Verde AgriTech Limited (NPK) Earnings Call Transcript & Summary

Hi, everyone. My name is Cristiano Veloso. I'm the Founder of Verde AgriTech Plc. And I would like to thank you very much for joining us for our Q1 2021 results meeting. If you're watching it live, thank you very much for taking your time to be here with us to contribute, sending questions, which we'll pretty much look forward to answering all of them later on during the presentation. Thank you for attending it. So if you listen to our Chief Financial Officer, Felipe Paolucci, giving the financial presentation for the quarter. And if you're watching it on YouTube, thanks very much for doing the same. Thanks very much for your interest in Verde AgriTech Plc. I will allow then Felipe Paolucci to begin the presentation now. [Operator Instructions] So one more time, thank you very much for being with us here today, and Felipe please go ahead.

Thank you, Cristiano. So thanks, everyone, for joining. I'm going to present the Q1 2021 results for everyone. So first, we have our disclaimer, which will be publicly later in our website and everywhere to look into details everyone, if needed. Beginning with the Q1 highlights, I'd like to say that we still will remain with a good credit limit approved of over BRL 22 million with an average interest rate of close to 1.1% per month. Currently, the company has a total loan of close to BRL 10.5 million. Most of it in long-term perspective, for 3 to 5 years' time of loans. We've ended Q1 with 2.1 -- $2.02 million cash held by the company with an increase of 150% year-on-year. A bit on profitability, gross margin increased also to 41% in Q1 2021 compared to 35% last year. Sales increased by 63% in Q1. And the company recorded a net loss of $1 million in Q1 2021, what is in line with the company's expectation for the first quarter, mainly due to the seasonality of our business. And revenue increased by 63% in Q1. And if you consider that exclude the exchange rate impact, I would say that our growth in revenue is over 110% year-on-year. Operational. The company still fully permitted to mine 482,000 tonnes per year. Plant 1 is in operation with BAKS since beginning of the year, end of 2020. And currently, 4% of our sales are in this product already the BAKS, and 14% of the orders in the quarter end was already with BAKS. We expect to launch a new technology in a few weeks, and a webinar will be held on June 9. Everyone is invited, and if you want to receive also invitation by e-mail and newsletter. On the right side of the screen, you can see that we had another strong first quarter in growth. The company has announced already in the last press release a 10% increase in our revenue guidance to BRL 55 million against BRL 50 million that we had before, which represents already a 56% growth year-on-year. So what's good to highlight as well is that it continues to see this strong growth, we will be probably improving also this target again in the coming quarter. Hopefully, it happens soon. The company continues to make investments in highly qualified employees. What also will be explained later, you'll also, of course, it impacts our SG&A expenses. Moving to financial statements, financial statements in the next chart. You can see Q1 in the left side, 2021. Q1 2020 in the middle in the right side the comparison year-on-year. As I've mentioned, the revenue grew over 63%. Production costs, a bit lower, 48%. And in consequence, our gross margin increased close to 100% to CAD 342,000. Gross margin also increased to 41%. This gross margin growth is mainly due to CIF sales, what impacts here in our revenue. Sales expense is growth of 26% and general expenses 66% year-on-year comparison. I have 2 charts later to explain a bit more details. And the operation profit loss before noncash events, we have [indiscernible] the last year, 34% worse than 2020, mainly due to general expenses. Going down, net profit and loss, we've ended the quarter with a loss of $1 million against $792,000 last year, and this $1 million was already expected by the company for this quarter. A bit on values per tonne, which is very important to our business as well. You can see the tonnes sold, we had 17,000 tonnes against 10,000 tonnes last year. Revenue per tonne is [ a wash ]. We are $50 against $50 last year. And the product cost per tonne, a decrease of 10% the year mainly due to exchange rate impact that reduced our Brazilian -- our cost is in Canadian dollars. And then gross margin of 41% against 35% last year. A bit on sales. You can see here on the left side, third quarter the volumes sold by the company. In Q1, as you can see, we came from 2018 of 0. Our factor was concluded end of Q2 2109. And then 2019, just 1,000 tonnes, 2020, 10,000, and now we are already in 16,000 in the quarter, the first quarter of the year. So that's a good comparison. And you can see that in 3 years, we come from 1,000 -- to 2 years back from 1,000 tonnes to 16,000 tonnes in the semester. In the right side, revenue also shows a relevant increase. It shows a trend of growth that we are expecting for the coming years as well. from CAD 154,000 in 2019 to CAD 510,000 and then CAD 831,000. On sales, general and administrative expenses, as I've mentioned before, the company is investing in people, high qualified people that going to support our growth and also to achieve our customers' expectations at