Verde AgriTech Limited (NPK) Earnings Call Transcript & Summary

Good morning, everybody. My name is Reberth Machado. I'm the new CEO here at Verde AgriTech. Today, we're going to be talking about a brief introduction about the company, the market situation in Brazil. We're going to be looking at the financials for the second quarter, when I'm going to turn this presentation over to our CFO, Mr. Paolucci, and we're going to hold the Q&A section at the end. So let's get started. So the company -- just for you guys to have a brief idea, we've recently changed the management. My name is Reberth Machado. I'm the new CEO, as I said. I'm a chemical engineer with almost 30 years of experience in the agricultural section and technology development, both in Canada and Brazil. I spent almost 13, 14 years as CEO in a sugarcane mill here in Brazil. Recently, I was working in a company in Canada, converting biomass into biofuels. And I decided to join Verde as a new challenge to develop new markets in Brazil and increase our sales, talk to different clients, focused pretty much on the B2B business and institutional relationships. The management is still the same. Marcos Ribeiro is still our Chief Revenue Officer; and Felipe Paolucci still as a CFO for us. So talking about the investment highlights, what actually brought me into Verde? Well, Verde has already made a $500 million investment into research and development and infrastructure and plant capacity. So there is no need for CapEx for further CapEx to reach our full capacity at 3 million tonnes per year of potassium production. The project is pretty much scalable. We can reach up to 6 billion tonnes of resources pretty quickly in Brazil without much further investment. We're located in the heart of Brazil agricultural sector. We're in the heart of Minas Gerais, pretty close to the major consumers or consumers of our products in Mato Grosso, Mato Grosso do Sul, Sao Paulo, Tocantins and Goias. We're pretty much proud of our end-to-end control. We are 100% vertically integrated producer, meaning that we have the resource, we mine it, we grind it, we [ polarize ] it, we transport that and even the mixtures are made into our factories or into our facilities. We're pretty much focused on specialty fertilizer for sustainable agricultural applications. Our product promotes the microbiotic of the soil, do not [ galvanize ] it. And we're focused on the regenerative agricultural sector. We also have a large carbon avoidance footprint. Our product compared to potassium chloride has an 89% carbon reduction. Talking about our full value chain that is already in place, as I previously mentioned, we operate pretty much from the extraction of our resources into manufacturing, into our final products. We currently have 2 plants. plant #1, where we do a mixture or a blend -- not a blend, but a mixture of our specialty products. And we have our large facility that is focused on bulk materials, large amounts. We also have our in-house R&D facility where we test our products, where we develop new products. And we also have our field validation where we test our own products in small areas to improve its efficiency. Verde, just to give you guys an idea about Verde potential into the Brazil market -- in Brazilian market. Currently, Brazil imports pretty much 50 million tonnes of potassium chloride per year. Given our resources sitting at close to 5 billion, 6 billion tonnes per year, we have enough to supply Brazil 100% of its demand of potassium chloride or potassium in that case for over 70 years.

So just some comments I'd like to make here. As everyone knows, our focus targets on the states that are in green in this page. And the factory is located in the east of United States. And the green point here also in the chart shows where [indiscernible] and [ markets ] are based actually. So they are closer to the market, closer to the key customers where we really want to to be side-by-side to be close to them, having face-to-face meetings. And this we think that will be something that will help us a lot in the coming periods. And also our sales force team, our key field sales are also located in Sao Paulo, Goias, Minas Gerais and South of Mato Grosso. So we believe -- we really believe that the freight competitive there is much better for us. The cost per ton is lower. And then it's either to provide additionally the discounts to clients or even though have higher gross margin and gross profit in this situation. So just to highlight how big the focus market is, it's around 6 million, 7 million tons per year. It's where we want to focus, where we want to sell. And if you make a calculation just on 3 million tons per year, that's our full capacity. It's not even like close to 5% or around this on market share. So the opportunity for the coming period, it's big, we will see in the coming charts a bit on the crisis [indiscernible] in the sector, et cetera, but we do believe that it's going to be ending soon and then we're going to come back to growth situation, et cetera.

