Nov 3, 2017
Executives
David Johnson – CFO Eric Wintemute – Chairman & CEO Ulrich Trogele – COO and EVP William Kuser – Director-IR & Corporate Communications
Analysts
Francesco Pellegrino – Sidoti & Company, LLC Joseph Reagor – Roth Capital Partners Tyler Etten – Piper Jaffray Jim Sheehan – SunTrust Robinson Humphrey Bradford Alan Evans – Heartland Advisors
Operator
Greetings, and welcome to the American Vanguard Corporation's Third Quarter 2017 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your presenter, Bill Kuser, Director of Investor Relations. Thank you, please begin.
William Kuser
Thank you very much, Royer, and welcome, everyone, to American Vanguard's Third Quarter and 9-Month Earnings Review. Our speakers today will be Mr.
Eric Wintemute, the Chairman and CEO of American Vanguard; Mr. David Johnson, the company's Chief Financial Officer; and also assisting in answering any of your questions, Mr.
Bob Trogele, the company's Chief Operating Officer. This afternoon, American Vanguard filed our Form 10-Q with the SEC, providing additional details to the results that we will be discussing in this call.
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 that are detailed in the company's SEC reports and filings.
All forward-looking statements represent the company's best judgment as to the date of this call, and such information will not necessarily be updated by the company. With that said, we'll turn the call over to Eric.
Eric Wintemute
Thank you, Bill. Hello, everyone, and welcome to our third quarter earnings call.
We thank you for your support and continued interest in American Vanguard. Let me start with 10,000-foot view of our overall performance, and then I will focus on sales by market.
David will follow with his analysis on financial metrics for the reporting periods. I will then return with a view into the short and midterm and close with comments on our strategic investments.
As you will have read in our earnings release, we recorded healthy top and bottom line performance for the third quarter and first nine months of 2017. Sales were up 9% for the quarter and 6% year-to-date, while earnings were up 42% for the quarter and 34% for the first nine months.
This marks a continuation of our upward trajectory over several quarters for both the top and bottom line. During the quarter, we enjoyed strong performance by a number of existing products, particularly in cotton and public health markets and began to record sales of products from new acquisitions.
While the 42% increase in net income generated EPS of $0.14 per share, that result was hindered by higher operating expenses, which were up about $3.3 million for the quarter. This roughly estimates about $0.07 per share.
We believe that this money was well spent and about half of that increase arose from two things. First, we incurred one-time charges for audit and legal services, related to due diligence and negotiation of four recent significant acquisitions.
Acquisitions have historically been a key to our growth, and we expect to benefit from improved market access while building upon $100-plus million in total sales at our four newly acquired businesses have generated in recent years. Second, we increased our investment in SIMPAS technology, particularly GPS integration and further refinement as we draw closer to commercialization.
Before turning the presentation over to David, I wanted to give additional color on market conditions that supported our Q3 and year-to-date results. Our top line performance resulted from a combination of existing and new products.
While we recorded strong sales of Dibrom, our mosquito adulticide, as domestic customers responded to FEMA's requirements for aerial strain of about 6 million acres over coastal Texas and Florida in the aftermath of hurricanes Harvey and Irma. At the height of the application, there were as many as three C-130 military aircraft and two contractors using as many as 10 additional airplanes per night to apply Dibrom to the affected regions.
We are proud of the role that we played in enabling first responders to reenter flooded areas, which were prime breeding grounds for disease-bearing mosquitoes and to commence rescue operations quickly. Also, recovery time was improved as utility workers were able to begin reestablishing water, power and communication service.
Dibrom remains an important tool in controlling vector-borne diseases amidst severe climate events. We also continued to see strong demand for our cotton product Folex, driven by a 20% increase in planted cotton acres this year.
And national sales in the quarter were also up, led by our Hyvar and Krovar herbicide products. With volume nearly double that of Q3 2016, these products are proving to be reliable offerings in many international markets.
Other markets were mixed. While we recorded strong sales of our newly-acquired herbicide, Parazone, those sales were offset by decreased sales of our post-emerging corn herbicide impact.
In fact, in light of competitive pricing pressure in the Midwest herbicides market, we reduced the price of impact for 2018 by 15% and have taken a one-time charge of $2.1 million to reflect this adjustment in our customers' inventory. We believe that these efforts will position us to be more competitive next season, while maintaining brand value.
In addition, we will be launching our new product Impact seed for the upcoming season. Impact seed is a combination product that will enable us to expand our presence in the early season post-emergent markets for corn.
Notwithstanding herbicides sales, the Midwest corn market shows promise as our sales of our granular soil insecticides, including Aztec, were up during the period. Further, we experienced solid sales in our fungicide segment led by PCMB and our newly-acquired chlorothalonil product, Equus.
