Verde AgriTech Limited (NPK) Earnings Call Transcript & Summary

Ladies and gentlemen, it is 12:32 Brazil time. My name is Cristiano Veloso. I'm the Founder and CEO of Verde AgriTech Plc, and we start with our call to present Q1 2020 results. Before we begin the presentation and the update, we have some sad news to the company, which we'd like to share with shareholders and supporters. Two of our former directors unfortunately died. One former director was Dr. Richard Garnet, who served at Verde AgriTech's Board for a few years. He had a very long career in the mineral sector. Having found his covered a couple of deposits as well as have been served as a Board member of several other companies. I personally learned a lot from which Richard Garnet it. And I express condolences to everyone in his family that are also met throughout the years. The other director who are former director, who are former director who unfortunately passed away is Dr. [indiscernible] who also served in our Board for several years Dr. [indiscernible] Brandon. He was a Minister of a Biculture in Brazil. He served in several other boards of important companies both in Brazil and internationally, and we also express our condolences to his family. Before we begin, I would like to ask for a moment of silence from everyone who's attending and then we will begin the presentation. Thank you. Thank you, everyone. Okay. Before we begin the presentation, while we wait for other a couple of minutes, I can see there are more people joining the call just now. I will quickly share a couple of developments we came up with as far as Investor Relations is concerned. So I'm going to share my screen and I'm going to present where you can access this information. So the first change we made last month is the monthly publication of an investor's newsletter. So the first version of this investor newsletter was released a few weeks ago, covering what happened in April. Everyone who read the to our newsletter, gets this by mail. If you have it yet and you don't want to, you can come to our website investor.verde.ag and then you can come here in the presentations in download in. You can access the information. The other -- so let me take you through this investor newsletter. So you know what you can expect from now onwards. So there will be -- on the first section, there will be an update with the link to whichever documents we filed. So for example, the 1 from April, we have link to the MD&A financial statements to the YouTube media of our results video presentation and to the press release, which was published that month. We also offer a spree of our applications, our environmental license, our permits. So you can follow here a very brief summary and a recap of what happened in the last 12 months. It's broken according to the main pit. We're developing it's broken according to days, categories and the event which we're updating here. You can also see the growth in our sales. So this one is the one for April. So of course, doesn't have the result yet for Q1. Some information on operations, some information on share, both volumes and share price. Then here on section 6, you will see -- you will see some of the ARPUs we present to share. So in the case here, we shared the video about our customers, all like a compilation a video about our purpose, the video of Q4 presentation, you will see the link to anything written by our analysts, which are shared by our analysts, which coming to the public domain. So Christopher Crestone, potatoes, which we have the link here, John gave an interview, which we offer the link here. We also will have some news, relevant news about the Brazilian agriculture sector. Every month, you will be reminded of the calendar showing when farmers are more likely to be applying our product as well as when they will be harvesting and plant in each one of the main crops. You will get an update of due date for filings. This was something we had lots of e-mails and people were also wondering when new result is going to come up. So you can get here monthly when it is when you should expect to get this update. Contact details for the analyst, coverage links to all of our social media accounts, which we will start updating more regularly. And also on #11 here, there is a way for you to schedule calls with myself. So if you want to schedule a full corporate presentation, if you're new to the story or if you haven't followed it close enough for the last while, and you want a full recap you come here, click here, it takes huge to this page here, and you can see the availabilities you choose a day, you pick a time and you schedule it, you will automatically get a web link and instructions for the phone call. The same mechanism applies if you just want an update. So this other link you have is to schedule a Q&A meeting. So in this one, we want to be going through the whole history of the company, the whole history of the project. It's just really, as it says questions and answers and you follow the same process and you can schedule it. And then we've also added a glossary option with some of the key terms, the translation, if there's any term here in this, please let us know when we will add to the list. This was put together after we spoke to about 50 shareholders in the beginning of the year, compile with a bunch of feedbacks and that's the result. We do appreciate though any further feedback. So if you think there's anything missing from this monthly update or something which you don't understand, you need more clarity, please let us know, please send us the feedback, and we'll try to improve it every month. Obviously, it won't have any material information here. So how much we would sell in a given month, how much tonnes we shipped in a given month. This