Dekel Agri-Vision plc (DKL) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Dekel Agri-Vision plc Interim Results for the 6 months ended 30th of June 2021 Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. These will be available via your Investor in the company dashboard. And we'll notify you by e-mail if it's ready for your view. I'd also like to remind you that this presentation is being recorded. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Lincoln Moore, Executive Director. Good afternoon.

Good afternoon, and thank you for all the participants for joining today to hear about our interim results for Dekel and touch on how we think things are going to play out for us in the next 6 to 12 months. As I said, my name is Lincoln Moore, Executive Director of Dekel Agri-Vision. I'd normally be joined and normally -- typically I join for the half year and the full year results by Shai Kol, our CFO. He's actually [ just got on the ] flight to Cote d'Ivoire. As those follow the company closely would know, we're in the process now of commissioning our cashew processing plant, which we'll get into detail later and Shai has to excuse himself today. So just in terms of what we will do today, I'll run you through the presentation as succintly as possible and try to answer as many of the questions and welcome questions on the side chat as we progress. But for those who are relatively new, [ I want to give ] a very brief overview. Dekel was in palm oil business, now is an agri processing business based all in Cote d'Ivoire. Our strategy is, I think, quite simple. We work together with thousands of small farmers in collaboration and try to assist them in terms of logistics and processing of agricultural products. Of course, for 7 years now, we've been operating one of West Africa's largest palm oil mills and we're obviously quite excited to be at the penultimate stage in the filing and commissioning of our cashew processing plant, our second production asset. We also have 2 other projects, which are in feasibility mode, one being a third commodity and the fourth being our aspirations in clean energy. Of course, makes sense for us with the agriculture waste product that can be turned into energy, and we're looking to do this together with solar. For today, there's obviously, I think, enough to talk about within the palm oil operation and the pending cashew business. So we'll focus solely on those 2 businesses. Just firstly, in terms of orientation for those also who are relatively new. You can see in the bottom right-hand side, it's the location of our existing palm oil business. This is the Ayenouan site. It's about 1-hour drive from [ Jada and ] Abidjan Port. In fact, we rarely use that port for this business. Almost our entire product, the crude palm oil, the pumpkin oil and the [indiscernible] sold ex factory which is a huge advantage for us in terms of being able to market our material locally. And further to the north in Tiebissou is the location of our cashew processing plant. Also will show some pictures later. The road to Tiebissou is excellent. The capital or the political capital of the [indiscernible] just to the south is a very big road [indiscernible]. So it's a 3.5-hour drive. This will be -- the cashew business will be an export business. So we'll be using road transportation to port and then shipping our finished product cashews in shipping containers. In terms of where we see ourselves, we see ourselves continuing to, in time, diversify agri-wise in Cote d'Ivoire. It's by far the most significant agri country in West Africa. And as a result of that, the logistics, the human capital and infrastructure are all excellent in terms of agriculture. It's Number 1 in the world in cocoa and it's 2 or 3 in cashews. Significant in West Africa from a palm and rubber, coffee point of view. So there's a lot of opportunities for us within Cote d'Ivoire. So just now focusing in more in our palm oil operation and results for the 6 months ending June 2021. These are the production numbers. They have been in the market for some time. So I won't spend too much time on this slide. Really [ of note ] that the key drivers of the successful half year really stemmed through the increasing quantity of the fresh fruit bunches that we were collecting this year versus last year, 16% up, and we'll touch on it in a little bit of detail later, but very strong palm oil prices, 35% up on the same time last year, which have been the major drivers of the results themselves. Just turning our attention to those results. I've tried to helpfully set them out in each year, so you can sort of see how we progressed. H1 2021 was a record for us in terms of revenue. Again, the main driver being pricing. It was a record in terms of EBITDA and close to record in terms of net profit after tax. I think when I look at the results, I always look at areas that I think where can we improve even further. Of course, this year, we had at a much better gross margin percentage of 22.6%, which is mainly driven by the better pricing, but still, that line is still lower than where we have been in the past in '16 and '17. I think there's a couple of things there. One, the extraction rate was down this year, and that is largely out of our control in terms of oil content in the fruit that we are doing a maintenance program at the moment in terms of the different bunch press and in terms of the oil separation process. And we think the extraction rate, which was less than 22% in the first half can move back to -- can potentially move back