By contrast, adverse weather conditions in the Gulf led to a decline of our soil fumigants as post-harvest applications were curtailed by wet weather and flooding. David will now give you more color on profitability and other measures of our financial performance.
David?
David Johnson
Thank you, Eric. Good afternoon, everybody.
As Bill mentioned, we filed our Form 10-Q for the three months and nine months ended September 30, 2017, earlier today. Everything I'm covering here is included in more detail in that document.
With regards to the financial results, as Eric just detailed, the company's sales for the third quarter of 2017 increased by 9% to $90 million as compared to sales of $82 million last year. Our third quarter gross margin improved to 42% as compared to 40% last year.
During the quarter, our operating expenses ended at 35% of net sales compared to 34% this time last year. In addition to the items covered by Eric in his opening remarks, we recorded increased costs as we pursued new product opportunities to expand our portfolio and increased regulatory expenses as some of our key products are going through re-registration as part of a normal cycle.
Overall, net income ended the quarter at $4.1 million or $0.14 per share as compared to $2.9 million or $0.10 per share this time last year, an increase of 42%. Year-to-date sales were up 6% to $239 million as compared to $225 million in 2016.
Our gross margin improved to 43% as compared to 41% for the same period of the prior year. Operating expenses increased to 35% of sales as compared to 34% last year.
The reasons for the increase are substantially those that I mentioned for the quarter. As a team, we regularly assess our OpEx spending and, while it is tempting to focus on the short term, we believe that it is prudent to invest in our future, whether through acquisitions, product development or technology innovation.
Year-to-date interest expense is down 18% as we have managed working capital well, notwithstanding a rise in the level of debt during the third quarter, primarily associated with completing product line acquisitions. The year-to-date effective tax rate is up from 27.9% last year to 29.2% this year, reflecting the improved domestic performance as compared to a more flat international performance in 2017.
Our net income for the first three quarters of 2017 amounted to $11.8 million or $0.40 per diluted share as compared to $8.9 million or $0.30 per diluted share in the same period of 2016. From my perspective, the key financial issues for the quarter and year-to-date are as follows.
First, we continue to follow a different approach to planning our factory activity, balancing overhead recovery with demand forecasts and inventory levels. In the nine months ended September 30, 2017, our under-absorption of factory costs has improved from $9.5 million or 4.2% of sales in 2016 to $8 million or 3.3% of sales this year.
In the last conference call, we said that year-to-date, our factory performance had been strong, and our plan continues to look strong for the rest of the year. This quarter and year-to-date performance underlines management's assessment that we remain on track.
Second, as I mentioned earlier, gross margin for the quarter was 42% as compared 40% last year. Of this improvement, 1% comes from factory performance, as I just detailed, and 1% comes from sales mix improvement.
This includes management of selling prices and product mix and our performance in containing inflation related to raw material purchasing. Year-to-date gross margins improved to 43% from 41% in 2016.
As with the quarter, this improvement came in equal parts from factory performance and sales mix management. Third, our factory performance is linked very closely to inventory levels.
If you look back to this time last year, we had inventories of $142 million. This year, we are $19 million lower as $123 million.
This includes the impact of new product line acquisitions, which amounted to approximately $4 million of inventory at September 30, 2017. We are pleased with this third quarter performance which, continues to confirm that we remain on track for our target of our $110 million at the end of 2017, excluding the effect of the inventory related to acquisitions.
Fourth, our effective tax rate ended in the quarter at 32.1% as compared to 31.3% last year. Our tax rate is driven by a full year forecast of where we make our profits, specifically, U.S.
or International, and the level of those profits. For 2017, as we estimate the full year, we continue to see a slightly stronger domestic performance as compared to our International business.
Fifth, with regards to liquidity, at the end of the third quarter, availability under our line stands at $125 million as compared to $96 million this time last year. You will also note from our 10-Q that we completed both the OHP and AgriCenter acquisitions in October of 2017 with a combined purchase price of about $42 million, excluding inventory and earnouts.
We borrowed these funds from our senior credit facility. Therefore, you can expect that year-end indebtedness will be impacted by these borrowings.
However, we pay down debt on a relatively continuous basis. As a result, the year-end debt level will depend on a number of factors, including collections between now and the end of December, accounts payable activity and program payments.
In summary, when looking at 2017, we can reflect on a solid first nine months with improved sales, factory performance, gross margin, net income and liquidity. Further, our balance sheet remains strong and while maintaining financial discipline, we are still able to invest meaningfully in our future in respect of existing products, development compounds, technology innovations and acquisitions.
With that, I will hand back to Eric.
Eric Wintemute
Thank you, David. Let me turn from the recent past and focus on the next quarter.
