Oct 30, 2014
Executives
William Kuser - Director of Investor Relations Eric Wintemute - Chairman, Chief Executive Officer David Johnson - Chief Financial Officer
Analysts
Chris Kapsch - Topeka Capital Markets Jay Harris - Goldsmith & Harris Brent Rystrom - Feltl Tom Willingham - The Hampton Group
Operator
Greetings, and welcome to the American Vanguard Corporation Third Quarter and Nine Months Conference Call. At this time all participants are in a listen only mode.
(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, sir. You may begin.
William Kuser
Well, thank you Adam and welcome everyone, to American Vanguard's third quarter and nine months year to date earnings review. Our speakers today will be Mr.
Eric Wintemute, the Chairman and CEO of American Vanguard; and Mr. David Johnson, the Company’s Chief Financial Officer.
Before beginning let’s take a moment for our usual cautionary reminder. In today’s call, the company may discuss forward looking information.
Such information and statements are based on estimates and assumptions by the company’s management and are subject to various risks and uncertainties that may cause actual results to differ from management’s current expectations. Such factors can include weather conditions, changes in regulatory policy, competitive pressures and various other risks as 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 will turn the call over to Eric.
Eric Wintemute
Thank you, Bill, and thank for joining us this afternoon appreciate your support for American Vanguard. I want to start by saying several things about our topline, our third quarter and nine months sales performance in 2014 reflects the lingering effect of surplus inventory in the Midwest distribution channel.
A condition that came to lighten in the fourth quarter of 2013 and is carried over into the current year. Over the course of 2014 distribution to large degree has been drawing down as excess inventory in lieu of place new orders.
As a result we’ve experience a drop in overall year to date sales which arises entirely from corn products. At this point in the year we believe the channel inventory levels are much closer to the historical average although like many chemical peers we still some overhang in a couple of products with a few distributors.
We expect that demand for our corn products should rise as distribution replenishes its inventory level and gears up for the 2015 planting season. While it is still early in the quarter we are already seeing some evidence of this demand among our customers.
Also while sales performance during the reported period is down significantly in 2014, we should bear in mind that our third quarter and nine months sales in 2013 were our best ever. Despite that difficult year over year comparison for our corn products sales into our other market such as potatoes, cotton, peanuts, vegetables, and fruits in our international business are all performing close to expectations, consequently as we indicated in our last conference call with you we’ve been able to deliver a modest sequential increased over our second quarter results.
With those comments, I will turn the call over to David.
David Johnson
Thank you, Eric. Good afternoon everybody.
Eric has already covered the shortfall in net sales for the three and nine month period, which continue to be corn related. I’m going to focus on the key areas of our financial performance that are particularly interesting to investors, including our factory under absorption, gross profit, operating expenses, inventory level and the credit facility.
Our under absorption of factory cost, increased by 2.4 million in the quarter to end at 5.4 million. For the nine month period under absorption increased by 12 million to end of 21 million, the year over year increases in under absorption arise from reduced utilization of our plants as we work down the levels of inventory of our corn products on our shells and in the channel of distribution.
We are working to reduced factory cost and in fact during the quarter and also the nine month period our costs were down 8% over the comparable period in 2013. However, our factories are not readily scalable and carry a certain minimum level of fixed cost.
As such lower factory outlook hits our gross profit performance in the reporting period. In order to minimize the earnings track we are focused on consolidating processes investing to expand our functionality in order to absorb overhead and taking previously outsourced products in house.
As I have said before recovering plant activity level takes times as it involves not only changing processes, but also selling through inventory. We expect to see greater plant utilization as we work down our inventory in 2015 and to a greater extent in 2016.
As you will read in Form 10-Q the majority of our drop in gross profit dollars is attributed to reduced sales volume. There are some changes, year on year in the mix of products and geographies growth sales all of which drive small individual differences.
In the quarter sales volume and mix accounts for 84% of the drop in gross profit dollars. In the nine month period these elements accounts for 79% of the year over year reduction.
