American Vanguard Corporation (AVD) Earnings Call Transcript & Summary

Greetings, and welcome to the American Vanguard Q2 2024 Conference Call and Webcast. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Young, Director of Investor Relations. Thank you, Anthony. You may begin.

Thank you, Elisa. Good afternoon, and welcome to American Vanguard's Second Quarter 2024 Earnings Review. Our prepared remarks will be led by Tim Donnelly, acting Chief Executive Officer; Mark Bassett, Board member and Architect of our Business Transformation Strategy and David Johnson, Chief Financial Officer. Mason Bennett, Vice President, North American Crop is also in attendance and available to answer agricultural economy related questions. Before beginning the presentation, let's take a moment for a cautionary reminder. During this call, we may discuss forward-looking information. All forward-looking statements are estimates by the company's management and are subject to various risks and uncertainties that may cause actual results to differ. Such factors include weather conditions, changes in regulatory policy, transformation, organization and liquidity initiatives and other risks, as detailed in the company's SEC reports and filings. All forward-looking statements represent the company's judgment as of the date of this release and such information will not necessarily be updated by the company. It is now my pleasure to turn the call over to Tim.

Thanks, Anthony. Hello, everyone, and thank you for joining American Vanguard Second Quarter 2024 Earnings Call. Before we discuss the second quarter and first half, I would like to comment on the current management team and then cover the company's direction to expedite change. In light of industry conditions and our recent financial performance, the Board of Directors has taken bold and decisive action to guide the company on a new course. Following the departure of the previous CEO on July 12, the company formed an office of the CEO to accelerate both short-term initiatives such as margin improvements, cash management, capital allocation and cost savings, as well as business transformation during the pendency of the search for a new CEO. The Board and management team are committed to moving forward with a sense of urgency and making necessary changes immediately while we look to fill the top position. As you will see on Slide 5, the OCEO is comprised of 4 senior executives who bring all the skills and experience necessary both to manage day-to-day operations and to accelerate our transformation. They are David Johnson, CFO with 17 years at the company; Senior Vice President of Human Resources, Shirin Khosravi, with more than 25 years in HR management and design; Board Member, Mark Bassett, PhD, who has run multiple large global businesses and is the architect of our transformation plan; and myself, Tim Donnelly, acting CEO, with 19 years at the company. In short, the Office of the CEO has a clear mandate to improve short-term financial performance and to accelerate the transformation process which will turn American Vanguard into the business that our investors, customers and employees deserve and we all know it can be. We will use the following framework for our discussion during this call as per Slide 6. I will provide a high-level overview of the second quarter and first half 2024 financial performance and make mention of a recent development with EPA on our products to Dacthal. Then Mark will provide an update on the progress we have made with our liquidity initiatives and business transformation. Then David will report on our amended credit agreement and provide a detailed review of the just completed quarter's financial performance. Finally, I will return to provide an update on our full year financial projections and to discuss our search for a new CEO. American Vanguard has a resilient business, and we think this is highlighted by the company's sales in spite of weakness in the farm economy, which is due to persistently low commodity prices, the cost of crop inputs and elevated interest rates, which have culminated in a just-in-time procurement approach within our distribution channel. I hasten to add that most of our competitors has been similarly impacted. Turning to Slide 8. During the second quarter, net sales decreased slightly to $128.2 million compared to $132.8 million in the year ago period and our adjusted EBITDA margin declined to 4.8% during the quarter, well below that, which we would view as our long-term potential and lower than the 8.2% adjusted EBITDA margin in the year ago period. This decrease in adjusted EBITDA margin comes largely from reduced sales of higher-margin products with U.S. crop sales down along with a comparative increase in sales of lower-margin non-crop products. During the quarter, we did record double-digit increases in both non-crop and green solutions products. Net sales for the first half of 2024 were up on a consolidated basis by 2% with both non-crop of 20% and domestic total sales up 5%, outperforming in the first half of 2023. In addition, recorded double-digit sales increases within our green solutions portfolio, led by strong demand in Central America. Further, and as David will report while down in the second quarter, gross profit for the first half of the year was about equal with that of 2023. With that said, the current management team and the Board view our overall results as unacceptable. In our years of experience with the company, we believe that the primary impediment of this business has not been in generating sales, but rather has been in managing our cost structure Thus, it is incumbent upon us to take a decisive action to reduce costs, improve liquidity and accelerate our business transformation. Before turning to Mark on our multiple initiatives to expect this change, let me first touch upon the subject of Dacthal. As you may have read in the press earlier this week, the EPA just issued an emergency suspension of that product, which prevents its sales, distribution and use. As you may recall, we voluntarily suspended sales of Dacthal last April, and has submitted a much reduced label in an effort to meet the agency's concerns. In addition, at that time, we had removed Dacthal sales from our 2024 forecast assumptions. We are, of course, working in good faith with both EPA and our stakeholders to ensure compliance with the suspension. With that, let me turn to Mark Bassett on our multiple initiatives to improve operating leverage and efficiency, both in the short term and permanently. Mark?