That's a great point, Felipe. Like I said before as well, like we're strategically located in the heart of Brazil's major production or agricultural sector in Brazil, pretty close to all the states that Felipe just mentioned. Talking about the potential -- our potential economics. Like I said, the company has made already the investment to reach 3 million tons capacity production per year. And that would actually yield us a close to CAD 200 million in revenue that would be equivalent to [ $70 million ] in EBITDA, which is 35% of our EBITDA in terms of our percentage and yielding a net profit close to $40 million. So our focus here today is to expand our commercial operations to increase our sales volume in Brazil, currently -- current situation for the market in Brazil is quite challenging as we're going to see ahead. But that's our focus, and that's our major -- that's our potential to reach, and we're working towards that. Talking about the Brazilian economic scenario, like we're sitting -- we're in a year of elections in Brazil. That actually caused a lot of uncertainties and people are actually reevaluating investments in Brazil. Our interest rate in Brazil is still quite high, actually dropped 25 points, but still sitting at 14%. It's worth -- it's good to know that nobody actually gets the money at 14%. So we're talking about a spread over between 6% and 7% or sometimes 8%, which actually brings us to a total cost of borrowing around 20% to 22% a year, which is quite high. There is a big credit crunch in Brazil currently. All the producers and our clients or distributors, they're lacking access to new money because of -- they have been -- in the past, they have been highly leveraged. So the renewal rate of new investments in Brazil today is quite low. And in that situation, everybody is reviewing their investment opportunities and holding further investments a bit. Canadian dollars also -- actually also dropped in terms of reais. Our currency in reais increased and -- which in terms of sales, it might help us because the producers are able to export more products. So it might have a higher demand, but that actually has a counter effect on our revenue and our numbers in Canadian dollars. I already mentioned that the credit quality -- crunch in Brazil is quite high currently, and that creates a big burden or overburden in our credit analysis internally. And we have been reluctant to sell too much. We're being very thorough in credit evaluation internally, which also reduces the volume of sales over time. And like I said, there's an election year. This year is an election year in Brazil and also the El Niño forecast adds to the overall complexity of the situation for the agricultural sector in Brazil. Just to highlight the crisis in the agricultural market, we're not just talking about Verde, but all the major producers like Raízen, AgroGalaxy, Lavoro, they're also fighting for a company restructuring. Pretty much it's the beginning of a Chapter 11 filing. So just to highlight that again, it's not just the situation. It's an overall market complexity that is dropping the volumes. We're not being able to hit the margins that we had before as we're going to see in the next graphic.

Just one point here that I'd like to comment as well, the second bullet on the left side of the chart, Lavoro prepares to file for bankruptcy protection. This is something -- the key points that hit our Q2 bad debt provision. As I present as well in our numbers, we have around [ 400,000 to 500,000 ] on bad debt provision. This is basically on the Lavoro side where we had sales for them around 2023 and 2022, then the collect should be made on 2024, but they did not pay, they renegotiate for year. And then they pay for the first installment and then just 3 months ago, they said, well, we will not pay anymore, we need to renegotiate, et cetera. So according to our policy, we were pushed to make this provision and this hit our [ EBIT BRL 0.5 million ].

Fantastic. Like I said before, that's the agricultural cycles in Brazil since 1980. You guys can see that the fertilizers -- even though the grain prices went up 134% based on a baseline that began in 1980, the fertilizer cost actually went almost doubled. They went to 226% up. So that actually shortened the margins for the agricultural or for the producers in Brazil. And therefore, everybody is reevaluating, like I said before many times, their investment strategies for this year. I believe that's it for me. I'm going to be turning over to Mr. Palucci, our CFO. He's going to go through the highlights of our financials, and we're going to host a Q&A section at the end. Thank you very much.

Okay. Thank you, Reberth. So first, the key highlights that we have for the quarter. Our revenue in Q2 was [ $3.4 million ] compared to $4.8 million in Q2 2025. And sales volume were 46,000 tons compared to 80,000 last year. So excluding freight cost or delivery investments, et cetera, the average revenue per ton increased to 40 compared to [indiscernible]. The profitability remains resilient and average gross profit per ton. Here, we exclude freight impact again as we [ showed ] in another chart that this has a significant impact in our numbers, but we still have a better result from $22 to $23 per ton. So it means that our efforts that we are doing in terms of cost reductions and SG&A reduction, they are bringing to us some results. I will talk a bit more about these reductions as well in the next charters. OSG&A decreased by 10% in Q2 compared to last year. EBITDA before no cash [ events ] was $1.2 million negative compared to $0.2 million last year. And net loss, we were $1.2 million or even worse than we had in the previous year. So in terms of cash, as June of 2026, the company had $4.1 million in cash and 5.7 million short-term receivables compared to $2.4 million last year and $8.2 million short receivables in June 2025. Here is the key chart on the financials. We can see the first lines here the [indiscernible] -- numbers per ton. So we have the total sales Q2 and then year-to-date comparing against prior year. You can see that the revenue had a significant improvement, but here we have the freight impact, as I mentioned, we're going to see this also later on in the next chart, excluding this impact. We can see here as well the allowance for expected credit loss, which is the bad debt provision, as I spoke before, CAD 518,000 basically mainly due to the Lavoro situation. And at the end of the day, the EBITDA, we had a worse number around CAD 1 million compared to last year. The operational summary, we can see 2 tables, the first one, including the freight revenue and then the second one, we exclude this impact from our results. The key takeaway from this chart, in my opinion, is that you can see that the gross margin at the end of the day remains resilient, the remaining 57% compared to 58% last year. So this means that in Q2, we were able to -- even though with lower volume to dilute fixed costs because we've made some new projects. And also, we are working really hard to reduce expensive contracts, fixed costs, SG&A [ teams ], we've made some reductions. Actually, we made some more reductions on headcount this week in the factory. And we are now prepared even if we have higher volumes to come, we are prepared to deliver because we do have in the [indiscernible] a very good fantastic news, and then we are not using them now at this point, but we can increase volume without increasing cost. So my expectation in the coming periods is when we start to see the volume growing again, increasing again, we can -- will see for sure, our production cost per ton going down. So since as Reberth showed in the chart before, we are fully verticalized company. We have [indiscernible] mining, the mining up to the delivery to the clients. So most of the costs are controlled. And then we -- of course, we can mitigate impacted EBITDA and improve numbers once we grow in volume, SG&A and costs -- fixed costs will be diluted. So it's our expectation for the coming periods. In terms of SG&A, we can see here the key reductions we've made. So first, for example, in sales and marketing expense, over 12% reduction. Of course, the fees paid to sales [indiscernible] decreased because the volume went down and then this is automatically impacted. But the key point like SG&A, for example, general and administrative expenses, we're revising contracts like SAP, Salesforce and among others contracts, legal counsel, et cetera. We are trying to mitigate as much as we can and working on negotiation and reduction on costs. That's the key point that my team and I, we are working on this [ news ]. So now I think we should come back to Q&A, Reberth, this is what I have for numbers. So please, if you did not share and send your questions so far, please do so. We do have already a few questions here. So I will address this to Reberth, so I can together answer the questions, the ones that are related to factory or financial, I can support and then the other ones on marketing and clients, et cetera, Reberth will handle.