The balance of the change in dollars is driven by increased under absorption of fixed factory cost further because lower volume does not directly impact gross profit level, when expressed as percentages of sales you will see that our gross margin percentage has dropped from 44% in Q3 2013 to 40% in Q3 of 2014. The majority of this percentage change is caused by the increased drag on earnings from these under absorbed factory cost and the same is true for the nine months period that the 7% decline in gross margin percentage is primarily caused by increased under absorption.
As I mentioned, as we draw down inventory we will be able to gradually turn back up our manufacturing activity and should see a rise in gross margins as a result. Our operating expenses are being worked across all disciplines, however we are retaining the established skill base of the organization as we focus on continuing to grow the business for the long-term.
Overall our cost in the quarter were down 5% and in the nine months period they are down 9%. Major areas of reduction are related to incentive compensation, however we have also made savings in travel expenses, some discretionary activities and other actions like taking some legal work in-house.
On the subject of inventory, at the end of the third quarter we are at $172 million which is a reduction of about 3 million in comparison with the level at the end of the second quarter. This is lower than the level I had indicated in the last conference call, during which I predicted is inventory would increase through to the end of September.
This was largely due to the delayed receipt of raw materials. At the end of the 2014 season we are seeing an improved picture of channel inventories and with the commencement of the 2015 corn planting season we expect to continue to work down our own inventory levels.
Understand however that this is not a static process, we build and procured multiple products throughout out the entire year. So as we sale corn products we are ordering raw material for the next season and preparing, for example, to synthesize soil fumigant.
In other words there is a constant flow of raw materials, intermediate and finished products into inventory and the sale of finished goods out of inventory. The goal here is to ensure that the outflow exceeds the inflow.
With that said we expect inventory to move down slightly during the final quarter of the year. During 2015 we expect to continue to work that number.
Clearly we would like to get back below a 150 million but that will take us through into 2015 and this target will move once we get back on track and continue to grow the business. Our sales and profitability have reduced year-over-year, we have also focused additional attention on our working capital requirements and debt capacity.
As you may recall we obtained covenant release from our land group during the third quarter to ensure that we had adequate borrowing capacity in light of covenants based on 12 month trailing EBITDA. During the third quarter due to decreased operating expenses and manufacturing costs, amongst other things we have controlled our borrowings to a level below our forecast.
During the year we have controlled our capital spending which is mainly focused on our plants very carefully and year-to-date we have spent $6 million in 2014 as compared to $12 million in 2013. We planned to continue this low level of spending as we work our way through this period.
As a result of working all these aspects of our business we have ended the quarter with $51 million of available debt capacity. Now back to Eric.
Eric Wintemute
Thank you David. In spite of lower corn prices, corn soil crop rotation and new seed technology, we strong believe that our sales will continue to be driven by the very positive benefit cost return that our proven yield enhancing products provided to corn growers.
Additionally, our introduction of liquid versions of our industry leading soil insecticides will broaden our accessibility to the market in corn with lighter, secondary insect infestation by offering superior performance relative to products currently available. We are committed to our highly successful business model of product acquisition and our teams are examining multiple opportunities at the present time.
As we find them right one, at the right pries, we will act decisively to add new elements to our portfolio. Our price development efforts continue at full throttle with the number of projects designed to drive our proprietary SmartBox’s equipment technology to the next level.
Our Advanced SIMpass Technology has intended to provide a single path multifunctional plant treatment that could revolutionize plant prescription planting, an important component of modern procession agriculture. This exciting game changing prospect is an important part of American Vanguard’s bright dynamic future.
To conclude we feel that renewed restocking demand for our corn products along with the proactive steps we are taking to enhance manufacturing efficiencies will allow American Vanguard to deliver rising revenues and a gradual recovery in gross margin. Now we will be happy to entertain any questions you may have.
Adam?
Operator
Thank you. At this time we will be conducting a question and answer session.
(Operator Instructions). Our first question comes from the line of Chris Kapsch with Topeka Capital Markets.
Please proceed with your question.