extremely high level. So it, of course, costs us a bit. And then it explains why our sales and max expenses increased for 14% in Canadian dollars. And in the second line, the product delivery freight also increased I want to show in the next chart as well, we are focusing in CIF, which we can control much more the date, the exact date that the client will receive the product and this help us in the factory as well. Related on general expenses, we have here 5 expenses that we opened in the presentation, general administrative, that shows an increase of 118%. And then IT -- of course, IT generally, I'm going to explain that next chart. But IT, we can say that basically we are working with Salesforce. For example, when we have additional expense as well on additional people, we keep costs towards the year. And then the end total general expenses, an increase of 66% year-on-year. Now Chart #9, we have the sales expense on the left side, general on the right side. In the sales expenses, we can see that the total growth is basically due to total marketing sales, 14% and then freight. We can see that freight, we had like 14% are at in 2021. And in general, expenses also on the right side, you can see that the key point here is that we have additional 12 ad administrative employees, head count increasing from 14 to 26. And also Q1 2021 expenses related to incentive compensation. The last one here on chart, you can see FOB against CIF. FOB, the freight is a responsibility of the customer on CIF, the freight responsibility of Verde. We can see the growth here last year, we had only 300 tonnes sold on CIF. In this year, we had 6,600, which represents around 14% of the -- 40% of the total of the quarter. So that's a huge increase that supports in the freight expenses increased a bit the gross margin. But basically, the good point of it is that the company announced the calendar, the schedule and the dates that we expect to -- which product to be removed from our factory. What helps a lot our supply chain. On financial summary, a bit on revenue. So revenue from sales in Q1 was $831,000 higher than -- was $831,000 about 16,500 tonnes sold at a price of $50 per tonne. This average per tonne, as I've mentioned before, is pretty similar to last year. On profitability, sales increase of 63%, and the company recorded a net loss of $1 million. What as I've mentioned as well, in line with the company's expectation for the first quarter compared to a net loss of $792,000 last year. So this $216,000 increase is mainly due to additional expenses in order to continue growing in accelerated pace while upholding also the customer satisfaction. In gross margin, at the end, was 41% compared to 35% last year. On cash, the group increased by 150% to a total of $2.02 million on hand at the end of the quarter compared to $806,000 last year. One of the reasons here is the loans that we took the opportunity to take last second semester of 2020. And this helped us for our cash flow perspective and is supporting our growth and long-term sales to the customers. Here, we have a summary of the interest-bearing loans and borrowings of the company that totaled 10.5 or $3.3 million that is mentioned in the third chart. You can see that most of the loans are close to 10% to 12%, what is considered a good rate, taking in consideration that the government in Brazil is close to 8.08% per year in the public bond. This chart shows a bit on exchange rate. You can see that the Canadian dollar and U.S. dollar against Brazilian real has the same trend. We had a huge big devaluation in the beginning of the COVID-19 last March 2020, and then we had also a peak in the Q1 of this year. And then now we reduced the CAD 4.36 and USD 5.29 in but actually compared year-on-year, we are significantly, the real is significantly weaker than Canadian dollar and U.S. dollar. On potassium chloride price, we can see that we had also last year Q1, a big relevant devaluation of the potash price CFR Santos Brazil. And now we do see a trend and then we had in the last week, a few weeks an increase of the potash price closing now in May, close to $355 to $360 per tonne CFR delivered to Brazil. And what, of course, is going to reflect soon in our sales price and revenue and probably profitability. The second chart, you can see a 30-year history comparison from May 1991 for the last 12 months. So you can see that the price is not that low anymore, but we are -- we can still have significantly increased in the coming months. This chart summarize a bit in the year-on-year sales growth. The first table on the top shows the tonnes. You can see that 2018, 29,000 tonnes; 2019, 119,000 tonnes; 2020, 243,000 tonnes. And now our expectation here is close to 380,000 tonnes. So it's a growth of 56% around. We had in the beginning, a target of 350,000 tonnes and the revenue of BRL 50,000. And what we are revising so far is the revenue of BRL 55 million for 2021. Chart #16, revenue, we can see is the full year revenue in 2020 in Brazilian reais. You can see in 2020, finalized BRL 35 million. At the end of March, we had BRL 3.5 million of revenue. But we also had on hand in the end of the quarter additional another BRL 14 million of sales and what makes us confident to deliver this BRL 55 million revenue target revised for 2021. Cristiano, that's it. I think we are here to -- for Q&A session. Anything you need, I'm here to support.

