Thus, we expect to generate reasonably attractive cash flow in the fourth quarter of the year. We will apply virtually all of this free cash flow towards debt pay down. With that, I'll turn the call back to our CEO. Dak?

Eric Wintemute: Thank you, David. Before opening up the call to questions, I would like to thank the team for implementing the changes that are necessary to improve this business. Your hard work is delivering tangible results. While the market slowly improves, we will continue to focus on things we can control. Improving our manufacturing efficiency, keeping a close eye on net trade working capital, and minimizing our operating expenses while focusing on long-term growth opportunities. This is a business that has always been a resilient one, with products that are proven and effective and backed by the best technical team in the industry.

It is also a business that can produce even greater cash flow now that we are a globally integrated organization. The future is bright for American Vanguard Corporation, with a robust product pipeline, improved cost structure, and a focused team, we will remain on track to be the trusted provider of proven agriculture and environmental solutions. With that, I'll open up the call to questions. Operator?

Operator: Thank you. At this time, we will be conducting our question and answer session. A confirmation tone will indicate your line is in the question queue.

Operator: And you may press star 2 if you would like to remove your question from the queue. One moment please while we poll for questions.

Eric Wintemute: Thank you.

Operator: Our first question is coming from Mike Harrison with Seaport Research. Your line is live.

Mike Harrison: Hi. Good morning.

Eric Wintemute: Good morning, Mike.

David T. Johnson: Good morning.

Mike Harrison: I was hoping we could start out by talking a little bit about some of the trends that you're seeing across the different portions of your business. You know, maybe starting with the strength in US crop, it sounds like the herbicides area was very strong for you. Can you talk about what was driving that and maybe how you're feeling about momentum into the fourth quarter and into the first part of next year?

Eric Wintemute: Sure. Yeah. US crop was available. As you mentioned, the herbicides impact invoke very performed very well in Q3. They performed very well year over year, as well as the Aztec in the quarter. What we're seeing is more normal demand in the US crop business. Therefore, we're not having to incentivize as much as we've had. As we did in Q1. There's a lot more upbeat around the channel with distribution. There's still a cloud overhanging the farmers in the marketplace around the tariffs and the impact on soybeans primarily. But, in general, we see corn acres were up this year, and they are being projected up next year.

So that bodes us well for our portfolio in the US.

Mike Harrison: Right. And then on the non-crop or what you're calling the specialty side of the business, it sounds like maybe the product liability situation dragged on part of that business. Is that something that is more of a one-time issue and we get back to growth in specialty as we look into the fourth quarter, or is that product liability issue something that's gonna continue to drag for a few more months or quarters?

Eric Wintemute: Yeah. Good question, Mike. From an accounting standpoint, we've gone ahead and recognized the impact of that potential claim. We still have the offset that we're working through. The mitigation there, and we fully believe that we're gonna get reimbursed for our claim there. We are completely not at fault, and the counterparty is in the specialty business. Related. It was a drag on the first part of Q3. We started to process those claims and get communication to the customers more readily. Middle to end. Usually flowing much better now. The market has been very receptive. Actually, customers have been very pleased with the fact that we have started processing these claims in light of the situation.

So I don't believe that it is a long-term impact. I believe you'll see growth in Q4 and in Q1 for specialty.

Mike Harrison: Alright. That's good to hear. And then, David, I was hoping you could talk a little bit about free cash flow generation for this year. I believe you used the term reasonably attractive. Is there any way to put any numbers around that? It seems like you're making good progress on working capital. And that should improve even further during the fourth quarter.

David T. Johnson: Yeah. I mean, we had good cash inflow in the third quarter in comparison to the performance in the first two quarters. So that was encouraging. It wasn't quite as big as this time last year. But as I mentioned in my prepared remarks, we went out for and got less than we got last year in terms of early pay. We got more than we looked for, so that was good news. And our cash flow in the final quarter will depend to a degree on the early pay, but it looks pretty good at this point in time. So I'm expecting inflow similar to last year, which was quite strong.

Mike Harrison: Alright. And then last question for me is just on the transformation process. It sounds like transferring that to the internal team is a really important step. Was hope... Did we lose the mic? Sorry. Can you still hear me?

David T. Johnson: There we go. If you could repeat the question, Mike.

Mike Harrison: Appreciate it. Yeah. Transferring the transformation process to the internal team sounds important. Can you talk about how meaningful that is and maybe talk a little bit about how we should think about potential savings and further actions into next year?

Eric Wintemute: Thanks, Mike. This is an important transition of the transformation process to our business improvement initiative. It's primarily to tweak it and manage it internally and give accountability to the plan as we go forth. There's a lot of potential, as I've said a few times, on investor calls. I believe that the Kearny had a great set of initiatives that they created a blueprint to go forward with. But I do believe that the plan was really looking at low-hanging fruit, and there's a lot of other fruits on the tree there for us to grab, specifically in the manufacturing efficiencies.

And as we get into the SIOP process more formalized, we'll see benefits there throughout the P&L and EBITDA.

Mike Harrison: Alright. Thanks very much.

Eric Wintemute: Thanks. Bye.