to traditional levels, which it's actually quite a material number. A 1 percentage point increase in our extraction rate over the year can add at least EUR 1 million of direct EBITDA. Until that it's important to know this is the first 6-month period where we carry the operating cost of the cashew business, which is not yet operational. So there's approximately EUR 200,000 within the EBITDA there. So that is in addition to last year as well. And it's important to note that stock on hand was reasonably considerable at the end of June 30. We are holding just over 1,900 tonnes of crude palm oil, which has been sold through Q2 and 3. So that's more of a timing issue and those results will be reflected in the full year results. And as we stand now, our stock levels are virtually back down to 0. In terms of the results, obviously, the profitable period has assisted our balance sheet. So you will recall we did an equity raise to assist us as we moved into cashew production at the start of the year and also entered into a bond facility which we drew down approximately EUR 5 million [ towards the ] year. And this has materially improved, both the short-term working capital position of the business and the net asset position of the business. We think -- and we'll touch on why we think the results can improve next year as well that natural organic growth and profitability can further improve our balance sheet next year, and that will be the main driver of the strength of our balance sheet. But as it stands now, this is probably the strongest position we have been, but we seek to further improve the balance sheet position of the company. So palm oil prices, no doubt, particularly in the last few weeks, everyone is being drawn to news on the various commodity prices, gas, coal and others, which have been heavily publicized, but across the board in commodities and in food, which is perhaps not as well-known on [ hand ], prices have been increasing for some time. We shared some of the same reasons as things like gas and coal in terms of there has, of course, due to private being supply restrictions and now logistics challenges. But the fundamental reasons of the palm oil price increasing go much, much deeper. Before COVID, there were really very strong or very low stock levels of palm oil, and the price was already on the way up before COVID hit. If we go back to April 2020, the price shortly dipped last year for technical reasons like oil did and like others did. But then you can see on this graph that the palm oil price has steadily gained. And as I looked this morning, it was sitting at $1,285 a tonne. Now just looking at what we did in the first half, we averaged, that's back in the U.S. dollars, around $1,000 a tonne. And at the moment, we're doing around $1,150 a tonne. So there's scope for prices to stay at this level for our high season, which is certainly a few months away to even be better than it was this year. So supply-wise, palm oil remains incredibly tight. You've got the overlay of the COVID structural reopen issues impacting as well. And in demand side, of course, as markets reopen, people are looking to restock. And one of the interesting stories that I follow is how much stock countries will want to hold on hand as we move perhaps into a period where the countries want to protect and have more stock on hand and that previously did on a scale with a new that could source as and when they're required. What do we think in the next 6 months? I think the prevailing view is that we're going to see very strong palm oil prices over the next period. Perhaps, from my point of view, maybe there could be some additional supply out of Indonesia, potentially, if they reduce their levies and taxes. But on the flip side, that you've got countries like India, which traditionally ran quite big tariffs on palm oil and it's unlikely to see those -- that stay at those levels or increasing in a time when prices are at a world level that's so high. So for us, anything over $1,000 a tonne is excellent and at these prices, $1,200 plus, we're talking about a very super potential high season coming up early next year. Of course, I'm pretty much focused on what is going to happen in 6 months, but our view remains bullish on palm oil. The major producing countries, Malaysia and Indonesia, have had substantial reductions in planting over a very long period of time now. And you need to bear in mind that they still produce over 80% of crude palm oil and crude palm oil is over 40% of all vegetable oils. So it is quite significant. And it's really difficult to see where that supply side is going to be picked up. In my view, in terms of the demand side, palm oil is an essential product. It in 50% of products on the super market shelves. So a GDP type oil growth of 3% to 5% on a situation where supply is constrained, leads us to a view that there could be a very bullish period of palm oil prices over a number of years to come. So of course, the palm oil business, and we'll touch on it. And again it's has been -- it's been fantastic first 6 months. And I think we potentially are positioned for a better first half next year in the high season. And coming together with that is our cashew processing plant. I could say it's been slow over the last to 12 months. I think from a COVID perspective, Cote d'Ivoire has had a lot less impact locally than perhaps other countries in Europe. We haven't been immune to challenges in sourcing raw materials and logistics. Pleased to say now we're in a situation where the mill has now started