Thank you, Felipe, Excellent. So ladies and gentlemen, we've received a few questions so far, but I was hoping for more. At the moment, there are only 3 questions. So let's start with them, but let's try to keep the interaction. The first question comes from Chris, and he's asking what impact is the local drought likely to have on your company target of BRL 55 million for 2021? Chris is correct. It has been a little bit drier in some regions of Brazil this year. It's not affecting all the country equally. But the good news is that we're expecting some rain for Saturday, which would significantly improve that. Having made this disclaimer, the short answer for your question, Chris, is that we don't expect any impact from the local drought to our company target. We will carry on working as hard as we've been to make sure we can achieve or perhaps overcome this sales target for BRL 55 million. The next question by Mark. Mark is asking might it be possible to borrow money from a Canadian bank where the interest rates are far less than your local banks? We've spoken to Canadian banks. There's always the possibility. One, we don't have any conversation ongoing with any Canada at the moment about a loan. What usually happens, Mark, is when you are borrowing money in a strong currency, let's say, in Canadian dollars and U.S. dollars, and when your operations or in Brazil, weak currency, very volatile, it's often more prudent for you to be borrowing funds locally. And when you adjust rates from a stronger currency -- when you adjust interest rates from a strong currency to a weak currency, quite often, they translate to be equivalent, let's put this way. Felipe, would you like to add anything to Mark's question about borrowing money internationally?

Yes, just one point that I think should go to highlight that we go to a loan in strong currency, as I've mentioned, I know it's a bit cheaper. The interest rate per year, however, would need to hire a head, financial head in Brazil hedge. And then this will cost maybe 8%, 10%, you can say in the perspective of pandemic situation like we are, it might be also even achievable. So in the end of the day, the cost could be much higher, and it seems to be cheaper, but at the end of the day, might be higher. So I prefer, the company preferred to take these loans in Brazil, our currency. And to avoid this currency mitigation, even though that's not that cheap this kind of [indiscernible]

Having said that, Felipe. If you could you please stop sharing your screen, so we have a -- so it's -- sorry, share your presentation, your -- but Mark, by all means, if you want to lend there some money, we're open to it. We're open to listen to proposals, and if anyone watching on this presentation, watching this presentation in YouTube has some proposals, some suggestions from international lending, we're always open to suggestions, and we do respect a lot, the very strong background lots of our shareholders have in finance and transactions, best in banking. So we are always open to listen and to evaluate all the ideas, for fact. The next question comes from Jeff who is asking, have you noticed any change in farmers' attitude to trying new products given the substantial increase in grain prices and to a lesser extent, coffee and sugar? Yes, Jeff, we have noticed an increased interest from certain farmers to pay more attention to what we're doing. But also some farmers, they -- it's an interesting negotiation, isn't it? So yes, we've increased our price from last year to this year. But it's interesting because when we talk to farmers, they -- a lot of them, they are not necessarily happy with the fact that our prices went up considerably in comparison to what they paid last year. They -- lots of the farmers, they have an expectation that the fluctuation wouldn't be as significant. In that context, of course, we have to remind them about well, essentially to two things. The first one which is that everything is going up, as you said, whatever they're producing has also gone up a lot in price. And the second aspect is how fertilizers. They are priced -- even when you produce locally, even when they produce domestically, they are priced against the international commodity or in connection to the international commodities. So for example, Petrobras that produces urea in Brazil or, for example, Mosaic or Yara that produces phosphate fertilizers, even though it's produced in Brazil when it comes to them for pricing their products, they don't necessarily discount the price because it was locally produced. So that's a bit of the conversation we have with some of our customers and some of our potential customers. The next question comes from Chris. Did Felipe mention the value of presales orders when projecting your revenue for 2021? Did he say BRL 40 million or BRL 14 million preorder sales in Q1 for 2021? Do you want to answer that one, Felipe?

Yes. 14, 1-4, we had 3 orders in the end of Q1, which is pretty higher than last year what makes us more comfortable to achieve the BRL 55 million in the end of the year.