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

Wayne Pinsent: Hi, Dak. Thanks for taking the questions. Congrats on a nice improvement there in the quarter.

Eric Wintemute: Thank you. Thank you, Wayne.

Wayne Pinsent: Just wanted to... you know, a competitor, on their call recently noted increased generic pressure in the market. Just wanted to get your thoughts there and if that's impacting you guys at all. I know you noticed that pricing is starting to stabilize, but any color there?

Eric Wintemute: Yeah. Not speaking directly to the competitor's situation, but in our situation, we have one product that underwent competitive competition over the last couple of years. Quite honestly, we feel like we're in a very good spot this year. We've seen an increase in volumes due to various market conditions, I would say. I think also the benefit that we have being a US domestic supplier and producer, specifically on this product, was talking about Folex. We have a benefit there. And we should see some increased volumes in 2026 with Folex, and we're planning for it as well. So there's always gonna be generic competition in the marketplace.

It's just always important to be cognizant and looking forward to those situations and making sure that you're planning accordingly, is what I would say.

Wayne Pinsent: Okay. So nothing significantly different than what you've been seeing. Alright.

Eric Wintemute: Correct.

Wayne Pinsent: And then, you know, Corteva announced that they're splitting up their seed and crop business. Just any positives or negatives for there for AVD? Looking forward?

Eric Wintemute: I think there's gonna be some consolidation in the marketplace. With what the other majors are planning and doing as well. And the potential with Bayer, as what they might do as well. So I think there's ultimately gonna be some consolidation in the marketplace in the next twelve to eighteen months. And with consolidation, we see strong opportunity to get back to what we were doing ten years ago, which was buying a portfolio of products off the basics when they go through these consolidation periods. So in the next twelve to eighteen months, I think there'll be a real opportunity to add to the portfolio through acquisitions. I think that's the most positive aspect of that.

Wayne Pinsent: And then just I know you're not gonna give guidance on 2026, but just thoughts on volume pricing trends. I know you mentioned pricing improved. It seems to be stabilizing. Just what you're seeing and if the crop protection market stabilizes and returns to more normalized low single-digit growth, how do you think AVD could perform in that environment now after a few, you know, down years?

Eric Wintemute: I think we'll perform well. I mean, we've set the company up to perform very well in 2026. There's a transformation plan of 2024, you know, reorganizing the team, implementing global best practices. In 2025 is setting the stage for a very upbeat 2026 outlook in my opinion. I think the team is well-positioned. The organization is well-positioned. We've got a clear vision of who we are and where we're gonna go. I think the pipeline is growing there. It's not gonna be there in 2026. But it's gonna be there in '27, '28, '29.

We're gonna get there and go ahead and I think with the current situation with the market stabilized, the channel inventories lower, we should definitely see volumes increase in 2026.

Wayne Pinsent: Okay. Great. And then last one for me. And you just touched on it there, the $100 million net sales over the medium term from the pipeline, any more color on that and kind of the cadence of how you could see that playing out?

Eric Wintemute: Yeah. Great question, and thank you for asking it. This is something I'm excited about. It was, yeah, when I first got to American Vanguard Corporation, I was a little bit disappointed at the pipeline of products that we had there. And I think it was because of multiple reasons. The SIMPASS technology was so heavily in focus that the new products were not in focus, so to speak. Having said that, as we got into this year and started organizing and analyzing, there were some very good products in the product pipeline that we brought through and cleared through the stage gate process in order to formalize it to get to that $100 million that we're talking about there.

There's some really nice products that spread pretty broadly across the US crop, international markets, and in specialty. Like I said, there is a gap here. We're not gonna see fruition on those new product sales until, or materially, until starting in 2028. Just because it takes two to three years to bring a new product to market. So I think what we've gained through this last year is the ability to put the new product pipeline in focus and give accountability to the timeline to bring in these new products to market. And I'm really upbeat about it now that we put it on paper and looked at it and validated them. So it's pretty exciting.

Wayne Pinsent: Okay. Thanks a lot. Good luck with everything.

Eric Wintemute: Thanks, Wayne, for the questions.

Operator: Thank you. Our next question is coming from Charles Rolls with Cruiser Capital Advisors. Your line is live.

Charles Rolls: Hey there. Good morning.

Eric Wintemute: Good morning, Charlie.

Charles Rolls: Hey, buddy. I just wanna go through a couple of numbers on free cash flow issues just to make sure I got them down sort of properly. It looks like if you do something between $40 and $44 million of EBITDA, I take out, let's say, $5 or $6 million of CapEx. Maybe there's a million or $2 million of cash taxes at most. I don't think there's much cash taxes. And then interest expense is $20 million. And then maybe working capital is a source of funds, as I'm assuming working capital maybe is $5 to $6 million as a source of funds for the full year. You get free cash flow of about $20 million.

Is that sort of the way to look at it?

David T. Johnson: That's where I would pencil it up exactly. I think interest we should be a little bit under $20 million, but, yeah, that's a good estimate. Good estimate, Charlie.