the commissioning phase. We have 2,000 tonnes of raw cashew in warehouse awaiting production. And we believe that we'll be in a position to have first production within 50 days. So what I think we can see is a number of key milestone announcements over the next 1 to 2 months in terms of the cashew business. The absolute key for us over the next 2.5 months of the -- or 3 months of the year is to ensure this mill is operating as effectively as possible to allow us to scale up to close to full production as we can next year. So commissioning is 30 to 45 days. So it's certainly very achievable. And the cashew season in terms of buying raw cashew starts in February. So we have a really critical 3 or 4 months ahead of us. First of all, the proof of concept, the existing commissioning process and first production and a number of the key KPIs and then move into the initial full scale production. But what we believe in time is that this business, and we'll touch on little bit of the reasons why in next page, can be a larger EBITDA contributor or the larger margin business than our palm oil business. So it's got a heavy focus from the management point of view. And just a reminder why we chose cashew as our second project, as I said towards the start, Cote d'Ivoire is Number 2 or 3 in the world in terms of real cashew production and there's a significant shortfall in local processing. So whereas in palm oil business, we've [ stagnated ] around 40,000 tonnes of production and the capacity is 60,000. There's a strong view that we can move the cashew business towards its full production much more quickly. And then the margins that we're seeing, and we're getting some vision of that, of course, already in terms of we can see what we're paying for the raw materials and potential selling prices potentially, we think, higher than the palm oil business. So we hope to prove those concepts out over the next 60 days to 90 days. These pictures are a little bit old, probably 2 weeks old, but you can see the top left-hand side, the size of the 2 buildings, one deals with inventory and sourcing and the other building deals with processing all through to final product for road transportation for shipping and pictures of some of the equipment inside. You can see, probably the bottom left, you see there's a lot of room inside the warehouse. That's because all the infrastructure is being built to effectively in time process 30,000 tonnes of raw material and we were starting with 10,000 tonnes. So that's simply a case of adding another line, but all the infrastructure is in place to move to that full scale capacity. So basic economics, we're sitting on at the moment 2,000 tonnes of raw cashews. Assuming we processed all that before the end of the year, we're talking here roughly about 460 tonnes of cashews. And it's the determination of the breakdown between the whole and the broken and the whole. We're hoping the whole will be north of 80%, where we are conservatively estimating 60% to 70%. We're talking a small initial contribution this year in terms of actually when the sales all take place, some of the sales may take place into January, but that plenty of products on hand. It's around about EUR 2.5 billion and it's, of course, the next year where we should see the full benefits of the first size of the plant. The 10,000 tonnes of raw cashews can generate revenue at the current price around about EUR 13 million and we think that the EBITDA contribution could be somewhere between EUR 3 million to EUR 4 million. People may have tried to look up to cashew prices restated them here in U.S. dollars in kilos. It's a high value product. Of course, when you think about it per tonne, we're talking about $7,000 to $7,500 per tonne. What we're seeing in the last 60 days as prices start to creep up, not particularly surprising given most stable or essential food products have already increased. Cashew is still a high value product and seen or viewed as a more medium to luxury product and the price increases has started to take a little longer but we're seeing quite robust pricing at the moment. And I think in terms of agri in general, being in spices and cashew as well as an essential product like palm oil it's going to give us great diversification next year as well as increased scale. Social environmental side, absolute priority for us at the moment. The social side, I do touch a lot on presentations that our business has it already in-built in terms of the relationships we have. We have 3,000 small farmers at the palm oil operation, and it will be a similar number of small farmers that we work with at the cashew project. So working together with them, providing them a guaranteed place where they can sell their product, the systems we provide in terms of our nursery setups, [indiscernible] and discounting programs, our health insurance programs put us in really strong state from the social capacity, and we've worked together really strongly with devco, who the U.K. financing partner, who have also heavily focused on the ESG factors. For us, now the critical focus is RSPO certification. We had the preaudit done by Proforest at the back end of Q1 into Q2 and now working through the audit points, which [ a lot have been made ] administrative in nature. We have calls over the next 1 to 2 weeks with the auditor to try and go through where we think we are in terms of readiness, which we believe we are ready for them to come out and do the certification. And I think probably the most obvious key announcement will be once we've booked