Thanks, Tim. Before I get into the details, I'd like to quickly introduce myself as per Slide 11. First, I'm a shareholder of American Vanguard. I invested in the company before I joined the Board a little more than 2 years ago. Prior to that, I spent almost 6 years as Chairman and CEO of Hemlock Semiconductor. During that time, we were able to significantly increase the valuation of the company by reducing the total cost by about 30%, while creating a substantial new revenue stream to drive rapid growth. Prior to that, I ran several large global businesses Dow and early in my career, I worked in finance and technology. I invested in American Vanguard because I believe in the company's potential and I still do. After joining the board, I spent 2.5 months inside the company last year, developing the foundation of what became the transformation that [indiscernible] is helping us implement. And I've spent the last 2 months in the company focused on accelerating the transformation and helping improve liquidity in the second half. After my time here, there's no doubt in my mind that this is a solid company capable of delivering a 15% EBITDA margin performance. So with that as a purpose, let's turn to Slide 12 and then get into some of the details of what we've recently accomplished. First, we felt it was critical to get alignment throughout the company and how we want to work and the priorities for the remainder of the year. Our mantra is teamwork, focus, performance and urgency. This mantra may sound simple, but it's the key driver for success. I can tell you that there is a lot of excitement throughout the company and leadership is committed to realizing company's full potential. For the remainder of the year, there are 4 key priorities: one, cultivate our people; two, improve liquidity; three, accelerate the transformation; and four, operate the company across all functions, excellently, day in and day out. To that end, we've created a one-page blueprint with all key initiatives and key performance indicators with clear targets that we are tracking, acting on and communicating globally too, so we know how we're doing. This was recently rolled out to the entire company, and we've instituted a monthly run the business meeting to drive a more urgent and proactive response to changing conditions. We believe this clarity and focus will allow us to better meet our commitments. The objective of these initiatives is to increase cash flow and create a consistently higher operating margin. Turning to liquidity and inventory management on Slide 13. First, we'd like to discuss SIMPAS. The company has spent many years developing this groundbreaking technology. At this point, we believe that we've proven the concept for a multiproduct prescribed application. However, at this stage of commercialization, we believe is the most prudent course with SIMPAS is to maintain the benefits of the technology internally and to find a partner within the precision application space to help exact broader commercialization and market acceptance. This would enable us to significantly curtail spending on the technology and could lead to savings of approximately $6 million a year. In addition, we've taken deliberate actions to reduce inventory. To that end, we've recently updated our forecasting methodology and have implemented a new standard S&OP process involving a cross-functional team from the supply chain, manufacturing and commercial organizations. This initiative will allow us to better serve our customers and lower our working capital. Lastly, we've implemented stricter cost control. These include limiting spending with outside genders, reducing travel and entertainment and limiting the use of contractors. In addition to our liquidity improvement targets, we've been working diligently to accelerate our business transformation as per Slide 14. After conducting a thorough analysis, we've decided to implement a new simpler customer-centric organization. We will have 2 global businesses, crop and non-crop with centralized functions that are leveraged into the businesses, allowing them to be run with multifunctional business teams. We expect to have this new structure in place early in 2025, and we believe this will allow us to have clear and more consistent strategies across the world, enabling us to more effectively deploy our resources and drive growth and improve profitability. Working on this new organizational design has already enabled us to identify redundant roles, allowing us to trim about 4% of our global workforce. This will yield annualized savings of approximately $3 million. As part of this effort, we are also taking the opportunity to clearly define roles and responsibilities as well as moving decision authority through the organization to empower our employees to operate the company with greater agility and a greater sense of urgency. Secondly, we finished or are wrapping up several cost savings initiatives to cut across raw material and logistics purchasing manufacturing efficiency and SKU rationalization. We believe that those efforts will yield annualized savings in excess of $5 million. Thirdly, we have several commercial initiatives involving pricing and customer strategy that are being implemented as we speak. The American Vanguard team has a high degree of confidence that these will yield annualized earnings improvements of over $5 million. Lastly, we have also done a deep dive into our international strategy. As a result of that effort, we've identified numerous opportunities to improve performance that we believe will lead to over $2 million a year in improved earnings. In summary, I'm proud to say that our team has come together very quickly. We're working collaboratively. The team is energized, and we've accomplished quite a bit in a very short period of time. We've taken numerous actions to reduce spending, to lower working capital, and we're dramatically accelerating our transformation, which touches all aspects of the company and will allow us to reach our full potential. I will now turn the call over to our Chief Financial Officer, David Johnson.