I will then give a broad outlook for 2018 and close with a discussion on strategic investments that we are making to foster American Vanguard's growth in the longer term. During the fourth quarter, with respect to our crop segment, we can expect to see end-of-season strong use of our soil fumigants and recover some, if not all, of the sales that we did not realize in the third quarter as growers treat their fields in advance of winter weather.
Further, we are currently experiencing strong demand for our new burn-down herbicide, Parazone. This is also the season for Dacthal application on high-value crops.
In addition, we will begin selling soil insecticides and herbicides into the Midwest corn market for the upcoming planting season. Channel inventories for our products in this market are relatively low.
And as I mentioned earlier, we'll be launching our new mixture Impact seed into that market as well. On the noncrop side, we expect to stable sales of our existing products, including PCMB on golf courses.
We are also introducing two new fungicides SCEPTER T&O and Surepick for use on turf. In addition, we expect significantly improved sales for our test strips for use in consumer applications.
Further, our newly-acquired business, OHP, should serve to give our noncrop business a significant boost. As you may recall, OHP sells multiple products into the greenhouse and nursery markets, and has generated sales of $20 million to $25 million in the recent past.
With OHP, our noncrop business should increase by about 50% on a full year basis. In the International markets, we also expect a good quarter.
Soil fumigant sales in Mexico and Central America should be strong, and we expect Mocap in Hyvar to drive overall sales performance. We also anticipate sales of the new products in Mexico that we acquired from Syngenta in August.
As you may recall, these products had generated between $8 million and $10 million in the recent past. Further, our acquisition of the AgriCenter distribution business in Central America significantly expands our presence in LatAm.
This company has generated in excess of $50 million in annual sales during recent years and should help us to double our International business next year. Having just closed this acquisition, we are working to integrate the AgriCenter team into our operations.
As a side note, I spent the last two days in meetings with some of the AgriCenter team members to get a full understanding of potential upsides from this business and can report that this is not a traditional distribution company. First, its subsidiary, Green Plants, develop specialized plant nutrients and offers a portfolio of 20 unique formulations, including basic active ingredients like phosphorus, potassium and nitrogen as well as a full range of micronutrients such as zinc, manganese and boron.
Green Plants plans to launch 10 additional new formulations in 2018. Because they are not pesticides, these products do not require government registrations.
As such, we believe we have the opportunity to take these unique nutrition formulations into the global market with limited investment and generate near-term sales. Second, AgriCenter has established field product development unit called Life, for leading into innovation for excellence that meets directly with both growers and the AgriCenter sales team on a regular basis to identify specific problem areas on yield or test control and develops custom-made solutions.
This in turn, engenders strong customer loyalty. Third, AgriCenter is the exclusive distributor for the company Biotor, which for the past 10 years has been developing high-performing bio-pesticides that it produces in its own factory using the diatryde fermentation process.
We're excited about the prospect of expanding these solutions into other regions globally, on behalf of Biotor. As for 2018, broadly speaking, this should be a time of growth.
We will continue to integrate the four acquisitions that we completed in 2017 and expect to see full year performance from these product lines in many sectors, both domestic and foreign. I am pleased that we were able to obtain these four high-quality businesses for less than $70 million excluding inventory and warehouse.
We believe that the opportunity for additional acquisitions remains robust and will carry into the upcoming year. Also, with all of our acquisitions, we are obtaining trusted brands and, in the case of OHP and AgriCenter, highly experienced and confident personnel.
Through these efforts, then, we are establishing a platform for growth in new markets, and we are doing so without incurring excess indebtedness. While integrating our new businesses, we will continue to invest in our portfolio as well as in our future.
I anticipate continued investment in developmental compounds and note that we are seeing encouraging field trial results from new technology that we are developing with our China-based partner, Huifeng. As for 2017, however, we will work to ensure that our investments are rational, that we maintain our financial discipline and that we keep our eyes fixed on the top and bottom lines.
Taking a longer view, we will continue to invest in alliances that provide us with market access globally. For example, we recently combined our Australian and New Zealand businesses with those of Huifeng in order to expand our presence in those regions.
In addition to market access investment, we continue to cultivate through technology innovation. As we reported in our last call, our SIMPAS precision application system was field tested on about 5,000 acres during the 2017 planting season by a dozen growers and received excellent reviews.
The system was featured recently at the Farm Progress Show, during which it was highlighted by the program host as one of the top new promising technologies in the industry. If you have not had a chance to view our current SIMPAS video, I encourage you to do so by visiting our website at amvac-chemical.com or just type SIMPAS video into your search engines.
Further, we announced in early August that AMVAC has entered into an agreement with Simplot Grower Solutions to continue the development of this advanced soil treatment technology. The opportunity to combines SIMPAS variable rate application technology with Simplot's SmartFarm prescriptions and post-harvest analysis will give participating farmers the ability to target crop protection and nutritional products in a precise manner.