we consider material information. Therefore, we only disclosed in our quarterly results. On the site or the other aspect I wanted to share is our YouTube channel which is only dedicated to investors. We have another one which focuses on filers, focus on market development in Brazil and has a lot of content on all the content in Portuguese. This one has content in English. You can see, for example, here at the presentation -- our last presentation, which had 237 views over the last month. I would strongly recommend that you watch this video here, 400 happy customers, just the beginning. It's a completion, as I said, with testimonials from a bunch of our clients and the other video strongly recommend everyone watched is this one which talks about our purpose equally very important. The last thing I would like to bring up before we begin the presentation, and I presume now most people have joined is about a crisis. So it's this website I'm sharing here, children are being badly impacted by the crisis in Brazil because poor children used to feed in their schools, unfortunately, all the schools are closed now, and you have thousands and thousands of children, which are starving. And what we did here with the support of the states and in June, which compare the less with the most vulnerable children in our state of miniseries where our operations are, where I'm from. And we're raising money so that they can get a minimum additional income, the family can get the minimum additional income. So there's no starvation. It's really the most vulnerable children of the state. So I appreciate your help. I appreciate if anyone wants to help raising funds. And to give you an idea, with as little as BRL 50 per month, which in U.S. dollars, it's a little as $10 per month per student, $10 per month per student, you can make a huge difference in terms of not allowing children to starve. So if you want to get invoked, please get in touch and we can give more details about that. So I presume all of you have joined by now, and we will now begin our presentation. You should all be seeing the slides for the first quarter. And as I begin the presentation, I would like to remind you that it contains forward-looking statements and actual results may differ. And the agenda for today, we will begin with our CFO, Felipe Paolucci, give you an update with the financials, a little bit about operations and how we respond to COVID-19. Then I will talk about our development exploration, what happened in last quarter, and then we will take questions. [Operator Instructions] So with no further ado, I would like to bring on Felipe Paolucci, who will be giving the presentation. Felipe, I'm sharing my screen. So whatever you want to meet you change slides, just please let me know. And I'd also like to -- I'd also like to acknowledge that 2 of our directors are also attending the call. So Paulo Segra here if at some point, he's in a place you can turn this camera on, we will put him on the screen, so everyone can see you. And likewise, Michael St Aldwyn, is also joined here on the call. So Felipe, please, the floor is all yours.

Thank you. Yes. Can you hear me now? Can you hear me now?

Yes, Please go ahead.

Yes. So thank you, everyone, for joining the meeting. The intention here is to show and to get a bit more in detail of what we've presented before or shared before in the MD&A and financial statements for Q1. So I'll have a few charts here, and I'm pleased to answer questions at the end of the meeting. So please move on to Slide #4 or 5. The first chart here on financial highlights. It's our P&L with the big numbers show in Q1 2020, Q1 2019 and the variances. What I'd like to highlight and first, let everyone know, this is the big picture. And then we have other chart like to get more into details of the -- and explain the variances. So our growth on revenue, it was 2020, 231%. Although, we had this growth, we still show a loss of $792,000. What is going to highlight here in the profit and loss is that we had a reduction in 9% quarter-on-quarter. And the good point here also to mention is the gross profit growth. I can see a green above in the table that the gross total value increased from CAD 105,000 to CAD 110,000. So I will get more into details, as I said before, after Slide 6, please Cristiano, where I can explain a bit more the other accounts. First, a bit about tonnes sold. We sold during first quarter 10,170 tonnes compared to 1,093 in Q1 2019. This is a massive growth of 830% quarter-per-quarter. And total revenue, we also had a big increase from BRL 154 million to BRL 510 million. But on the other hand, what I will get into more details we lost a bit on revenue per tonne consequence in gross profit per tonne. As I explained, we explained here in the third bullet point, our gross growth per tonne reduced because most of Q1 2018 sales were exported international markets where the product achieved higher gross margin per tonne compared to the domestic market. Overall export grew by over 120%, but the share on total was proportionally reduced. We have a few tables in the next chart, please Cristiano on chart #7 that will be easier for everyone to understand what's happening. So we can see in the left side, the total volume growth of 830%, as I said before. And in the right side here, the revenue per tonne decreased of 65% and also the production cost per tonne decrease of 27%. And what it explains it, you can see in the table is that the export sales last year, the world 14% of the total volumes sold. And in 2020, they were only 3% of total volume. Of course, that the price per tonne and data exports is much higher than the domestic market price per tonne because we have the international logistics, we need to -- so we have freight from the factory