Thank you, Mark. I will begin my comments with a summary of the terms of our amended credit agreement, followed by a recap of our performance for the second quarter and first half of 2024, and we'll close with comments on working capital and current liquidity. In order to ensure that we have ample working capital to operate the business within current conditions, we've reached agreement with our lenders to modify our senior credit facility as summarized on Slide 16. The amendment includes first, a reset of our total leverage covenant, which, as you may recall, has borrowing capacity to trailing fourth quarter adjusted EBITDA, allowing us to work through this challenging time for the global ag chem market; and second, a higher basket for nonrecurring charges to allow us to follow through on our transformation projects without impacting borrowing capacity. This continued support from the lender comes with some restrictions. First, our interest rate will increase by 25 basis points when the leverage ratio exceeds 4 times. And for the present, we are prevented from repurchasing any shares, paying any dividends or making any acquisitions without lenders' consent. The lenders have agreed that, notwithstanding the term of the amendment once we can show sustained improvements in our performance, we can request approval to reinstate one or more of these important capital allocation levers. Turning now to our financial performance, let's focus on sales. As you will see from Slide 17, overall revenue from the quarter was down about $4.5 million or 3% as compared to the same period of 2023. Our U.S. crop business was challenged by just-in-time ordering and pressure from generics and recorded net sales that were down 7% as compared to the second quarter 2023. On the other hand, during the quarter, our U.S. Non-crop business was a bright spot, with sales growing 13% compared to last year. Finally, net sales of our international business declined by 2% as compared to comparable period as to prior year. Turning to the first half of 2024 on Slide 18. Overall, revenue was up about 3% compared to the comparable period of 2023, while net sales of our U.S. crop and our international businesses were essentially flat as the prior year. U.S. Non-crop sales rose by 20% during the same period. Turning to Slide 19, with the decline in second quarter net sales and some product mix changes, gross profit for the quarter decreased by approximately 12%. This decline primarily arose from lower net sales of our U.S. crop products, which generally carry higher average margins. In addition, we recorded lower factory overhead cost recovery as we work to control inventory and working capital. Overall, gross margins reduced up to 29% from 32% of sales. On the plus side, our inventories ended marginally lower than our internal target for the end of the second quarter, which was encouraging. With respect for the first 6 months of '24 net sales were up 2% and gross profit was flat for the comparable period of 2023 and gross profit margin declined slightly to 31% from 32% of sales. As you will see from Slide 21, operating expenses for the second quarter of 2024 increased by approximately 20% over the comparable period in 2023. The primary driver for this increase were nonrecurring expenses arising from activities to transform both our business structuring process and our digital platform. These transformation costs include third-party consulting costs in support of the change initiatives just discussed and severance costs for the former CEO. We also incurred some other onetime costs. Without these out of the ordinary costs, operating expenses would have declined by 5% for the quarter as compared to last year. Similarly, for the first half of 2024, operating expenses rose by 12%, including approximately $10.5 million from transformation, severance and other onetime type costs. Turning now to inventory on Slide 23. You will see our inventory trends on a quarterly basis since the start of 2023. We are moving quickly to reduce inventory levels by monitoring factory activity building only to demand, scaling back procurement of third-party products and selling out of smaller nonstrategic inventory positions. Through these efforts, we are focused on driving down inventory levels to reach our target of 34% of net sales by year-end. Inventory drives our working capital levels, which in turn drives our debt. That ended at $211 million on June 30, 2024. That was slightly lower than our internal target. So that was a pleasing result following a lot of focus across the entire company. Furthermore, it is interesting to note that in the first 2 weeks of July, we collected more than $40 million from our U.S. customers and additional funds through our international subsidiaries. Accordingly, we were able to drive debt down at the start of Q3 before starting to borrow again as the annual cycle continues. That sums up my detailed comments. And with that, I'll turn the call back to Tim.