Finally, we have entered into a collaboration with Trimble on synchronizing SIMPAS with their superior geo-positioning software for a precision application of crop protection and nutrient soil inputs. We will also be conducting market assessment of this technology with Trimble's Vantage retail network to develop a detailed, commercialization plan for SIMPAS hardware by retailers who are experts in precision A.
2018 will be a pivotal year for SIMPAS as we will pressure-test the system on a much broader scope than the 5,000-acre demonstrations we've completed in 2017. In closing, I would say this.
We are systematically building a global business while continuing to drive greater shareholder value. We are benefiting from industry consolidation by procuring products like those from Adama and Syngenta that are being run off.
We are also charting our own course towards finding acquisition targets like OHP and AgriCenter that get us into new markets, new regions and new product lines. As David reported, we remain fixed on watching our expenses and maximizing factory activity, while continuing to invest in our future through technology innovation and new product development.
Before turning this call over to our listeners, I want to take time out to thank the hundreds of men than women at American Vanguard who make our success possible. Your dedication, energy and creativity are second to none.
And it is a privilege to report on your accomplishments. Now I'd be happy to answer any questions from our listeners.
Royer?
Operator
[Operator Instructions] Our first question comes from the line of Francesco Pellegrino with Sidoti & Company.
Francesco Pellegrino
So I'm not sure if I've missed this in the opening commentary. Just because the OHP deal's going to fall into early October, did you mention what the acquisition price was for that or do we have to wait for the fourth quarter?
David Johnson
Didn't disclose that. We did disclose that we had a combined spend of $42 million on OHP and AgriCenter.
Francesco Pellegrino
Okay. Okay, perfect.
I noticed that you guys highlighted the hurricane activities, specifically with Hurricane Harvey and Hurricane Irma as contributing to higher Dibrom sales. I guess what I want to ask you about is in regards to when a hurricane occurs, how quickly do you guys recognize increased product sales for an event?
Because I would have thought that the elevated Dibrom revenue that you recognized would have been something that would have occurred maybe in the fourth quarter or in the first half of 2018 as compared to like recognizing it weeks after both of these hurricanes occurred.
Eric Wintemute
It's a good question. Basically, from the time a hurricane hits and basically, the water essentially becomes stable, it's about seven days before mosquitoes hatch.
And so it's a relatively quick time that seven days, as they start coming off, the adults, that's when adulticide spraying starts occurring.
Francesco Pellegrino
Okay. What do wholesaler and distributor levels look like if you're able to recognize that sale so quickly?
Eric Wintemute
Yes, also. So I think we reported earlier that inventory and channel for Dibrom was at a very low level.
Ourselves, we did take the position. I think normally we plan for a potential upside of 25%.
But back in the first part of July, based upon forecasts of what time of year it was going to be for hurricanes, we actually pushed that up into the 70% to 80% increase of normal. As you may understand, we have raw materials that take time to position.
So we brought those materials in and had production available. And then where we have material in the field staged at various warehouses, we did pull back from some of the hurricane areas to safer warehouses that would be out of the path.
But as soon as the demand hit, we were able to ship those directly. And in the case of Harvey, the military set up in basins outside of San Antonio and basically laid out a daily forecast of how much product they wanted to deliver to the airfield.
And our people worked very, very hard, you might imagine. In the midst of the aftermath of hurricane, trucking is not the easiest thing to obtain.
But we made every single night flight and made sure material was available. And it was quite an ordeal, and I'm very proud of our team.
Francesco Pellegrino
All right. And just the last question for me before I drop back into queue is when I look at the last four acquisitions, all the acquisitions that you've done in 2017, the Adama, the Syngenta, the Grupo AgriCenter and the OHP, selectively, you're going to be adding $110 million, $120 million of revenue.
Can you sort of give us a little bit of insight what the consolidated EBITDA run rate was for these businesses? And then what your post-synergy capture EBITDA will be?
Because I would think like that you have a great track record of acquiring businesses and layering them on. You have a great product portfolio.
But I think you're going to start getting a lot of leverage. You're going to be able to begin reducing a lot of fixed overhead cost via the consolidation.
And I just wonder how much value you're really going to be adding via the consolidation.
Eric Wintemute
So I don't know it would calculate exact, but we do have a number, I think that we pushed to the bank. But I don't know that we're comfortable in releasing that at this point.
So the synergies with the two businesses, I think initially, we're not seeing a large synergy because these are all, what I would call, stand-alone businesses. What we will see, I think, is greater penetration with our products in those markets where our Costa Rica center in LatAm sales.