Charles Rolls: Okay. Then if I extrapolate that a little further out, right now, leverage ratio at $165 million of EBITDA, I'm sorry. I wish you were $165 million of EBITDA. $165 million of net debt. And $40 to $44 million of EBITDA. Your leverage ratio is running four times. So by next year, let's say you can get the numbers up towards something in the $50 million zone and you can get down the debt by another $20 million, you should be able to get one turn of leverage reduced. Is that sort of the goals you're trying to get to, Dak?

Eric Wintemute: Absolutely. Get that number under three is the primary goal that we're working for.

Charles Rolls: So that's sort of what you wanna do when you get towards the refinancing issue. Right?

Eric Wintemute: Yes. Yes. Indeed. We've shown positive momentum in Q2 and Q3 with our performance. And we are in the process, the mix today, the refinancing initiative right now, right in the middle of it.

Charles Rolls: Then the last question I want to, which was asked earlier about Corteva. Obviously, we're seeing companies being set up to take advantage of consolidations. Then you see this issue with FMC and their, let's call it their troubles. Can you give us some color on that situation too, Dak? If you could just to see if there's something more problematic there, or is it something that's not as problematic as the market suggesting. I'd love to hear your color on this whole thing because we're seeing now differentiation between different issues of the ag industry.

Eric Wintemute: Yeah. Gonna be hesitant to speak about that one competitor, Charlie. I have some thoughts on it. But, you know, I really don't wanna go there if that's okay.

Charles Rolls: Okay. I understand. Because it is a very levered company, and it seems to be much troubled with their products and their, it could be much more trouble than we think. That's why I was just wanting to get your thoughts. But I understand you're not commenting. Okay. Anyway, congratulations on moving the company forward. Look forward to your next quarter as well. Thanks, Dak.

Eric Wintemute: Thanks, Charlie. Thanks for the questions.

Operator: Thank you. Ladies and gentlemen, if you have any questions or comments, please press 1 on your telephone keypad. Our next question is coming from Dmitry Silverstein with Water Tower Research. Your line is live.

Dmitry Silverstein: Good morning, gentlemen. Thank you for taking my question. Congratulations on a solid quarter. I just curious about a little bit more in your gross margin improvement. 300 basis points on an adjusted gross margin year over year. Given what's going on in the industry is pretty impressive. So just wondering if it had more to do with the manufacturing improvements you've made over the last year. Was there some pricing or mix involved? So what were the major buckets that allowed you to get that three-point improvement on a year-over-year basis?

Eric Wintemute: Yes. Dmitry, great question, and thanks for asking it. You know, I think it's a combination, not one specific thing. There. It's a combination of sales starting to flow more easily into the marketplace, specifically in the US without so much incentives. I think the SIOP process is allowing for that inventory replacement cost to be funneled through the P&L now as we've worked off a lot of that old inventory, which is up in the margin. But I think also the manufacturing efficiencies we grew this, which is both the combination of focus on the manufacturing activities as well as the coordination and communication between demand planning, production planning, and procurement, is allowing for expanded margin there as well.

So I think it's a combination of several things. And mostly, it's the great teamwork that we've got going on at American Vanguard Corporation.

Dmitry Silverstein: Thank you for that granularity. So it sounds like you didn't have to be as promotional this quarter as you did this time last year, so pricing or mix may have improved a little bit, in addition to your internal improvements. As far as manufacturing costs themselves are concerned, is there anything in your, as you kind of look out towards the end of the year and early in 2026, any concerns on the raw materials situations? Anything giving you issues or giving you reason to expect that your costs are gonna be going up faster than inflation, let's call it.

Eric Wintemute: No, Dmitry. I mean, we're really not. I mean, we've analyzed the tariff impact heavily. There is some, but quite honestly, most of the tariff impact is being offset by lower COGS. Raw material costs that we're seeing. So it's been mitigated there quite substantially. We were just talking about one raw material this last week with the procurement team, and we're seeing a nice downward trend on that raw material costing. And so, yeah, I don't see anything in our COGS increasing at this point in time.

Dmitry Silverstein: Wonderful. And then the last question, just sort of the mood in the marketplace. You talked about inventories getting more kind of in more appropriate level in the supply chain and for yourself internally. Given that there's a pretty strong outlook, you mentioned increased acreage likely again next year in North America. Would you expect your season in the fourth quarter and the first quarter to proceed in a more normal way, where demand in the end market is actually reflected in your results? And not so much from inventory clearing out of the channel?

Eric Wintemute: Yes. Yes. I mean, personally, I think the inventory and what we see from our data from the systems, the third-party process that we get as our inventories in the channel are. Our products are very low. Not or lower in relation to prior years. And so, we feel that the inventories are down. So the normalized buying is coming back. Now what the normalized buying is not gonna, we don't believe it's gonna be building inventories. But on an annual basis, the product being bought and sold should be consistent.

So, we don't feel at this point in time unless there's a black swan event, that they will start building inventories again to the level they did right before COVID just because the market has enough supply and the customers know that now.

Dmitry Silverstein: Understood. Thank you very much. That's all the questions I had.

Eric Wintemute: Thank you, Dmitry, for the questions.

Operator: Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. End of our call. This will conclude today's call and you may disconnect your lines at this time. And we thank you for your participation.

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