Thank you, David. Our last topic is our full year financial outlook. Year-to-date, our sales are actually higher than they were last year. Nevertheless, as I had mentioned earlier, weakness in the agricultural economy has had an impact on both the year-to-date sales and profit performance. Like a number of our competitors, we foresee stable demand within the crop segment over the second half of 2024. At the same time, we are cognizant of the many factors that could affect the ag market, commodity prices, interest rates, geopolitical activity, channel inventory and the like. Further, as David mentioned, controlling working capital will also require us to optimize factory activity while working through our inventory. In light of these considerations, like a number of our competitors, we are decreasing our full year 2024 targets and in this case, we are targeting adjusted EBITDA to be between $40 million and $50 million, down from $60 million to $70 million. We are also decreasing our sales target to now expected to be in the range of $565 million to $580 million. This results in a down 2% to flat versus our prior targeting of sales up 6% to 9%. As we mentioned earlier, we are conducting a CEO search and have retained the well-respected ag tech search firm of Kincannon & Reed in that effort. You will note the attributes of the ideal candidate or some of them on Slide 27, and as this search progresses, we will provide updates to the market as appropriate. So let's review what we have done in the last 4 weeks as summed up on Slide 29. First, we have formed the OCEO to unleash the company's earnings potential endowing it with a full complement of executive skills, both to manage day-to-day operations and to steer the enterprise while we search for a CEO. Second, we have acted quickly to reset our credit agreements and to ensure greater flexibility of working capital. Third, we have redoubled our efforts to reduce expenses and maximize liquidity and the short to midterm, including a workforce reduction. And fourth, we are driving transformation, both digital and business-related with the goal of achieving a 15% EBITDA margin in 2026 and beyond. In closing, our focus is to provide our shareholders with the highest possible return. We are all shareholders, and we know that the long-term future of this company depends upon our efforts to return the company to greater profitability while transforming it into a leaner engine for growth. And let me put a final point on it. We, at the OCEO, have been given a mandate to change the company for the better. We are the agents of that change and the time for that change is now. With that, I'll open up the call for questions. Alicia?

[Operator Instructions] Our first question comes from the line of Scott Fortune with ROTH Capital Partners.

Thanks for stepping through all the color and changes going on, on Board here. You mentioned the transformation in accelerating that. Just kind of step us through you see $15 million in cost synergies and savings, kind of the expectation of that? And kind of what are the steps to kind of really accelerate these costs and kind of coming to see these cost savings can flow through the P&L in the financial portfolio company? Just kind of a sense of that acceleration going forward here?

Sure. This is Mark Bassett. I'll take a stab at answering that. I think again, there's multiple tracks. So starting with -- there's a procurement track and the logistics savings we should start seeing some time in the third quarter, I believe, and should realize those full savings through the end of 2025. The raw material -- there's a raw material track as well, which we're in the middle of a bid process for that and should begin to see those later this year, but we won't see the full benefit until probably the end of next year because it takes time for those savings to roll through our income statement. Because then you've got a number of commercial initiatives, which again will begin probably late this year, early next year. And -- but by the end of 2025, we expect to see the full $15 million beginning to hit our -- in full hitting our earnings by the beginning of 2026. So they'll ramp up beginning late this year and get the full $15 million by the end of next year.

Got it. I appreciate that detail. And just trying to dig into the guidance here a little bit in more of the current North American ag market, in the international side. But I just wanted to get a sense, obviously you brought down numbers pretty significantly. What has changed so significantly, we saw kind of a weaker ag market from that standpoint? And just provide a little more color on the visibility around fourth quarter, that is a big quarter and kind of your sense that the confidence level of the fourth quarter being kind of the strong quarter as normal or are we going to push out to potentially for 2025?

Maybe Mason Bennett is on the line with us, and he runs our U.S. Crop Business. Mason, your thoughts on the crop -- the U.S. Crop sector, looking at the 2025 season and its relative stability.

Yes. Scott, thank you for the question. Mason Bennett here. Yes, just to comment a little bit on your Q4 inquiry and then moving into '25. Yes, we did look to lower a little bit in Q4. We understand what's happening in the ag industry. We know that the ag economy, the challenges we're having, a lot of this comes down to customers trying to manage -- again, manage down their channel inventory, which has had a little bit of favorable outcome. But what we're seeing now, Scott is these customers are beginning to manage their cash flow and look at just-in-time purchases. So we believe that although we'll see steady purchase through Q4, we will see customers actually probably moving to more just-in-time in Q1 of '25 to begin to bring purchase in for the grower. So that's really what's driven a lot of that. We don't think that it's down the share. It's more of a phasing of the business.

And a real quick follow-up on that. Does the farmer's health and economics still remain very positive and strong? Are we starting to see factor, obviously, with commodity prices down just kind of a sense on farmer's health overall?