AgriCenter actually has not been a customer of ours as we've been marketing through different or through our own to the major companies such as Del Monte and Chiquita. But we think we'll have greater access of our products through this channel.
With regards to, certainly, the other two, I think within Mexico, I think we are thinking of adding just a couple of people to take that business as it's down more in the south part of Mexico where we've more northern and central. I think with regard to the Adama piece in the United States, I think that's turning out to be a very nice surprise for us.
We may add a couple of salespeople to manage that growth. But I think there, we'll pick up this kind of synergy that you're talking about.
Francesco Pellegrino
Thank you
Operator
Our next question comes from the line of Joseph Reagor with Roth Capital Partners.
Joseph Reagor
Couple of things. I guess, first thing, just I'm looking at margins by segment for the quarter.
I understand why the herbicides segment felt lower margins given the impact. But what were the key drivers for insecticides and the other, including the plant growth segments for their declining margins in the quarter?
Was that seasonality or what? And then expectations as far as a rebound there in Q4 and beyond?
Eric Wintemute
So David, as far as are we talking about insecticides with regards to crop? Because I think our margins in overall...
David Johnson
Is that the crop…
Joseph Reagor
Yes, just crop. The noncrop segment crop, that was the one that was up for the quarter.
But the other two, insecticides by sales crop?
Eric Wintemute
Yes, so probably in Q, I'm trying to think of Q3 last year, whether we had more vibrant sales, I'm just trying to see whether...
David Johnson
We did have higher sales …
Eric Wintemute
That's true, but it's not huge, right. So that wasn't a big issue.
So driving margins, I'm just trying to think what would have been lower. What is the number, I'm sorry?
Joseph Reagor
I was looking quarter-on-quarter not, like Q2 on Q3 not so much Q3 this year versus last. So mostly your margins are up versus last year.
Eric Wintemute
Yes, okay. So Q2, Bidrin was a very strong quarter for us in Q2 and that's a high-margin product.
So quarter-over-quarter, that would have been a driver there, because of the significant amount of sales in Bidrin in the second quarter and a much smaller amount of sales in the third quarter. I would say that's probably the biggest driver.
Joseph Reagor
Okay, fair enough. Then kind of a bigger-picture question.
Can you guys give whatever probably you can on the magnitude of growth next year that's going to be organic growth compared to from all these acquisitions you're completing? How we should think about that?
Eric Wintemute
I think typically yes, so we're looking at 3% to 5% range for organic growth. We do have expansion of existing products with a view with new labels as we go into like the Impact seed, which is a combination.
So I guess we consider that new growth. Are you talking about current product lines versus the acquisitions?
Is that what you're looking for?
Joseph Reagor
Yes, yes, exactly.
Eric Wintemute
Okay. Looking at blank faces here, I don't know I'm going to have any...
Ulrich Trogele
I would just give you some color there Joe, Bob Trogele here. Most of our growth next year is going to come through the acquisitions, right.
So I think the number that was just mentioned before was $110 million, right? So if you consider us this year at a $300-say-$30 million to $40 million business and you add on to the full year-to-year, most of that's going to come through acquisitions.
We are launching both in the OHP business, in the AgriCenter business, new products. And just please excuse us, we've just recently taken over those businesses, so now we're looking to see what do those budgets look like going into 2018.
We have pro formas, but we didn't do a deep dive as far as that split you're asking for. So there'll be some growth there that's coming through new product launches.
We're also launching products in our U.S. business and are both on the crop and on the noncrop side.
So we have not done that split the way you have it because of all the, how would you say, all the acquisitions we've done in the last five months, right. Does that give you some flavor?
Joseph Reagor
Yes. No, that's helpful a little bit to put some color on it.
Eric Wintemute
I think if you looked at – yes, if you looked at maybe in that, again, 3% to 5% maybe from organic, given that Dibrom was up fairly significantly, you're not – we'd anticipate that again next year. And metam, depending on how this quarter plays out, I mean we were definitely below normal this year so far as we've had again all this wet weather to deal with.
But I think, largely, if you take the acquisitions that we've made, I think that's going to be 90-probably-percent of our growth, somewhere in that range.
Joseph Reagor
Okay. And then one final one if I could.
Just any update since Q2 on SIMPAS, any developments? I didn't hear anything really in the prepared remarks there?
Eric Wintemute
Well actually, we mentioned SIMPAS, Simplot which was again, the kind of key parts of this are getting somebody to be able to write prescriptions. So that's a major piece for us.
Simplot is very engaged in that process, as I mentioned, through their SmartFarms. And they've been going on a separate piece going this way and have made a nice marriage for us going forward.