to the sector, to the port. We have also custom expenses, et cetera. And normally, a size of the packaging international markets are much smaller, 20 kgs or 25 kgs. So if the price per tonne is much higher than the price per tonne sold in the domestic market. Moving on, please, Cristiano slide 8. Yes. Now this on expenses, selling and general administrative expenses, we are showing here the key lines of the expenses of the company in the first quarter in 2020 and 2019. And also again, that's the first -- the big picture only, and we want to get into more details in the next chart. But what you can see as a total of SG&A., we had an increase of 50% year-on-year from BRL 561,000 to BRL 842,000. So the key point here that we want to explain in detail is why we had such increase in sales and marketing expenses and also in distribution expenses, which are the C1 that explain this -- how this increase on SG&A. So please Cristiano on Slide 9, we have a bit hill detail on sales and marketing expense, for example, which increased around 126%. And the key reason for this is that we hired 23 sales and marketing professionals, being hired in Brazil during 2019 as a full time staff, in order to achieve the 2020 goals. We're going to see later that you have the 2020 volume here. And well, we're going to be a bit more on the tail on it. Probably the sales and market expenses is something that we're going to see each quarter is growing because most of the people were hired in the end of 2019, beginning 2020. Distribution expense is also a good point to raise the tail a bit. This year, we are selling as well in the domestic market for CIF. I'm not sure if everyone is aware, but CIF Cost Insurers and Freight which means that we delivered the goods in the farmer door instead of that free on board when the customer pick up the product in our plant. But just as a percentage of the sales are related to it. Most of this is still FOB as last year. But the other point is that also in Q1 2019, we sold twice -- more than twice over 124% to other countries, which has a huge cost here on international logistics and also freight from the factory to port, So it explains the distribution expenses grow from $25,000, almost none last to a $167,000 a year in Q1 2020. So Cristiano, please move on to Slide 10. Now this on 2020 guidance and increasing sales profile. You can see that climate is driving our agricultural cycle. So most of the sales are expected to taking place from June to September. And for example, you can see in the left side here, in the graph, that we saw in Q1 10,000 last year. But in Q3, you had 63,000 tonnes. What is really a huge increase in concentration, in Q3 of the year. What we can see in the right side of the table is the last 3 years, 2 years, 2018, 2019 and also Q1 2020, you can see that 2018, we had 29 net tonnes sold. In 2019, we achieved almost 122,000. And now in 2020, we have a projection of 85% growth expected for this year, 222,000 tonnes to be sold during this period. We are at sold in Q1, as expected, 10,000 the cycle and seasonality it's more than expected. And also the revenue target that will remain with BRL 32 million for this year, which is a 76% growth expected compared to prior year. So that's the key point for 2020 so far. So please Cristiano, Slide 11. Liquidity and cash flow. Suggest Some high -- some 2 bullet points that is chose to to get a bit more in detail again of what is happening? How is our situation here on cash flow. So the net cash generated from operating for operating activities, we had an improvement of over $106 million. This was mainly due to a decrease in receivables and increase in payables. We are working on our extending accounts payable and of course, reducing accounts receivable in order to improve our working capital. And the second bullet point is about investing activities. We had a significant increase as well, mainly with the factor expansion that we started and already concluded. in 2020. And the expenses were recognized in our books during Q1 this year. Yes. Thanks, Cristiano highlighting global to be everyone to understand. The third bullet here is about net cash generated from financial activities. We had a decrease compared to last year, which was expected I think everyone knows that we have the private placement that raised over 1.8 million during Q1 2019. And this year, so far, we did not have any kind of of cash coming from debt or other financial activities. So for this we don't have this decrease. So these are big key points on liquidity and cash flows. Cristiano you can move on to Slide 12, please. Now a bit about our -- sorry, a bit of the strategy. We believe, and we are confident that we have a solid balance sheet situation at this moment. We have an ability to generate significant free cash flow. And why I'm saying it is because we still have a very good gross margin, as you can see. And as together with our sales growth, we're going to dilute our fixed costs, including cost and also expenses that are fixed. We also decreased what will deliver to us a good cash flow, free cash flow expectation for the year. We have -- in the second hand, we have also credit facilities already approved, totaling over BRL 21.8 million that you can use whatever we need, if we need, we can anticipate, for example, receivable from customers. We are offering to some customers longer term for payment, sometimes 180 days up to 12 months, if necessary. In this needed, we can anticipate receivables using this facility that were approved with 2 or 3 companies, and the average interest rate around 1% per month. So in conclusion, we believe that we have reduced the cash liquidity risk for this year, for the company. A bit on the operational improvement, we are working in the sector in the mine