Yes. No, that's a very good question. We're seeing a lot of movement around the ag economy and pricing. So unfortunately, we've seen commodity prices slide, corn and soybeans have dropped pretty significantly over the last several months. We are beginning to see reports that net farm incomes dropping somewhere near 25% versus last year. So that puts a lot of pressure on timing to buy for these customers. We don't think that it's going to reduce the amount that they necessarily purchase, especially around some of our portfolio, it just comes back more to timing. But the farm economy and the health is not good. It was referenced by Tim earlier. Many of our competitors, you can see what their outlook is. And we're seeing other parts of the industry equipment and other segments in the ag economy taking some pretty drastic moves as well around OpEx and expenses. So that's all a reflection of the ag economy and the drop that we've seen here over the last several months.

Scott this is Tim. Yes, I know it's something we're ganging up on you. Yes. There were -- growers had recently been before Congress seeking to have additional consideration in connection with the farm bill looking at the profitability of that growers are experiencing. There's a decrement in it. That being said, you're looking at some other factors here yes, commodity prices have been a bit of a malaise. Interest though, interest rates look like, I mean, ask me tomorrow, but somewhat more encouraging. So the cost of money is a thing that is on their minds as well. And then finally, and I mean I think Mason would agree with this, growers will still be growing and they'll still be requiring inputs. But I think we can expect them to move -- to continue this sort of fiscal rectitude in their procurement practices in light of the last trailing several quarters, particularly with respect to cost of money as it relates to commodity pricing.

That's really helpful. I appreciate that. And if I could get one more in, just kind of touch base on Dacthal and the recent EPA news. Your sense of any litigation or any issues. With that kind of moving forward, kind of the risk there and just want to get a sense for -- you have potential abject products that can replace that Dacthal, just kind of looking at the pipeline from your products in the Green Solution side, which got more focused on drive here?

Yes. I think maybe answering it from back to front, yes, we will be placing an emphasis on expanding other product lines. I mean, the Green Solution products have a different effect in our biorationals -- I'm sorry, Dacthals and our biorational and Green Solution products. Yes, to invest in and continue to expand the solutions is certainly an important initiative that we have, and we continue to drive this. With respect to other issues as Dacthal raises, we are a very highly regulated industry, and we continue to work I think, constructively and in good faith through it all with EPA, we have like our competitors, many products are always under registration review. But let me go back to the earliest. And the question is really one of risk and litigation and the like. We're not aware of any at present. Obviously, the public relations environment is adverse to this compound presently. I will maybe take a minute, if you've got a minute, Scott, to give us sort of a sense of a context. I don't think that the -- maybe the regulatory context or the -- where the press has gone with this necessarily is giving fair coverage to how it works in the world of registration. So let me just frame it up a little bit, it might help to give a little context to it. I think maybe about 15 years ago, EPA started focusing on endocrine function in the body and they established things like the endocrine disruptor screening program, EDSP, which they were requiring any number of AI, active ingredients that is registered products to undergo. That moved forward and it culminated in some more refined testing, the likes of which are at the basis of what happened with Dacthal. And that test was -- it's a comparative thyroid asset. And it was really -- the agency is looking at that test where they were testing laboratory rats. There was prenatal fetal rats, neonates and mothers looking to see if there was any effect that Dacthal might have on those rodents and they found an effect. And by the way, that was a study they had requested that we do, and we did that study. And then looking at as the agency would do what their scientists typically do. There's no human testing that's done these days, right? That's not legal, it's not humane. So all of this is done with laboratory animals. And what happens in this case is they usually do is they take what they perceive as an effect. And here, it was only on the fetal rodents and they extrapolate that and they do kind of an interspecies translation and they say, well, there could be a risk of harm for human fetuses. And in that vein, then they would be either help us out with trying to figure a way to mitigate that, which is why we ended up submitting a reduced label and/or is there other data that could give us enough information to let's say, alleviate our uncertainty. And ultimately, after many months, we were not able to do so. So my point, Scott, here really is that what we're looking at here is the agency doing -- making a preventative move, it's a prophylactic kind of a thing to say, let's stop the train on this product because the data that we have says that we believe that there could be this effect. We don't -- looking at it from the company's point of view and from a registrant, we don't have more data. It would take probably years to develop data from the other end of things to say, I found a person with a certain condition, and I can trace it all the way back to and exposure in utero. My point being that we're not looking here at -- there's been no report of actual injury to anyone. There's been no report of actual harm. It's the EPA taking measures that they believe are important to ensuring that there is safety in a preventive way. So that's kind of the context. I just -- I'm not sure that's coming out in many of the things that I have read, but if that's of any use to you, then I thought maybe I would at least volunteer that.