And then also, Trimble is a leading GPS company with a key component that we need in order to make sure that the prescriptions, which they work with Simplot on are able to incorporate into our gateway system that we've developed with that technology. So then, the other piece is then the equipment, which their retail network would look to put into their system, and their setup, not just in that seat, but on a global ability to do that.
So with regards to what we're looking for this quarter, or this season, I've got to mention that we've done about 5,000 acres with about a dozen growers last year. We'll expand dramatically on that this year to again, pressure test further and make sure that now the GPS system works in, we can do prescription application where each one of those meters can operate independently as it rolls through the field.
So I think I mentioned a video if haven't had a chance to do that, if you just kind of Google or Safari a SIMPAS video or YouTube, you'll be able to see. It's a short.
It's a two-minute video. But it'll kind of detail, kind of, a little bit of where we're at with this.
Joseph Reagor
Thank you.
Operator
Our next question comes from the line of Tyler Etten with Piper Jaffray.
Tyler Etten
Just a couple of questions for me. On the inventory goal, looks like you guys are going to hit it, no problem.
But once you get to that goal, are you guys more comfortable with the internal inventories, now that all of the channel is kind of settled out and we're getting closer to getting towards full production?
Eric Wintemute
Yes, I think we're getting close enough to our target. We still have a little bit of foreign inventory in our hands.
But we're getting close to that being at normal, probably by the end of 2018. We've had historic hangover with the PCNB, but that's dropping very dramatically, and you may recall that we had stopped production in 2014, and we're getting to the point now where we're thinking maybe the end of 2018 or the first part of 2019 of bringing that back online.
So yes, it's been a real team effort. I think it's something we've focused on every month.
We've walked through and chartered and it's a process that's worked well. And as you mentioned, the fact these are running now at, I'll call it, historic levels.
And so we're pleased to report that that's working well as well.
Tyler Etten
Okay, good to hear. And then, on SIMPAS, could you talk about just the time line or just remind us of the time line of commercialization?
And then maybe the financial impact once we reach commercialization, what we would expect to see since there's so much investment going into the technology right now?
Eric Wintemute
Well so I think 2019 is what we call a soft launch. So I don't think you'll see material sales at that point.
That kind of depends on how much momentum I mean moves along, and how fast prescriptions can be done. We're pretty excited about the micronutrient side of this because that's much further advanced as far as prescriptions are concerned.
I think we're excited about taking this into markets outside United States as we look and I'll let Bob talk to that in just a moment. But I think 2020 will be more material.
If you look at some of the past pieces that we've put out, we did a third-party generation of a review of six crops in the United States and what the unmet needs were and what might be a reasonable number for us? And kind of those products mature, it was in the $600-plus million dollar range for the product.
So the time line for getting that ramped up is going to depend on how quickly companies like Simplot are able to write the prescriptions for those needs. And some Bob, I don't know if you want to talk a little bit about?
Ulrich Trogele
Well, I would just say that we've mapped out the market opportunity for the six crops that Eric mentioned with an outside consultant for the United States. We see growth there for our company, which is substantial once the system gets into place.
We also see that we can add incremental value to the market as far as a growth segment. We're in the process currently of mapping out Brazil.
We have a very detailed time line as to how we're adding, from a project perspective, technology into the system. Until now, we've had some really good advances in 2017.
The feedback from the end user has been extremely high. And companies like Simplot and Trimble joining the projects has been just an indication that there's going to be high value created.
I would like to say that today, we can't talk about all of the discussions we're having due to confidentiality. But there are also other companies that are highly interested in the SIMPAS system.
The project is evolving nicely. But when we launch the project, we want to also be ready to show the market the complete system and all the features.
And so it's a matter of just how fast we can add the different components into the system.
Eric Wintemute
I mean I think that we're fairly well through kind of all the programming. I think the one big piece that we have left, that at least is something over six figures, that gets into the 7-figure level is, is all of the programming with regards to the RFID chip.
So this went from something that we'd be able to track and make sure that the right product was used in the right spot to now a much more robust system that would monitor the product all the way through the system to the farmer, back to retailer for resale and back with credits. And so it is a little bit more complex than we had originally put on our charts because we see a much greater opportunity and our customers are thrilled about the ability from a tracking standpoint and also from a food safety standpoint to know exactly how much of every product is used on every square meter of every farm that utilizes SIMPAS system.
And I think our people are viewing this technology as something that would be available and licensed to all companies as they look to make smart products, smart packaging other than our smart cartridges that we would utilize through the SIMPAS system. So we think it has a much greater utilization as the industry for, I'd say, the last 20 years has tried to figure out how to standardize some sort of bar coding system.
And it just doesn't happened. But I think the industry is poised to have that happen.
And I think our guys are excited about the opportunity that this technology that will serve SIMPAS well but also be able to serve the industry.