with ISO 9001 and ISO 14001 implementation. We have a third-party consultant company very well recognized in Brazil that are working together with our team in the factory and in the mine, and we do expect to have the certification in Q1 2021. So this will bring to us really -- with some real improvements that we really believe that it will take us to the next stage. And also, of course, in a way, we are 100% focused on improvement safe for our workforce. We want to see more a bit of it later, Cristiano show some charts on COVID, et cetera, that going to cover a bit on safe control that we have in our factory. So please move to 13 Cristiano. Yes, okay. So a bit on agri business in Brazil. This slide shows 3 key commodities trials that we have from March, beginning of March to June or April June, we can see that, for example, coffee, soybeans and corn, coffee soybeans raised a lot and corn around flat. But the key point for this chart is to show to everyone that we do expect, besides the huge crisis around the world in Brazil related to COVID-19. We do expect a growth on revenue for our business. Our business in Brazil is still projects growth even to 8.6%. So -- it's very good for our company that the business that we are 100% into it, it's like an essential business and the expectation for 2020 is still growth besides our crisis around the world and the country. So Cristiano can move on to 14, please? And now just for to-date everyone, I'm not sure if everyone is aware, but Brazilian Real devaluation and also federal interest rate decrease. So just for a comparison from January to April 2020, Brazilian real devaluated around 23%. We've achieved this USD 5, USD 5.3 for BRL 1. We had a peak last month or a few weeks ago of almost BRL 6 per dollar, BRL 6.86 around. And now it went back now in May, yesterday, it was BRL 5.3 again. So hopefully, some -- that much seasonality it's not good for anyone. Brazilian federal interest rate, SELIC reduced from 6.5% to 3% year-on-year, which is for the energy company, it's an opportunity also because now we have one lower interest rate for loans. that can support our cash flow operation and lower cost to the company. Well, I think these are the key slides on financial. So I'll pass it back to Cristiano to move on to the presentation, and we'll be here to answer your questions at the end of the presentation. Thank you, Cristiano.

Thanks, Felipe. So quickly going through our -- what we've been doing in COVID-19 response. First of all, as we said in our last meet fertilizer production pausing to their food production chain. and therefore, it's protected. So we didn't have any interruption problem, and we don't foresee to have interrupt our manufacturing activities. Therefore, all our plans are moving forward as client, respecting, of course, social distancing whenever possible in the use of masks and equipment to assure the protection of our employees. In terms of those actions we took, everyone has been -- everyone from the administrative, financial, sales, teams have been working in home office. We have suspended all nonessential business travel. And as what has been reported by several other companies, we've seen productivity increase. So we're very pleased with the support and the dedication given by all our employees in this difficult time, and we can see the results in terms of increased sales, in terms of consumer satisfaction, on customer service. So as far as the impact in home office and how to work, home office, I would even rest see it's been very positive for the company. Has also been positive that we're so happy with the system that it allowed us to expand our recruitment beyond the city where we're based, beyond the state where we are. So we're hiring people from all over Brazil, accessing other pools of talent in order to build a team which can be working remotely whenever possible. A little bit of an update in terms of development and exploration. We had 3 very important events in the last quarter. So we filed an environmental license application to allow us to produce 2.5 million tonnes per annum, that's in connection to mine pit 2. We also had some excellent news from the mining agents in Brazil. They approved our plan moderate economic which Indus interest-like feasibility steady for a cluster of mining rights that could allow us to be producing up to 25 million tonnes per year. And we applied for another cluster of mining rights in another cluster of mining rights, we applied for another mining concession for up to 2.5 million tonnes per annum production. So it's been -- was a very successful and busy quarter as far license is concerned. A little bit of the summary. We have now for our 3 different mine pits. So mine pit 1, we have this mining permit granted for 233,000 tonnes. And then we're waiting for an environmental license to produce this 233,000 tonnes. We expect to get this license before the end of the year. On mine pit 2, we're fully permitted -- permitted to produce 150,000 tonnes, and we have additional applications in the mining permit front for 25 million tones and already an environmental license application for 2.5 million tonnes. So here, we also like to expect or to believe we will be granted an environmental license by the end of the year for an additional 2.5 million tonnes, which, combined with our mine impairment could see this area significantly expanded in terms of production capacity. Mine pit number 3, we have 49,000 tonnes, and it's there, we made an additional obligation for 2.5 million tonnes, and we will be also working one of our environmental application for an additional 2.5 million tonnes. So in summary, we currently allowed to produce 199,000 tonnes on a calendar year basis from the permits, and we have additional applications