Chris Kapsch - Topeka Capital Markets
Hi it’s Chris Kapsh, just following up on your comments about the channel inventories approaching sort of historical averages. Just wondering if you think going into this coming season based on where commodity prices are and the uncertainty about acreage.
Do you think that the channels is thinking about maintaining sort of historic levels or is there any indications that there is about likelihood they will in fact try to go into this coming season at a much lower level or lower levels than in recent years?
Eric Wintemute
Well coming of 2013 and into 2014, there is no doubt that distribution is looking to keep the inventories level down to much lower level maybe then historically do with regards to our insecticides we fell they’re down and into the range of where they need to be. There are other products that go into the market particularly fungicides, I think where they are on an inventory.
But I think our -- we’ve had a discussion with our customers about what we see 2015 looking to like and at this time they seeing to be in align with our cost as well.
Chris Kapsch - Topeka Capital Markets
Okay and then Eric you mentioned your efforts to acquired new product lines in just wondering, on one hand the resurgent demand in general for crop protection chemicals the functions of biotech trades being less effective has increased demand overall for legacy chemicals or chemistry. But now it’s also created -- that trend is created what seems to be spade of M&A and there has been obviously consolidation of space about the deals in this space and so I was just wondering if that changed the landscape for your ability to acquire niche [orphan] product lines, just what the sort of the landscape in term -- and the competitive nature in terms of trying to acquired those sorts of product lines that have worked for you in the past.
Eric Wintemute
With regards to the consolidations that have occurred those are as you point out pretty high multiples, but we’re not participating at those levels. Consolidation does occur, typically there are competing or multi products or redundant products that need to be divested.
We continue to see the majors going through their portfolio and calling out products that they no longer feel are strategic for them and offering those for sales. So we have seen some products that we’ve been interested in going at higher levels and what we felt they were worth, we do see the activity level continuing as we go forward and we are confident that we will find the right products to continue that strategy of acquisition.
Chris Kapsch - Topeka Capital Markets
Okay appreciate it.
Operator
Thank you. Our next question comes from the line of Jay Harris with Goldsmith & Harris.
Please go ahead with your question.
Jay Harris - Goldsmith & Harris
David where do you think you’ll end up with inventories at the end of the year?
David Johnson
I don’t think it will move very much from it sits now, down a few, 2 million or 3 million or 4 million maybe.
Jay Harris - Goldsmith & Harris
With manufacturing lower -- could you go through the steps that were taken to lower the overhead absorption issue that enables you to get up to a 40% gross margin on what 72 million in revenues?
David Johnson
Primarily it’s been the reduction in expenses at our excess facility.
Jay Harris - Goldsmith & Harris
Is that people of other things?
David Johnson
Yes people.
Jay Harris - Goldsmith & Harris
And what will happen if -- as your revenue rise at all in the fourth quarter will Access have to produce more or will you be shipping out of inventory?
David Johnson
It’s a combination of both in the fourth quarter, a little bit of a higher level of manufacturing activity and some optimism that Q4 may be little strong than Q3.
Jay Harris - Goldsmith & Harris
And how should one think about gross margins on -- we’ll call it more normal or higher revenues next year.
Eric Wintemute
We have had a long track record of being somewhere in that 40% to 45% margin bracket. I haven’t got a forecast for next year in front of me at this moment in time so I can’t give you that information and we don’t normally talk about that anyway, but I am anticipating that we are moving towards in that range I guess.
Jay Harris - Goldsmith & Harris
Okay, I will get back in queue. Thank you.
Operator
Thank you. Our next question comes from the line of [indiscernible] with Piper Jaffray.
Please proceed with your quarter.
Unidentified Analyst
Hi this is [Tyler] thanks for taking my call today or my question. With farmers focused on the harvest and with the lower grain price backdrop how is the demand for corn soil insecticides.
In other words how does the order book look?
Eric Wintemute
As I mentioned we have talked -- we had laid out after the last year, we sat down and went through our EDI sales and matched that with what had shipped and what we saw in the channel, what we identified at the retail level, what we saw at our distributor level, where we saw the target for 2015 season and we have discussed that with our customers. And at least at the current time our expectations are in line with their expectation.