Tyler Etten
I don't think anybody's questioning it's a very exciting product and we're all looking forward to what it can bring to American Vanguard. I guess the question I was more asking was after the soft launch, in terms of a modeling perspective, are we going to see a significant drop-off of internal costs going into that right now are going into the project?
Or is this going to be something that's a little bit more stable that's going to take further investments or a run rate that's similar to what you guys are putting into now?
Eric Wintemute
I think where we're going to be transitioning with this – after kind of the RFID piece is into actual equipment. And this would be whether it's reselling or whatever.
But there it just goes into capitalized cost. So the expenses that we've been incurring, yes, we would see would drop off as we've kind of completed the process that we want to do.
So we've processed along to the point we have and, as I said, absorbing these expenses in each quarter as they occur. But I think we're getting close to the point now where we'll start any expenditures, which will be maybe building out readers for all the dealers and whether we sell them to them or what.
Actually, I think we're getting near the finish line.
Tyler Etten
Okay, great. And I really want to pass it along.
But just, David, if there's anything to read into with the large drawdown in the income tax payable or receivables? Or I guess any color there would be great?
And then I'll be done.
David Johnson
That related to some taxes paid earlier in the year following an audit of our IFRS audit in 2012, 2013. And that was disclosed in the Q probably earlier in the year.
Q1 I think.
Tyler Etten
Thank you.
Operator
[Operator Instructions] Our next person will come from the line of Jim Sheehan with SunTrust Robinson Humphrey.
Jim Sheehan
Can you quantify how much sales that you received from acquired businesses in the third quarter, please?
William Kuser
Yes, so it was $7 million.
David Johnson
$7 million.
Eric Wintemute
$7 million.
Jim Sheehan
And how much of the acquired business should we see in the fourth quarter? Can we take those annual numbers that you gave out and just divide them by four or is there some seasonality in these businesses that we should be aware of?
Eric Wintemute
So hang on just a second. [indiscernible].
Yes, right. So well, you're talking about the products and the businesses?
William Kuser
Yes.
Eric Wintemute
Was that your question, is the new products and the businesses as well or just...
Jim Sheehan
Yes. All acquisitions and the product lines and businesses, please?
William Kuser
Jim, this is Bill Kuser. The $7 million in the third quarter was all from the three products acquired back in June from Adama.
What David and Eric are looking at now is the expectation for the fourth quarter of any of these other businesses that were acquired since: the Syngenta business in Mexico; the OHP business; and the AgriCenter.
Eric Wintemute
So probably in the $20 million range.
Jim Sheehan
Okay. Are you pretty much finished with M&A for now, or do you expect more to come over the next 12 months?
Eric Wintemute
No, I expect we'll have more over the next 12 months. I mean we actually had six that we are working on, and there were these four that we did close on.
I think with the most strategic force and the most likely, we're pleased with those. We do have some additional acquisitions we're working on now.
And I think we've also been in discussion as far as the consolidations that are occurring that they'll likely be some non-forced divestitures in over the next 24 months that we'll see as well that we'll be working on. So it remains a robust time for us.
Jim Sheehan
Great. And it appears that Monsanto has been forced to delay the launch of a nematicide.
Does that have positive implications for your business?
Eric Wintemute
David? It's in the seed treatment business.
I would say it's not negative for us, but I wouldn't say, it's positive for us either.
David Johnson
So we'll say neutral.
Jim Sheehan
Neutral, you say?
Eric Wintemute
Yes.
Jim Sheehan
Okay. And can you guys help us with what operating expenses will look like in 2018?
I assume you're still going to be spending on SIMPAS at that time. It looks like you may be doing some work due diligence.
Where should operating expenses be for next year?
Eric Wintemute
Well, of course, we've...
William Kuser
We have 100 new.
Eric Wintemute
110 new employees. So we expect operating expenses overall to increase.
But I think as a percent of sales, we would like to see that trim down from what we've been. I think the operating expenditure as a percent of sales for the businesses are less than what we are.
And then in addition, we mentioned the two product acquisitions or product line acquisitions should not generate the operating expense associated with those. So I don't know that we're..
David Johnson
Not quite too sure, but you can process almost, but not quite. I think we should expect to see a slight improvement on the percent to sales for sure.
Eric Wintemute
Right.
David Johnson
I think we're still targeting people to look again at the budgets that they've come forward with. So I think the question – we're not quite ready to answer that question yet.
Eric Wintemute
Yes. But I think if we – if we're in that...
David Johnson
35%.
Eric Wintemute
35% and look to shave 2%, 3% off of that.
David Johnson
Yes.
Jim Sheehan
Thank you.
Operator
Our next question will come from the line of Brad Evans with Heartland.