as I expressed. One thing that's important to say it's on this footnote here on this slide that we can reach more than 199,000 tonnes of production this year, because of unused mining quota from last year. So last year, we have permits to produce more than we actually mined. So some of that unused quota comes to this year and allow us to hit a greater production amount. In terms of ESG, we always like to stress how little impact we have in environment. We're really borrowing a rock from an area of the graded pasture, putting it through our mechanical activation technology, accelerating the availability of nutrients, give it back to farmers who they apply it to the fields, improving productivity, improving the Nutrien density of food. This area, which is mined, it is recovered as we progress the mine pit into tropical forests. So last year, we planted over 4,000 trees. And for this year, we are planning to plant an additional 5,000 trees. All of this has been recognized in an important award here in Military sat. So we won in terms of best practices in the mining sector. So this concludes the presentation. We will now be taking questions. [Operator Instructions] We will be happy to address those as well. When we wait for questions, I'm going to try something. I don't know if it will work or if someone will work step. We had -- we're very -- we're very delighted that 1 of our shareholders came to visitors a couple of months ago. His name is Mark Bradshaw. So Mark, if you could share a little bit of what you saw in Brazil? What your impressions were before you came to Brazil? And I think it would be important to say you in following Verde since 2010, and that was the first time we came down to the site and you met other people from the team, you met all the directors, you met with our clients, you met some of the scientists doing development work. So I will -- if you want to join us on unmuting your microphone, and this isn't -- this is -- if you want to share something with us, everyone can hear you now, Mark.

This is a put-up job by Chris Veloso, who didn't ask me to do this beforehand. But I'll give you 3 minutes on what I think the key issues are. But before that, I will then talk to you about my experiences. We -- it was a great visit, and thank you very much, Chris, for that. And I think it's fair to say that is deeply impressed by the quality of the operation they've got down there. There's been huge progress made in the last 2 years. The actual mines themselves look well run. The plant and equipment is very well based. I was very impressed with the guys they had on site joined my visit. And there was a whole load of bag ready for shipment to China, which someone else may want to take up in a minute. This is a very easy and blessed operation to the extent that really, as you can see behind Chris' photo, this is a question of digging up lots of Glauconite from the ground. Glauconite is a very soft substance, so it's quite easy to crush and they crush is at their mill, bag it up or load it directly on to lorries and send it off to their customers. There's a further thing which probably hasn't been discussed much, which is that they there is demand for blending from customers because, obviously, farmers need not only K2O, but they need other nutrients as well. And I understand that that's a significant potential long-term value-added area for Verde, which I don't think it has necessarily been discussed by the public, but it's amazing what you get when you look around plants. We then went through a coffee research station, where we saw quite clearly that use of K2O was superior. That's a use of a lot of other products and certainly vastly superior to leaving coffee untreated with fertilizers. After that, we went through an avocado growing plantation where not only any did we meet the owner of that who is extraordinarily happy with his supplies so far, K2O, but also his father who has now become a customer since our business. So that was very successful. I think it's fair to say that there is a guiding a PhD as well who has, I think, going to publish some very interesting information in the coming months about the uses of K2O in Brazilian farming. So one of the key issues and takeaways that I got from this. First of all, really, this is the case of Felipe managing the cash flows properly. And I think he's given you some evidence about the various commitments he's received from Brazilian banks in order to allow that to happen. Secondly, most importantly, it's about the sales operation actually generating the tonnage required in order to become profitable and don't forget that the breakeven number here is less than 150,000 tonnes a year. So they will be nicely profitable if they make their 220,000 tonnes. My hope is they make more than that, but we will see. And then thirdly and finally, key interest is the states Minister and how they act in future to grant the necessary permissions for this business to increase its production ultimately to 25 million tonnes a year. That's a long way off. I will be thrilled if they're up to sort of 750,000 tonnes a year in the next couple of years. That will more than justify my investments several times over. But I think I would very much like to hear more from Chris because I was hoping there will be some information on this in this conference call about your continuing relationship with Minister is and how you see these permissions developing in the coming months. Chris, do you want me to say anything else? Or is that a -- as I say, this is an unrehearsed statement. So is there anything else you'd like me to cover? If any other investor wants me to cover anything. I've got to leave the call it, 7:25 -- sorry, 5:25, but happy to take any other questions, if anyone wants to be seen.