So I think we feel that we are as far as fourth quarter and first quarter shipments that were are in track with our expectations.
Unidentified Analyst
Thanks. I was wondering if you could talk about the level of interest you are receiving from the liquid ready corn soil insecticides Xpedient?
What the general inventories are for that?
Eric Wintemute
So we have positioned in our initial launch year, balance with a variety of different customers and of course that was our first year and one of the criteria how well does it mix with variety of different fertilizers and we are pleased to hear that with all of our customers, they saw the performance is quite good. So with that basis we feel we are in position to move forward to a much greater degree this year and have some nice commitments from customers to penetrate that market in this 2015 year.
Unidentified Analyst
Excellent. And then my last quarter would be, could you talk about any developments in pursuing new geographies such as Brazil or maybe a different crops such soybeans?
Eric Wintemute
Well, Brazil we are -- as we look at Brazil obviously it’s a great opportunity, we have a variety of different products. We are in the process of shifting distribution from our current distributor to new.
We found that we have a few registrations what we weren’t aware of like Astec being registered down there, which we didn’t know when we purchased Astec from [indiscernible]. So with Europe we are expecting this year this upcoming our registration for SmartBlock and we do think that Europe will be our biggest market since they are very limited on the amount of the competitive products, main products, CIBC that they use, there is some very strict restriction on its use.
So ultimately we are looking for that business to grow in the international sector to about $15 million. So those are upsides certainly for us.
And I think you were asking -- what was the last question international? I am sorry what was the last point?
Soybeans?
Unidentified Analyst
If there is any new crops?
Eric Wintemute
So, new crops. We did at the tail end of the year, right at the very end we did get a special names registration for our counter the MadaCide on cotton and that’s something that we are looking with several other states to obtain this year as well.
So that would be an expansion for us in a market that has been kind of deployed of a good MadaCide for the last four years. So [momentum] pressure continues to build.
And soybeans we look at in our acquisition, we look for opportunities. One of the things that we are taking with our SIMpass side is that we are looking for strategic products that we can put through that system.
We currently have thousands of these and they are being used for corn. There is no reason why they can’t be used in soybeans as well.
So that’s what we are kind of looking at, what would be the right product to drop in at time of plant with soybean. But we are also looking at potatoes and we have got SmartBox systems in sugarcane and peanuts and in cotton as well.
So that’s kind of the avenue that we will get into for soybean.
Unidentified Analyst
Okay, thank you. I will get back in queue.
Operator
Our next question comes from the line of Brent Rystrom with Feltl. Please go ahead with your question.
Brent Rystrom - Feltl
Just couple of quick questions. Can you characterize for us just from chemical itself perspective on both your granular and liquid insecticide for corn?
What is the cost per acre to the typical farmer, how much of are each of those would you calculate a cost breaker to use them?
Eric Wintemute
Our granule run in the $20 to $25 per acre and in those heavy infestation areas we’re seeing an average about 20 bushels per acre. So that probably -- that’s the message that we could drive is that’s the kind -- that’s the return on investment that you can have.
For the liquid, its down closer to -- depends on the rate again, but in that maybe $10 per acre. The new liquids that we’ll be looking at are probably 2016 introduction but that would be during our Astec liquid and our SmartChoice liquid.
We will be launching an introductory expect to on our high strength Astec and our high strength SmartChoice in this upcoming season 2015.
Brent Rystrom - Feltl
Follow on then the question earlier I know there is a lot of concern about acres and from a vacancy the acres look like in corn there, to come out North Dakota, Kansas, Oklahoma and the South East. Historically your granular corn soil insecticides are not really gone to those states from what I can gather, could you comment on that?
Eric Wintemute
That’s correct, those acres are not in wheel and so when we talk about the people that are been using our material year after year after year, a lot of these people think they are corn growers and they continue to grow corn. And so there is -- rotation is can happen to these guys who have experienced, they have from the increase through this, so we think the majority of our corns soil insecticide customers are going to continue going forward and as we got and talk with the marketed it seems to reflect that we’ve got a solid base that we’ll continue.