the certify, which we're trying to do as soon as possible. So a huge priority for the company. It's something we've been working out for some time. It hasn't been easy with moving consultants around over the last 12 months, but we are very close to the finishing line and the certification. I think it will be a strong endorsement for ESG, along with the investment of, of course, devco and the business in general, the ability of the business to assist small farmers. So where we think we are and what can things look over the next 6 to 12 months, I think the high season, which is starting in mid-January at this stage where palm oil prices are, we could be better off by potentially another EUR 100 a tonne. So could be -- again, that could drive an improvement on the palm oil business. We think there's scope for improvement in the extraction rate. So those 2 points together, I think, can drive a further period of growth of the power business. The [ capacity ] side was reasonably strong this year. Possibly it could be stronger, much more difficult to predict in terms of the raw material availability. But overall, this business has the potential. In the first half of next year there's no reason why it can't push to EBITDA from around the $4 million mark to close to $5 million for that business standalone. Cashew, of course, is one of the key milestones of the company since this has been on aim. It will drive a material step-up on the revenue and profitability, we believe almost immediately from next year. And in 2 to 3 years' time as we move towards capacity, we think it could be a stronger contributor than the power operation. And of course, we have the other projects that I mentioned earlier that we are working through the process to be ready to greenlight and move into each form of construction phase. So it's one of the strongest propositions we have been. I think we're likely to report record revenue and record EBITDA for 2021. And as I said, in terms of the supported price of palm oil and the cash business coming on board, there's a strong view that we can step up materially again in 2022. That concludes my comments for the moment. So I'm more than happy to take questions.

Lincoln, thank you very much for your presentation. [Operator Instructions] But just while the company take a few moments to review those investor questions submitted already, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard on the Investor Meet Company platform. [Operator Instructions] Lincoln, investors have submitted a number of questions before the event and during the presentation today. And I wondered if I could hand back to you to respond to those and where it's appropriate to do so or could I just simply ask you to read out the question and then say who it is from.

Okay. I'll try to [ do this on ] logical order by starting with some of the operational stock questions and then moving to the financial questions and then share price and valuation and investor relations. So the first question is a really good one. CPO, prior production, flatlined at 37,000 same as the 2016, '17, what are we doing to increase the volume or is it likely to continue at this rate. I think forgetting, first of all, putting aside like what we do, it's important to understand the market size. So when we entered the market in 2013, there's been a period of virtually new planting prior to that. And all the new planting has taken place from 2012, '13, 14 onwards. It takes all 5 years to first yield 8, 9 years to get to any sort of close to mature yield. Planting rates have been significant in our region. We know this because we're one of the major suppliers of the plants from our nursery where we, on average where we're selling 3,000 or 4,000 tonnes -- sorry, 3,000 or 4,000 hectares equivalent. So there is going to be an organic growth around us and that will be clearly the major driver in terms of moving from this line of around 37,000 to -- obviously, the next goal would be 40,000 to 45,000, which is, obviously, we're hoping in the next 12 months, we can deliver. Secondly, on top of that is maintaining and improving our market share. So when we built the mill, we built it with a double reception and automatic tipping systems. So trucks can come in and out of our mill, particularly in the high season when there's significant traffic, far quicker than alternative mills. We built -- we have now 7 logistics centers making it as easy as possible for farmers to drop their product at our locations where we compete with other mills and region on price, known as a good payer. We sell discounted plants from the nursery. We recently added in a health insurance scheme for our small farmers to incentivize them to sell to us, which also extends to their families. So there are a number of things that we're doing. There hasn't been, in terms of mill sizes, a mill like us coming to the market, but there has been some smaller adequate type mills established, which don't conform to any environmental standards and don't pay for any of the property fees and levy fees. I don't touch on this a lot that has taken some of the production we've worked with the local authorities and other players in a sensitive way to ensure that all players are following proper ESG rules. So to summarize, the main thing is the sheer amount of planting over the last 5 years coming through. And so you can do any confidence that all we've seen happen in other areas. Rubber, as an example, where they all forgot there was a huge planting regime 10, 12 years ago, and that's coming on