Thank you, Felipe. The next question. Thank you, Ron, for attending our call. Thank you for being our loyal customer in Brazil. And Ron is asking, how is processed to produce K40 from extraction to storage? What is the necessary infrastructure? So we operate with -- it's an open pit mine. We extract the ore from the mine pit. This is transferred to our industrial facility. In our industrial facility, the product is crushed, and then it's ground, then we separate, so the product is of the correct [ fines ]. The setup of this operation is what was developed, the inspiration from Cambridge University, which is what we call our Cambridge tech, one of our technologies. And it is essentially that up to the production. Then we store the product. We can -- we either store it in sheds or when it's for a delivery or we store it in totes or big bags, how they are known in Brazil. The second question, what's the necessary infrastructure. So of course, it's the site, it's the mine, it's the transportation link between those 2, requires a lot of electricity because of the production process. So I hope I've answered your question. Next question by Jeff. Felipe mentioned that your admin head count increased by approximately 2x to support your ramp-up in sales. How should investors think about your ability to grow sales moving forward in regards to leverage per employee? We've always, Jeff, been very understaffed in Verde. And growing as fast as we've been, we realized like often how understaffed we are in a number of areas. Trying to answer more objectively your question about how should investors should think about the ability to grow sales in regards to leverage per employee, it is our expectation that as people are better trained as the process are better designed and implemented as with our systems. For example, we are setting up SAP now for the admin staff for the admin sector as we're getting our [indiscernible] as those types of systems as they improve, we would expect an increase in productivity. The other important aspect here is when we went to build our team, we had the choice between hiring very experienced people to the day-to-day activities. Let's put it this way. But they're experienced people and very good people. They would completely blow up our treasury. Our costs would literally be 5 to 6x greater than what it is in terms of admin, in terms of sales. What I'm asking now here also applies to sales 5 to 6x for us to get very good people and very experienced people. We would be looking at 5 to 6x higher costs than what we currently have. The other alternative we have would be to hire experienced people but not necessarily the best in class, not necessarily the best people in the market. In which case, you would get the experience, but you wouldn't get extraordinary people, let's put it this way, working for Verde. The path we took, and I'm very pleased about the fact we've taken this path was to hire people by their characteristics, by their personalities, by their behavioral traits with a sort of profile we wanted for each one of the positions. And when we created those profiles for each one of the positions, be it sales, marketing, admin and when we went out and advertised those positions, we had -- some positions we had like more than 10,000 people answering all the different questions you need to create this sort of personality profile. And then the system would rank, all of those 10,000 people, according to what we had originally established, which would be the requirement we had. And then we would go and talk to the top 3 people from 10,000 personality profiles. And often, what we were finding was that between those 3, you would have 1 person -- all of the 3 would be like excellent, like would be phenomenal in terms of the characteristics we were looking for. But often, you would have 1 person there who would be experienced and what would be already in a very successful career, would already be earning a significant amount of money and would already be employed and would only been looking to Verde because it really believes in our purpose, really wanted to be part of what we're doing. And then the other 2 people who we would find would be young, young people, recently graduated or in many cases, even like in the last year of university. So we've essentially been able to hire a whole generation of professionals who I have no doubt a few years down the line will and would become in other companies extremely successful professionals. So that is the third approach we took and which was to hire this extraordinary quality of people, but a lot of them still not experienced enough, and with the cost, which is significantly lower than if we had gone for this experienced personnel of similar capacity. So to wrap up the answer to your question, Jeff, I understand that I really believe that the productivity and delivery from this team we've built is going to grow so much, the advances, the improvement they're going to be so exponential that I do expect a significant increase in productivity. And I do expect to be able to be leveraging a lot the delivery per employee. A couple of good books on that topic about really good one is No Rules Rules about the culture in Netflix, there's not a good book with [ real principles ], which helps. And then of course, there is The Everything Store from Jeff Bezos. I think those are 3 books which kind of like have inspired us to go down that path. Next question by Arthur. I worry about logistics. What is the plan to transport the production growth? Arthur, that's an important worry. It's something we're always trying to plan ahead, we've hired a phenomenal guy who is our Head of Logistics. He was with a big trading company, young, thirsty guy extraordinarily smart and he's doing an amazing job, not just managing our current challenges but very importantly, preparing for the source of size we want to we want to achieve. Part of this plan, without going into a lot of detail, is establishing relationship with a lot of transportation companies which are active in the main routes we're supplying. Another component of it is creating a robust database with independent drivers that work around that area and to routes we're currently looking at. So we have this aggressive database. And the third leg of this strategy is really using a lot of systems to increase productivity. So we have some very useful systems. And one thing we recently implemented, which I think is interesting to mention here is there is a system which the first person who mentioned it to me was our Director, Michael St Aldwyn, which allows you to create, to get the square any place in the world a 5 by 5 meters, and that square we give you 3 words, which if you give 21, they can find precisely that square in a map. One problem we will have in the past was that a farmer to tell the transportation companies or tell us where the farm is was very subjective. I go there, you turn right and then you turn left. Google Maps wouldn't work the way you want in rural parts. So as of now, every time someone purchased a product for us, one of the things we get is this specific coordinate where he or she wants the product to be delivered. So that makes it easier and more cost efficient for us to negotiate with transportation companies but also makes the quality of our services better for the farmer who will have a higher guarantee that he will get the product delivered. Next question by Ian. Please can you break down the general admin expenses, which appear to be 65% up? What proportion of the increase in staff, what else is driving this increase? A big component of that increase was bonus payment, and then some of it was the admin cost, which Felipe also mentioned. That concludes...