Brent Rystrom - Feltl
Alright one more corn question and one cotton question. I’m noticing in Wisconsin, we’re starting to see the [indiscernible] one resistant pop up.
Have you seen in the sales channels as far Wisconsin is turning to be a new market taking addition to Iowa, Minnesota, Illinois, Nebraska?
Eric Wintemute
We have some sales in Wisconsin as you pointed out is not been historically a large market for us, but obviously our same customers are servicing in the same areas and there have been discussions I think in Wisconsin of some of the lighter trade schemes used and that maybe a corn soil insecticide needs to go in with -- I’ll call them lighter trades.
Brent Rystrom - Feltl
Okay thanks for that and then final question can you just give us quick update on how the cotton foliant -- the market have gone with any update as far as any corn impact? Thank you.
Eric Wintemute
[Floics] was up for us in the quarter it is a late season we are -- there was hail storm in Arkansas that knocked down lot of acres there. We still have a season to go in Georgia Southeast market and we’re still hopeful that we will see some additional activity in Texas.
So the market is in less sudden cross -- we do expect to have some nice [Floics] still to be used here in this quarter.
Brent Rystrom - Feltl
Thank you.
Operator
Our next question is a follow up from the line of Chris Kapsch from Topeka Capital Markets. Please proceed with your question.
Chris Kapsch - Topeka Capital Markets
Yes Eric I just wanted to follow up on one comment you when discussing the granular insecticide. Did you say that you believe that product gives a 20 bushels per acre yield improvement maybe that’s some of the most prolific soil regions but that sounds like some even Western Illinois that might be almost 10% alright.
Eric Wintemute
Right so if you look at -- and we’ve run the last pieces that we put out where -- again we’re been doing this every year since 2007 across all the universities and though we ran all of the compositive the 11, 12 and 13 yield boots and overall average is just about 9 bushels but that’s running across all corn planted, whether there is insect pressure or corn root worm pressure or not. If you take -- the third again we participate in approximately 4 million out of 90 plus million acres and if you look at a third of our studies which are in the areas that are -- do have corn root worm pressure, in that third we are averaging 20 bushel.
So that’s kind of how we come up with that approach. So in some areas it’s lot more than that, but that’s the average.
Chris Kapsch - Topeka Capital Markets
And have you been able to get any data which can help you with this introduction of liquid variants in terms of the anticipated yield benefit from introducing the liquid version of your products. I assume it’s a lower benefit since it’s a lower price point and then different acreage, but just wondering.
Eric Wintemute
The liquid version is similar to another liquid, it’s a same Bifenthrin that’s out there currently. The key to it is getting the formulation that will mix well with all of the fertilizers because it’s putting with the fertilizer and again it’s obviously a cheaper application.
Efficacy on that is not as strong as our soil insecticides, Astec and Force and SmartChoice or counter certainly for nematode. That’s one of the reasons why we are looking at a liquid version of the Astec and SmartChoice because both have dual modes of action, they are an organophosphate and pyrethroids whereas the current liquid are just pyrethroids.
Chris Kapsch - Topeka Capital Markets
Okay, that’s interesting thanks. And I had wondered -- just circle back to the factor utilization because I want to make sure I understand, just maybe if could I don’t know -- if its too early but any sense for the intended cadence that you bring the factor utilization rate up and over what period of time.
In other words where do you expect it to, lets say the beginning of ’15 the middle of ’15, obviously it may depend on ultimately how many corn acres are planted, I understand that, but -- and then just kind of associated with that I want to make sure I understand the cost you are counting because basically you said the under absorption is booked to your P&L in the current period. So therefore I guess you don’t have a FIFO or LIFO cost account assigned to your products that are sold.
There is no lags in -- or at least in terms of the margins because say a FIFO effect. I just want to make sure I understand it.
So the under absorption is effectively in the same period even though in that period you might not be making products that are sold in that period obviously, if you are building inventory for next year.