board, as an example, and we hope it's the same with the palm oil. So hopefully, that covers that question. Next one was do we sell -- forward sell. No, we don't forward sell the product. The way it works is the price for the start of every month in terms of the fruit and the price we sell at is essentially fixed. There are some market that's essentially fixed. So we have almost hedged in a set margin at the beginning of the month. So we haven't used hedging tools. We look at it from time to time, it's -- we obviously think they will invest some in us because they want exposure to the palm oil price. So we're mindful about putting a cap on that. And one of the things we're trying to do is, it was particularly notable I think this year that the local prices would be materially lower than international prices so find alternative international sales routes. You've got to bear in mind that once you're talking about exporting, you're gating on sometimes 100 to 200 per tonne. So it's often better to sell locally. But at this stage, we don't use any formalized hedging tools. And once we looked at it, have been quite expensive and could actually take up a significant amount of our gross margin. There's a question on cash use in terms of the tonnage. So obviously, the next -- oil produced. So the next few months is the commissioning and first production phase. There's enough raw cashews on hand and we can produce around 450 tonnes if we process it all before December 31, which is roughly revenue of 2.5x, but it's really, as I said, I think the key is to make sure we get everything right and be able to move to cost of full capacity next year, where we can produce something in the order of potentially 2,300 tonnes and it equates to revenue of about $13 million, which is, yes, we think it can be $3 million to $4 million of EBITDA, which is another question asking whether that $3 million or $4 million EBITDA was on the size of the mill we have at present or these scaled up. That's the size of the mill we have at present. If we move from 10,000 tonnes to 30,000 tonnes, the 30,000-tonne capacity, we can move up to up to around EUR 40 million of revenue and EBITDA, potentially, we've modeled it somewhere between EUR 10 million to EUR 15 million depending on which was all assumptions you make on whole and broken in pricing, et cetera. Someone asked about the price. Can you comment on how the price of cashews is recovering from the fall last year? Yes, I touched on that earlier. We have seen the price of cashew start to rise. It's risen about 25% in the last 3 months. And so at this stage, we've only been purchasing raw materials. So potentially, it's in our favor that we're then purchasing raw materials at possibly lower prices. And then as the end product price has increased over the last few months, there's a potential there will be -- the margins could be helpful for margins. But the price, the state guarantee issues is not -- it's a commercial market in Cote d'Ivoire. So the -- I think you've seen in places like Tanzania and others where there's a lot more government interference. But at the moment, as it stands, the price is roughly about $7,500 -- $7,000 to $7,500 per tonne for the sales price. Next one is the timing of the third commodity, is it likely across similar levels of investment as the cash at project. So we did a full internal feasibility about what our third commodity should be. [ Cut to ] what we thought were logical. And now in detail, there's visibility and there is leaning towards one in particular. And we'll get the detailed visibility internally back in the next few weeks. In terms of timing, first of all, there's so much focus at the moment on, one, ensuring that we take advantage of this period of great power prices and through the high season upcoming and doing everything we can from a maintenance perspective that we can capitalize and two, with the cashew coming into first production and ramping up next year, we are conserving funds. So I wouldn't expect any investment in a third commodity until or even really putting out the timing until we've stabilized the cashew business. But in terms of what it would look like from a CapEx point of view, it's -- if cashews is USD10 million to USD11 million, this one is more half. So it is something that we have within our capabilities potentially from continued cash flow development from the palm oil business and potentially cashew, together with the palm oil facility, which we've [ at this stage, draw down 5 of 15, ] which I think dovetails well into one of the next questions. As we're developing into a cash flow business next year or this year, next year, what is the plan? For us, we still think our debt levels are higher than we would like them to be. So the first priority would be to bring debt levels down a bit from the current levels before any dividends. And I think that, as I said, we've got other things to invest in. So I think there's a capability invested value for shareholders is through capital gain at the minute rather than moving back to a dividend model at this stage. So debt paydown, reinvestment in third commodity and then perhaps a potential scale-up of the cash use. And then perhaps we can look at the dividend, which is something which we would like to do, but we think at the moment, there's a growth trajectory we should take and diversification that we should take before moving to that model. So just as a quick clarification is that the palm oil mill, 60,000 tonnes or 70,000 tonnes? Well, I would consider it as 60,000 