Our next question comes from the line of Ben Klieve with Lake Street Capital Markets.

My first one is regarding the 2024 guidance and the outlook for 2026 until your initiatives have been implemented. Your current guidance implies an EBITDA margin at midpoint in the high 7% range. Really ratcheted down from where you were before. But your 2026 EBITDA margin target of 15% remains unchanged from a few months ago. I'm wondering if you can help us square that. The -- clearly, conditions today are tough, but the transformation targets that you have from an expense perspective, would help, but not get anywhere close to 15% EBITDA margin '24 months from now. So can you help us understand why you feel comfortable still having 15% EBITDA margins 2 years from now as your target, given all of the dynamics underway right now?

Yes, I can certainly be at the top end and let Mark fill in. So the factors that would be contributing to an improvement in an EBITDA margin wouldn't just be efficiency. It would also be recovery vis-a-vis consistency and sales of higher-margin products over a period of time. I think we're looking right now at depressed sales in over the 12-month trailing period. And we would expect that 2025 is not going to be necessarily subject to the same vagaries that we have currently undergone. So if we take an improved top line performance and kind of joined it with an improved number of efficiencies that we can bring to bear, as Mark has described, those things taken together should conspire to produce an EBITDA margin that is in that 15% range that we're seeking. Admittedly, what you're looking at now does not appear to be representative of what could be done in the future, but the whole purpose of the transformation was. If you look at what has been more -- the historical norm on an EBITDA margin, surely, it is feasible with a more efficient enterprise even with stable sales of margin -- well margin products, we could arrive at that 15% on a full year basis in 2026.

I would just add to that, that on top of improving conditions, I think these are, what I would say, we're very comfortable with these numbers, and we feel like there's upside to all of the numbers that we've talked about. And I think that there's a lot of benefits sometimes that are hard to quantify, for example, with a much simpler, more focused organization and better allocation of resources. There's a lot of potential value there that you can unleash. It's hard to quantify at this stage of the transformation. So we -- I personally believe $15 million is a number I'm very comfortable with, but I think there's a lot of upside to that number as well as we get into this and continue to build on it and to develop it. I think also, we talked about some initiatives in the liquidity section. They're also recurring benefits. So we do continue down the path of ramping down spending on SIMPAS. That's quite a bit of money as well that we've been spending every year that if we do slow that down, we'll drop to the bottom line as well. Again, the S&OP process, I think, will unleash. We've had a number of lost sales over the last handful of years because of a process that was not as far advanced as it could be. And so I think there's a lot of secondary and tertiary benefits that we haven't captured that we will capture as this transformation continues.

Yes. And it's also -- this is a very -- I mean you can appreciate. I know that when calculating return on investment, we all would like to be as definitive as possible. What we are doing effectively now is -- this is a living and breathing business organism. We're kind of -- we're working this thing up kind of like T. S. Elliot might in many senses. It's the background. It's the foreground and the impact of those things we'll be revealing a picture of that is better than it was that has greater clarity, that has greater strength, I think, going forward.

Got it. That's helpful. You are more well [indiscernible] than me. I'll look at what that portfolio reference was. And all that makes sense, and I certainly understand kind of how dynamic the environment is right now and how many moving pieces you guys are kind of working through at the same time. So I appreciate the context there. One question I have on your legacy portfolio and Green Solutions. It sounds like from all the comments you've made today that you all are -- remain quite enthusiastic about that opportunity. Can you talk about kind of what transformation specifically would take place within Green Solutions -- yes, in any material way? Or is that business going to kind of continue on as it has?

Well, I'll take a stab at it. I think the company has had a lot of success in Green Solutions. I think one -- this is one of those areas where, again, the transformation, I think, has an opportunity to allow us to be even more successful. With us aligning into 2 global businesses: a crop and non-crop business, I think we'll be able to develop very business, customer-centric strategies, to figure out ways to have a more coherent growth strategy than we have historically very targeted allocation of resources, a very targeted allocation of capital people, R&D strategies that will allow us to accelerate the growth of that portfolio even more so than we've had thus far. So I think that's another area where the transformation can really help us close in the resources and drive growth faster than we have in the past.