Eric Wintemute
So in 2009 we changed from assigning all factory overheads as a cost to the inventory to setting standard cost. And that’s what we have in the four factories, the standardized cost for each SKY that we produce.
So with that we have run an average of about $10 million and thinking ‘11, ‘12, ‘13, was about $10 million of under absorption across our four factory. The reason we do this is so that we can truly focus on each factory and see where we are work towards driving utilization to the standardized cost.
What we experienced this year is -- I think as David reported that would increase that to year-to-date, we are at $21 million under absorption. So we are more than 11 plus just year-to-date above where we would like to be.
So for 2015 obviously our targets are to try to get us back in online which we were in ’11, ’12 and ’13. And that’s what David was mentioning that products back in-house and will be producing product as needed to replenish the market not only for ’15 but for ’16 and ’17.
Chris Kapsch - Topeka Capital Markets
Okay, and then just maybe what does been the average utilization rate at the factories which has gotten you to the 21 million of under absorption year-to-date.
Eric Wintemute
I think it varies by factory. I mean clearly the biggest part of that is the access where were manufacturing as lot of our corn products, both formulation and synthesis.
And so the utilization of our -- I mean we have different units there. So our [indiscernible] unit is up but our granular units, our formulation unit is down dramatically.
And where we might look to produce in the vicinity of 20 million pounds 25 million pounds of granule, we were probably for ’14 well less than 10 million pound granule. So as we move forward as these granules move through the inventory channel again keep in mind first there was inventory at retail level in 2014 and distribution in ’14, that now cleared down to as you said more normal levels and we’ll start moving inventory that we’ve been sitting on into the channel for 2015 and that will require us to start replacing product for the 2016 year.
Operator
Our next question comes from the line of Jay Harris a follow up from Goldsmith & Harris. Please proceed with your question.
Jay Harris - Goldsmith & Harris
Eric where are we in terms of increasing the versatility of the SmartBox system?
Eric Wintemute
So we did three products going through this system and ran at this year and some field trial and saw that it worked. One of the things that we see is that we have -- we’re going to have -- we need to improve the meter itself, its accurate down to maybe two ounces per thousand lineal feet.
But with our higher concentrations and what we are looking to accomplish with multi product applications we are going to need that down to less than an ounce per thousand lineal feet. So that’s a project that we expect to have done within the year.
We have gone through a variety of different design functions and will be first looking to launch again three product type of approach and yet to any variety we can qualify a variety of different products that can through that arena. As far as the interaction with -- we’re underway with our program to build basically virtual terminals that will be compatible with the current systems that are out there with the various planters.
So that’s the project that we looked to have over this next year completed. So we’re excited I think it’s a great opportunity right now we’re talking with a variety of different companies who as you look at treatment -- because that’s really what we’re talking about is a seed treatment type business that’s a fast growing business, its growing at about 16% in the United States per year its in that 600 million, globally its pushing close to $3 billion.
And this is a different approach, a different way of looking at it. There are number of chemicals that we think could be very advantages to go down with that type of plant, but coating the seed has it limitations and this will allow greater access for more molecule to go down a time of plant.
Jay Harris - Goldsmith & Harris
It sounds to me like you still have another couple a years of development before it might start to have a material effect.
Eric Wintemute
That’s correct.
Jay Harris - Goldsmith & Harris
Okay and what’s your thought process today in terms of number of new SmartBox systems that could be sold between now and planting of time.
Eric Wintemute
For this year?
Jay Harris - Goldsmith & Harris
For ‘15.
Eric Wintemute
For ‘15 I think we’re looking at maybe another 300 to 400 systems going.
Jay Harris - Goldsmith & Harris
Alright and I am wonder if you could talk a little about beyond ‘15 as competitive activities are changing the environment in which you’ll be functioning as to what that does to the prospects for further recovery. If you might I could be more specific.
Eric Wintemute
If you could? I’m not real clear on what you’re asking.