tonnes. And I think where we can see it can get into is 50,000 to 55,000 tonnes is doable. Now what we need to get there is mainly going to be in the high season. So when we're producing, let's say, something like 26,000 to 28,000 tonnes in the high season of the first half of the year, that number needs to move up towards the 35,000 to 40,000 and then 15,000 at the back end. So I would work off 60,000 as an absolute maximum, and the business stabilizing somewhere between 50,000 to 60,000 tonnes would be an excellent business model for us. What is the labor market? More continuing questions coming through, what is labor market like in Cote d'Ivoire? It is -- from a perspective of availability, it is good. It is not suffering from the unemployment rates of some countries, which are north of 80%, but it would be roughly 60%. There's a high amount of skilled local labor. Our entire operations team is local. And our entire labor force for the palm business, which is roughly 300 is local split almost 50-50 men and women and availability of labor and stability of our labor team is very good. Just burning on to share price and what -- it's basically like this year, we moved -- I think this time last year, I think we were about 3P, and we moved -- as we moved into the high season, with pulp prices increasing, I think, by the end of January. We then raised about 6P. We raised 5P around that time, and it's great to say that we've stagnated around the 4.8 to 5P over the past 6 months despite almost every announcement in terms of the power business being positive in nature. Arguably, the main negative being slight deferral in the cashew processing part, which we're aiming for in July, which is obviously, I mentioned 40 days from today. So there's been some deferral there. We -- in terms of high valuations, we think that the business is on the power business stand-alone, potentially [ unavailable ]. We feel that there is almost 0 value attributed to the cashew business, which if you look at [ Ardent's ] research, hectares valuation potential were higher than the palm oil business. So from a fundamental standpoint, there's no reason why a $25 billion market cap that where we can move the enterprise value with these 2 business, the market cap of $35 billion to $80 million and enterprise value to around the 100 markets where we think. Of course, I invested in AIM and one of the reasons I invest in AIM is far from perfect. Where we have been, I think, slightly overlooked over the last 6 months as people have focused on renewables, to battery technology has been where a lot of the hype has been, but I'm seeing more and more news on the food side. There are not many ways to play food on AIM. I think Dekel is one way to play out from a particularly small-cap point of view. From an investor relations point of view, you could always do more. We do listen to conference calls. We did a monthly production, we do regulated fees, we've directed this tool. I think the next major but of Investor Relations that we would like to do is in the lead up once we have first production on cashews. And I'll probably do that through a series of interviews with [ crux ] which is one is said to be getting a lot of followings and do it in a 4 review format so that can follow the cashew business coming to operation. But I think just generally as we -- the palm oil prices stay where they are and we move into the high season at this level and we have the cashew onboard they're going to be the big drivers. If you look back, even in the poor performing years, the stock price always gains momentum at the end of the low season, which is in a couple of months' time, and it's through the first quarter of the high season. So I think [indiscernible] palm oil price so the share price can move up as well. I'll try to answer -- keep coming through, I'll try to answer.

Lincoln, thank you being very generous for your time there. And I think you actually managed to address pretty much all the questions from investors today. And of course, the company will review any further questions submitted and published responses where appropriate to do so. Lincoln, just before redirecting investors for feedback, I wondered if I could ask you for a few closing comments.

Yes. So I think where we stand right now, it's clearly been a record half year. The size of the pulp price is going to be -- is currently higher, materially higher than what we've got in that half year. We're 4 months away from the high season starting again. At these levels, that core business or the initial business can be more profitable. We've obviously got the cashew business coming on and going to full production, which will also be a material contributor but in time, I think, larger than the palm oil business. So there's a step-up in profitability of the core business and the introduction of the cash business with, of course, a pipeline of projects to come. So it's -- and I'd say, use the word [indiscernible] a little bit probably too much, but I think it's a really period of the next 6 to 12 months, where Dekel can break through this business being $25 million to $30 million revenue through a business that moves up to $40 million to $45 million with a much more material profit line, given the fixed overhead won't change a lot. So exciting and challenging period for us over the next 6 to 9 months.

Lincoln, thanks again for updating investors today. [Operator Instructions] On behalf of the management team of Dekel Agri-Vision PLC, we'd like to thank you for attending today's presentation.