And then I think one other point is with respect to some of our like bacteria-based fermented products, we are in the midst of working on state registration so that we can expand the breadth of the market that we are serving with that. These products would be for plant health purposes, primarily, these are also things that would improve soil health insofar as the microbiome is concerned by the root mass. And one of the reasons for our level of enthusiasm with the portfolio is that there is this continued evolving emphasis probably being led by the EU in digital farming and regenerative ag. These were -- the focus is on how to enhance the value of your most prized asset as a grower that is to say your soil, how to sustain it even in some places like Germany. So they are -- the authorities are requiring growers to test the level of nitrogen in the soil before applying any kind of synthetic nitrogen fertilizer and the products that we have would be helping with phosphorus, nitrogen, potassium uptake, for example, and so this fits well. This product line fits well into, let's say, a green sort of direction that agriculture is taken globally.

If I may comment on North America as well, Ben, just specifically what we've done with our sales organization in the U.S. and we're evolving in Canada as well is our Green Solutions is one of our key pillars of strategy within our sales organization. There's a big focus there because it's one of our fastest-growing segment. The profits and margins are good in this space for us. We're working with external partners that previously had been announced by the folks like New Leaf and we are building a franchise around feed inclusion products, but we're also looking internally at development projects and what we can bring to the table to continue to grow our portfolio. And I just want to note, I think it may have been mentioned before, but AMVAC was named a top 10 supplier of biologicals in the U.S. by Crop Life. So we're proud of what we have done to this point, but we are going to focus, we were going to put energy and effort, we're going to specialize in areas to ensure that we continue to build on the growth that we have up to this point. So that goes back to what Mark referenced as accelerating our transformation and focusing on specific product strategies, but that's what we're doing in that space.

Got it. Got it. All helpful comments. One last one for me, and I'll get back in queue. You commented on your target for inventory to fall from 42% at the end of this quarter, -- well at the end of the second quarter, excuse me down to 34% ending the year on a high level, working capital in general. I'm wondering if you can kind of lay out any expectations for working capital that you're going to be able to rip out of the balance sheet here from the levels ending the second quarter through the end of this calendar year?

Yes. I think it's typical of the company's annual cycle that we see working capital expand during the first 2 or 3 quarters of the year. The expansion usually slows in the third quarter and then comes down in the fourth. So we are expecting to see working capital come down $70 million to $80 million over the next -- over the balance of the year.

Very good. All right. That's helpful. Best of luck with all of these ongoing initiatives here over the next couple of months.

Our next question comes from the line of Wayne Pinsent with Gabelli Funds.

Wayne Pinsent with Gabelli Funds. Just wanted to ask on the Dacthal. Do you know if there's products still in the channel and risk of that product getting pushed back to you? And is that any component of the significantly lowered guide?

There is product in the channel. There's not much. And one of the reasons for that was we had I mean, we're not sure how much, but I think the fact is we were only in the market for a short time. It was unavailable than it was, and then we suspended the sales subsequently. So is that included in our numbers going forward? To the extent, I think from an accounting point of view, there was any recall or take back of material that's the thing that would be a commercial subject that would typically be accounted for in a period in which had occurred [indiscernible].

There's no decision at this point. So yes, that would be accounted whenever.

Yes, so it's a little indetermined at this point.

Okay. And then you mentioned on the timing of those Q4 sales in the drop in guide with [indiscernible] just-in-time. What's the confidence level that those are just moving into 2025 and lost sales?

Mason, do you want to handle that?

Yes, I sure will. So first of all, the distributors are the customers that will be purchasing. So I first want to say there's a normal purchase pattern that our distributor customers will make around our portfolio. So that's going to happen. We just don't see that the distributor customers are on a full-in excess product, especially after they got into the overstocking that we've seen in the last couple of 2 or 3 years. So they're going to be very, very conservative in their approach and what they bring in. So we see normal in that space. As far as the farmers and what they do, they're still -- their purchase timing from a confidence standpoint, it's going to happen. There may be consolidation, it may look different, but growers still have to grow a crop and they have to protect their crops to crop inputs. So we see that depending on what the offers are and opportunities, growers will continue to purchase. It just means they may not be flushed with cash as they have in the past due to net farm income being down but they will have to grow a crop, and that farm maker will be farmed. So there will be the products and many of our products that we utilize to get the crops on it. So yes, we're confident that, that will take place.

Okay. And then just finally, it fears that the press release hasn't gone out yet. Just wondering when will the full financials. Because it was a little unusual.

We're trying to get to a point of filing today. It may actually slip until tomorrow but the financials are pretty much ready to go.

I think he is talking about the press release.

The press release was released, but I guess it may arrive on the wire very shortly.

Our next question comes from the line of Paul [indiscernible] with [ Rewrite Capital ].

Clarification with regard to the press release not being out yet, it's not on the website either. So you mentioned in the slide show that the lenders have put some sort of restriction on dividends and buybacks. Does that affect the current $0.12 annual dividend?