Jay Harris - Goldsmith & Harris
Well you have a list that I think is been licensed for Monsano which might present growth barriers to impact you’ll have other relationship on corn soil insecticide, you have an RNA gene which will be marketed I think in ’16. I think those are enough.
Eric Wintemute
So the RNA in corn I think as we saw that earliest time we saw interest in the market that was this 2021. On the end list both the [2,4-D] and the DICAM genes, again the advantage to impact is it safety and that’s really what we are pushing.
There are certain concerns with some of those other chemistry of drift so we’ll continue to push the safety aspect of impact which again is unparalleled by other herbicides at this point. So I think your last one was, what was other corn soil insecticide?
Is that what relations?
Jay Harris - Goldsmith & Harris
The relationships, right.
Eric Wintemute
Are the relationships with corns or insecticides? I am not 100% sure what you are referring to, but.
Jay Harris - Goldsmith & Harris
Didn’t Monsanto make an arrangement with [indiscernible]?
Eric Wintemute
They have yes. So that -- so from the bag business they are doing offering a private label with Force in bags.
Again that really doesn’t compete with our SmartBox technology. We have Forced and SmartBox.
So I think we look at this as trade indicating that corn soil insecticides are important to be linked with trades that that’s the message that we have been singing since 2007 and although we have had some collaborative work with Monsanto on our corn soil insecticides and our SmartBox systems, frankly we view it’s as a positive that their promoting use corn soil insecticides.
Jay Harris - Goldsmith & Harris
Okay. That’s fair enough.
Thanks very much.
Operator
Thank you. Our next question comes from the line of Tom Willingham with The Hampton Group.
Tom Willingham - The Hampton Group
Thank you Eric. Can you comment on the average shelf life of your product?
And as you look at the drawdown of distributor inventory and are you being able to back fold that through the 2015 season. Do you see any risk potential write-downs in inventory due to the spoilage or [absorption]?
Eric Wintemute
No, we don’t. I mean fortunately our formulations are very stable.
And so we don’t see that as a concern.
Tom Willingham - The Hampton Group
Okay. And then on following up on the utilization question from earlier, on the last call you mentioned Alabama facility bringing that firm around the 90% utilization down to 50% as you were addressing the manufacturing cost and absorption issues, then also bring some products in-house.
As you look at ramping up for the 2015 season do you see at what level of utilization would you expect at the [indiscernible] facilities, they’re coming out of Q1?
Eric Wintemute
Well we have -- in the formulation unit we have just installed automation which frankly improved the utilization there it also lowers the amount of headcount. So I think that’s probably puts us above the 30 million and I was saying we are shooting for maybe 20 million pounds this next year, so that would put us at 60% somewhere in that range in the formulation.
The [MechAM] unit is running at a capacity, but probably at 70% of capacity, maybe 75%. Our synthesis -- we have two synthesis units, one that makes our cotton defoliant but also makes an intermediate for Astec so that will probably be at the 50% level and then in the other synthesis unit will probably running at about 75% to 80% of level.
So overall we are probably going from 50% to 70% maybe somewhere in that range.
Tom Willingham - The Hampton Group
And with the demand the surge demand that you would see as the timing season picks in, how much of a lead time you need in other words how much does that surge would you see that exceeding the distribution channel and your on hand inventories and would you ever see a need to spike your production up to full capacity.
Eric Wintemute
Well obviously that’s our desire. We have -- we spent kind of ’11, ’12 and ’13 expanding put in new line and expanding so that we could reach to too much higher level.
I don’t know that -- we are not going to run out of capacity, I don’t think certainly in the next three years which is one reason why I think we will probably keep capital expenditures down which will be more maintenance driven than expansion. Although with the automation system that we put in that was, that has kind of the simple one and half year payout.
So that’s pretty easy.
Tom Willingham - The Hampton Group
Great, thank you.
Operator
Ladies and gentlemen at this time there are no further question. I would now like to turn the floor back over to management for closing remarks.
Eric Wintemute
Okay, we will certainly thank you everybody for listening today. We hope that our next quarterly call will be more exciting for us.
So again thank you. And appreciate talking with you on our next call.