Unrehearsed things in life, Mark, are usually the best 1 so was perfect. I have no other questions. Thanks for sharing. If someone has a question, I'll bring you back in. Thank you a lot, Mark, and thanks again for taking the time to come and meet us in Brazil.

Pleasure. I encourage other people to come, and thank you for the opportunity, Chris. It's great.

Thanks a lot. So Mark Bradshaw, he is one of the founders of Mercury, which then became BlackRock, who's taken over. He's a very significant manager in London, impressed for Asset Management. He my shareholder back in 2010 has followed us closely ever seen. So I'll start at reentering some of the questions we have here.

So one first question here by Filip Elvis is your fully licensed current limit of 199,000 tonnes an amount of proved per calendar year or in talk on buying production over time, the latter? It's a 2 to combine production over time because for each one of our license, it follows a slightly different time frame, but for 2020 in terms of fully licensed capacity, you should consider 199,000 tonnes plus, as I said, the unused quota from 2019. Also, when do you expect the mining concession permit of the [indiscernible] We have a [indiscernible] which was issued for mine pit number 1. For that mine pit, we're waiting for the environmental license. And then we have an application for concession permits in 2 of the other mine pits. The other question by Stefan Baker, Chris, please speak to the continuity to sell more to China and associated revenue increase versus the lower domestic price per tonne. So -- it's -- at this point, I don't know if the potential to sell to China is much greater than what we've been doing. So far, we've been supplying niche markets in China. We've been competing against a product called poly hay light which is sold in China by a company called ICL, it's royalty company, and we're also competing against potassium sulfate. There have several trials going on. Our distributors seem very excited. But it's always going to be a very small portion of our business in comparison to the Brazilian market, which is far more significant for us. What is no doubt, very encouraging is to see Chinese farmers, the Chinese government paying for this project about 10x more than a Brazilian farm is currently you're paying for it. Another question by [ Ricardo Runda ]. What about the ambient of the environmental license, how much of it is already allowed to produce this year? And how much do you project it will be issued by the state of this year? So I think throughout the presentation, I went on in terms of the license on the slide, which has a summary and I addressed that. There's a footnote to the bottom, which which has the number of about 250,000 tonnes. And how much do we predict it will be issued by the state this year as Mark Bradshaw was saying. We've had some very good feedback by the government and I'm encouraged or I have big hopes we will get it issued before the end of the year for additional for additional production. So those were the questions we received unless there is any other question. I will conclude today's investor call. We believe couple of more minutes, just see if anyone wants to to ask any other questions. No. Okay. So this will be available in our YouTube channel. If you haven't registered to our newsletter, please do so on our website. At the bottom of the page, there is there's a place where you can add your e-mail, and we'll be sending news and update. So thanks a lot for everyone who joined today to be reversed on the call. Thanks a lot for everyone who is watching this on YouTube, and we're very excited. We're very excited about the work we're doing in Brazil. We're very excited about what we we believe in what we can accomplish here. And we're excited about coming up with given better news in a couple of months' time or in a few months time for our Q2 results. If anyone wants an update, Q&A a full corporate presentation on to share, as I showed just get in touch or just use those links and schedule a call with us. Thanks a lot, everyone. Have an excellent day, and stay safe. Bye-bye.