Brad Evans
I have just a couple of – one quick follow-up. David, you mentioned there was a $2 million charge for the carrying value of the Impact inventory as you reset pricing for 2018?
David Johnson
It's not our inventory, it's the channel inventory.
Brad Evans
Right, so that was not...
David Johnson
It was not held by our distributors at the end of the last season or the start of the new season. Obviously, they purchase at a higher price and now we're taking a 15% price increase, so we have...
Eric Wintemute
Decrease.
David Johnson
Decrease. So we have to adjust.
We have to compensate them for that.
Brad Evans
So that would be the prospective and that did not have an impact on this quarter, correct?
David Johnson
No, we took the charge this quarter. Once you make a decision like that, you have to take the charge.
Brad Evans
Okay, that's what I thought. So where did that fall in the P&L?
I was trying to multitask as you were going through the Q&A. Didn't see where that -- where did does that fall in the P&L?
David Johnson
Those rebates are a deduction from sales. So it's net sales.
Brad Evans
Okay. So if...
William Kuser
It was sort of in 1992.
Brad Evans
If we were to surpass -- can you help us, was there -- is there a way to think about the P&L impact to that reversal in the quarter then from an earnings per share perspective?
Eric Wintemute
Sure. It's $0.05, almost...
David Johnson
Almost $0.045.
Eric Wintemute
Almost £0.045.
Brad Evans
That's what I thought. So I just took the tax rate and $2 million so it's $0.045, okay.
So it's roughly $0.07 or $0.08 of higher OpEx for investment and then roughly almost $0.05 for inventory action. So really depressing the profitability in the quarter.
Let me just ask a question, longer term. So if you go back over the many years that you've been public, absent the Great Financial Crisis and the corn bear market, American Vanguard has generated an EBITDA margin that has been in the high teens.
Sometimes it has had a two handle on it. Would you be disappointed if you didn't have a 15% EBITDA margin next year, Eric or David?
Eric Wintemute
Well, again, I think the only -- I'm just trying to think if our -- I mean one, with the sales margins at AgriCenter are lower than where we are. So as a percentage of sales, I mean our sales are going to, I think, increase, but our margins will have some decrease because of that.
And I think also, we're seeing some considerable upside opportunities with the Parazone herbicide, but that's also not a high margin. But given -- I'm just trying to think.
What you're looking at there?
David Johnson
I think we should also assume that we'll take a little bit of time to onboard these businesses, these two new businesses so we may have some time to kill the costs et cetera.
Ulrich Trogele
But I think - so in '18, we're also trying to finish out again, that RFID piece, which again, will be expensed in. But then, when coming to 2019, I think we would see some pretty nice ramp-up at that point.
Brad Evans
Okay, so just to interpret. So as you said, roughly $330 million to $340 million business this year, top line.
The 3% to 5% growth rate on that, about $110-plus or minus million of acquired revenue gets you north of $450 million. So it looks like this year, you're going to come in at around a 15.5% to maybe 16% EBITDA margin.
So maybe slightly lower than that next year to account for the lower-margin revenue that you've acquired, but still healthy margin profile, correct?
Eric Wintemute
Right.
Ulrich Trogele
Right.
Eric Wintemute
Correct.
Brad Evans
And do you see a major step up in CapEx next year? And just curious what your thoughts are in that respect?
Eric Wintemute
I mean we're -- we've been managing our CapEx generally to...
David Johnson
Cope with depreciation.
Eric Wintemute
Yes.
David Johnson
I mean sometimes it trips a little lower or a little below, but that's about the target.
Eric Wintemute
I think the only reason we'd see something moving -- but with the -- as we start investing and building, the Simplot's systems we'd capitalize initially.
David Johnson
Yes, I mean some of these newly-acquired products and the businesses don't really impact our CapEx spending, which is mainly focused on the factory. So maybe a little bit with AgriCenter, possibly, but it won't be...
Eric Wintemute
No.
Eric Wintemute
No, not material.
Brad Evans
So free cash -- absent -- further M&A free cash flow should be quite strong, which would facilitate the revolver to be paid down, correct? Have you got some further M&A?
Eric Wintemute
Yes.
David Johnson
Yes, we have a good track record of paying the revolver down…
Brad Evans
Yes, you do. Yes.
And the revolver balance, David, what's the revolver balance at currently with the all acquisitions closed, roughly?
David Johnson
I don't have the number directly in front of me, but it's about $90 million.
Brad Evans
Thank you
Operator
It appears we have no further questions in queue at this time. I would like to hand the floor back over to management for closing remarks.
Eric Wintemute
Okay. Well, thank you, and I want to thank everybody for their participation in today's conference call and some very insightful questions.
I hope we answered them to somewhat of your satisfaction. And look forward to further updates with you.
Thank you very much and have a good evening.