And there is another question from them is a chat not in the Q&A but is asking FOB against CIF now around 1/3 of the volume from 3% in 2020. What's the reason for the change, please? And what are the advantages, if any? That's his question.

Do you want to answer?

Yes. Yes. What we are trying to do is to drive our company, especially in the low season like Q1 and Q2 for a higher volume in CIF. One of the reasons is that we -- when it's CIF, we have 100% of the control of the accepted day that we want to load the trucks, the type of products and the mix. If the size of the trucks, what matters as well. So it's all related to logistics, how we can manage it. Once it's CIF, it's easier for the company to handle it. What we had in the past, we did not push a lot the clients for CIF sales. And one reason is that it costs for us an additional cash flow for sure because basically, most of the time with 3PLs, we must pay them between 21 to 30 days, and sometimes we do sell much more than that. So what makes us 2 situations are we have on hand cash flow to support this operation or can go through to banks and pick up the money, anticipated to receive these accounts receivable. And this year, we are much more prepared to do this CIF. And as Cristiano said, we have now a logistic area that's responsible for that. And so far, it's going very well. We are close to 100% on time in full with the orders on CIF. So it's going very well. And I think that's going to be the trend. And maybe, I would say, the full year maybe it's going to remain 30% CIF or even 40% to 50% CIF.

Thank you, Felipe. I would like to acknowledge the presence in this call of Dr. Derek Fray. What pleasant surprise you see here, Professor Derek Fray. It's a great honor to have you participating in our presentation. I really look forward to connecting soon with you again. Professor Derek Fray for some of you who are we have been with the company for a longer period of time. He is the key man behind our innovation, behind our technology development, both in terms of inspiration and in terms of the work he carried out for us in the University of Cambridge back a few years ago. Professor Derek Fray is a fellow of the Royal Society, he is one of the most distinguished scientists in the U.K., and no doubt, one of the smartest have ever had the pleasure of meeting. And one sentence Professor Direct Fray you thought me which I probably repeat to everyone at least once every couple of days is one thing you taught me in Cambridge, which is the importance of finding simple solutions for complex problems. So I very much remember as in our talk and have the meeting in your office and you turn to me and say, "Cris, I like finding simple solutions for complex problems." That has been extremely inspirational, very for me, and I'm sure for several people to whom I've shared this story. So thanks a lot for attending our presentation. I can see -- I think there's a note question. So the other question by Ian. So how's last year's bonus being paid in this year's figures? I do want to -- do you want to answer that?

No, that was another type of incentive paid this year. The last year was paid year this year, but it was [indiscernible] in 2022 results.

Any more questions, ladies and gentlemen before we complete our Q&A and Q4 conversations? So Jeff. Jeff has a question for Felipe. What's the average amount of time that you collect from farmers?

So yes, the average time, we have a very significant part of the sales in 30 days, which normally we do not charge any interest rate on that. After 30 days, we do have a 1.39 interest rate per month at this point. It's changed depending on the market situation and other factors. But I would say that the average collect receivables is around 3 to 4 months in an average perspective. Managed base, that's it.

Thank you, Felipe. So it doesn't seem to have any more questions. But as always, we are equally available by e-mail, by WhatsApp. So if anyone wants to discuss anything further, it's always a pleasure communicating with you all. I would like to thank very much each one of you who attended this live presentation. I would like to thank you for watching it on YouTube. And if you're watching it now on YouTube, and if you like it, please do not hesitate to share this presentation to share our website with people who, like self might be interested in joining us on our quest to improve the health of the planet, the health of everyone. So thanks a lot again and stay safe, see you soon for the technology launch Q&A session, which by now, I would expect all of you either on YouTube, you know about it already or if you're watching it live to have subscribed so we can have another Q&A session, which I'm looking forward to in a few days. Thank you very much. Buh-bye.