Yes, it will impact going forward.

It's just $3 million annually, $0.12.

It's true. And also what we would be doing in conjunction with the quarterly consideration is clearing the notion of making a dividend at the time with our lenders, which was something we didn't have to do before, but we will have to do that going forward. Yes, it's part of the overall package. But the sizing is correct, yes.

[Operator Instructions] Our next question comes from the line of Andrew Lester, a private investor.

I want to start off by sort of thanking and applauding the Board for taking necessary steps to change the direction of the company, hoping getting from the control. I'm not an attorney, and I don't understand data all that well, but I did do some Google searches, and I just want to make sure I understand. The company started producing this in 2001. Is that correct?

That sounds right, yes. Well, selling it.

And in 2007, it was supposedly a private settlement, but the company paid $300,000 to Dole Foods, which, again, there's no greater disclosure when I tried to search for it, but I assume that there was sort of an awareness of a potential issue with this product to necessitate a settlement. It was sort of...

It was a different product [indiscernible] was used in banana plantations in various places, including in Hawaii and it was discontinued in the early 1980s, but...

Okay. So there was no -- although the government -- I mean, the wording of the government statement seems somewhat severe, but there was no specific issues or problems before separate and distinct from their studies of this. Is that correct?

That's correct. This is a move by the agency to take sort of an introduction following a scientific study that's not in response to harm that has been identified to persons or property.

Okay. That's comforting. Also, when you follow the track of the company's announcements for the last couple of years, and I've been a shareholder for the last couple of years. I mean there's sort of an uninterrupted series of earnings and EBITDA reductions and revisions. And I'm pretty familiar with investing in commodities, and I understand the nature of the cycles and the nature of what happens in the marketplace. But separate and things from marketplace, we have like downward revisions and never upward revisions. So at this point of addressing the industry in its current state. Do these numbers incorporate a base case going forward? Or is this some -- because I can only assume there was optimism in the past, and there was nothing in the prior quarter that would lead somebody to believe that a revision of this order of magnitude could potentially happen.

I think we have been very punctilious about making -- giving targets in the future based upon what we believe to be the then current conditions. And I know you've been a shareholder for some time, and you're aware that there have been exigencies that have arisen subsequent to the establishment of our targets that have affected them. But I also can tell you that the targets that we have positive today are targets that are, we believe, achievable conservative and that do take stock of not only conditions as we see them now, but conditions for the remainder of the year. And also take into account what we understand to be the actual demand from our people who are in the trenches selling the product, whether they be crop, non-crop or international. So that's the rubric that we're following in setting targets. And to the extent that we find in the future that our targets have been said at a level that's far too low based upon things that we're fairly certain are going to happen, that we would enjoy raising up estimates.

And in the past, previous statements regarding the company's assumption of debt or use of it would really been sort of dislocations in the marketplace whereby the company used debt to sort of smooth the manufacturing of product and the expected everything to return to normal. And as they would sell that product, they would repeat the debt and essentially go back to their status as either very low debt or debt free type of company. So it seems that something might have changed between the relationship with the lenders for them to require I guess, pre-approval before the announcement for payment of the dividend. Is that until -- does that circumstances this until all the debt is repaid? Or is there something more significant that's changed?

It's not -- the terms of the amended agreement are not based upon some sort of a concern that -- or requirements that we repaid the debt in its fullness over some specific period of time. That is our ability to use the funds, the revolver, the credit -- the letter of credit and the like are unchanged. It's -- from our point of view, is what you would expect from a lender is if you seek to have release in conjunction with financial covenants and specifically those related to ratios and the ratio of maximum leverage ratio becomes tighter, the risk for the lender is higher. And what they will tend to do then is to cover the additional risk that they're incurring by increasing the interest matrix up to a degree at 4x and above. And also in return for their, let's say, basins in allowing us to take the -- put more into the nonrecurring basket to allow for transformation charges, that's a use of cash, cash being our greatest security, if you will, in this case. And finally, with respect to that, then they would say, let's look at then your business, at your financial performance on an ongoing basis before we allocate funds to other things that are sort of outside the purview of direct investments in the company. And I think that's where those 3 elements would arise otherwise, the dividend, the share repurchase and the acquisitions.

There are no further questions at this time. I'd like to turn the floor back over to Tim for closing comments.

Thank you, everyone, for joining the call today. Thank you also for your interest and support in American Vanguard Corporation. Again, we are committed to maximizing investor value in the company, and we look forward to continuing to do so. We thank you for the privilege of being able to do so and look forward to speaking with you all very soon. Take care.

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