Okay. Thank you, Felipe, for your brief update on the economics, on the financials -- sorry, not the economics, but financials. I'm going through the questions here as we speak. And there is a few questions about production, the volumes that appears to have been substantially lower than last year. And that's true, but it's not just a situation for Verde. Everybody is facing the same. Since I joined Verde as June 1, I've been traveling throughout Brazil pretty much, talking to different clients, distributors, consultants, professors, attending seminars and conferences. And it's unanimous that the volumes have been -- have substantially dropped in terms of sales in Brazil, not only for Verde. Our 40%, 42% drop in volume is pretty much aligned with the current or overall market today. Some people are doing even worse, but that's one of the points here. There is a question here about that debt renegotiation. Felipe, you would like to expand on that?

Yes, sure. So the question is that, could you give us an update on debt renegotiation where discussions currently stand? What kind of time line they expect and what outcome were they seeking? Are you primarily looking for extended maturities and lower interest costs? Or is principal reduction also part of the discussion? Well, what I can see, yes, we are talking with our creditors, our banks. We have 7 to 8 creditors at this point. And they are aware of the current situation, and we are willing to renegotiate in the middle term. It's not something that will happen fast. It takes months, sometimes even years or 1 year or more to finalize the plan, et cetera. We do not know yet. what we will be able to achieve with the renegotiation. But for sure, we will have to fit the repayment according to our middle-term plan. So it does not make sense to set up a plan that we are not able to achieve or to fulfill in the next 12 months. So the key point I'm trying together with Reberth, he has a great experience on this in his past and other companies as well. We are working on to try to do something that will be definitely for a long term and will support us. So this could be just an interest rate reduction, just rephasing the debt or even though discounting the key point. I think I'll keep moving because the next one is related to the sector as well, Reberth. so the [indiscernible].

You want to do that? Okay. I was going to read that. But go ahead. [indiscernible].

Magnus made some good questions here. Product in Q2 appears to have been materially higher than the tons sold resulting in inventory [indiscernible]. What this intention of -- the [indiscernible] anticipation of stronger Q3 sales? Or are these tons originally expected to be sold in Q2, but that customers purchase were delayed. Given the storage character of the crush spread product, how do you manage the risk of holding significant finished product inventory? Well, first, the capacity in Plant 2 is quite big. So once we start to produce, we have some like sometimes 300, 400 tons per hour being produced. So sometimes better to have a higher inventory than just to produce a lower amount. We have in our warehousing. There is also another question that [indiscernible] can address now that was asking, well, is there any risk in your product in terms of humidity or any other risk once we have new inventory? No, we do not have this risk because as you see -- you can see in the photo of our plant 2, the inventory is located inside of our warehouse, which is fully covered without any type of risk to get wet or to get dry with sun, et cetera. So we are pretty comfortable to have a bit more inventory there and our capacity is like over 15,000 tons in this warehousing. So we did not build the inventory to -- just to achieve or to supply Q3, but like a [indiscernible] strategy as well and operation cost to mitigate cost to turn on and off the line. So sometimes you just run for 8 hours straight, [ no ] day and maybe we keep 2 days without running because we have the spread capacity at this point. So the key point that's...