Earnings Call: Q1 2021

May 20, 2021

Hi, everyone. My name is Cristiano Velozu. I'm the Founder of Verdi AgriTek 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 pretty much look forward to answering all of them later on during the presentation. Thank you for attending it. So you can listen to our Chief Financial Officer, Filippo 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 Verdi AgriTech PLC. I will allow then Felipe Paulucci to begin the presentation now. And if anyone has any question, I believe there is a lit or at the bottom of the screen, there's a Q and A symbol, which you can click and start sending questions as the presentation progress. So one more time, thank you very much for being with us here today. And Philippe, please go ahead. Thank you, Christian. Can you see my screen now? I think so. Yes, we can. Yes. So thanks, everyone, for joining. I'm going to present the Q1, twenty twenty one results for everyone. So first, we have our disclaimer, which will be publicly layered in our website and everywhere to look in details, everyone, if needed. Beginning with the Q1 highlights, I'd like to say that we still remain with a good credit limit approved of over BRL 22,000,000 with an average interest rate of close to 1.1% per month. Currently, the company has a total loan of close to BRL 10,500,000, most of it in long term perspective from 3 to 5 years time of loans. We've ended Q1 with 2.1% 2.02% cash held by the company with an increase of 150% year on year. EBITDA on profitability, gross margin increased also 41% in Q1 2021 compared to 35% last year. Sales increased by 63% in Q1 and the company recorded a net loss of $1,000,000 in Q1 2021, what is in line with the company expectation for the Q1, mainly due to the seasonality of our business. Revenue increased by 63% in Q1. And if you consider and exclude the exchange rate impact, I would say that our growth in revenue is over 110% year on year. Operational, the company is still fully permitted to mine at 482,000 tons per year. Plant 1 is in operation with Bags since beginning of the year, end of 2020. And currently, 4% of our sales are in this product already, the bags, and 14% of the orders in the quarter end was already with bags. We expect to launch a new technology in a few weeks and our webinar will be held June 9. Everyone is invited and you're going to receive also invitation by e mail and newsletter. In the right side of the screen, you can see that we had another strong Q1 and growth. The company has announced already in the last press release 10% increase in our revenue guidance to BRL 55,000,000 against BRL 50,000,000 that we had before, which represents already a 56% growth year on year. So what's good to highlight as well is that if we continue 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 hiring qualified employees. What also will be explained later, you'll be in the house, of course, and impacts our SG and 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 and 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 C300 and 42,000 dollars Gross margin also increased to 41%. This gross margin growth is mainly due to CIF sales, what impacts here in our revenue. Sales expenses growth of 26% and general expenses 66% year on year comparison. I have 2 charts later to explain a bit more in detail. And the operational profit loss before non cash payments, we are a bit worse than 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 $1,000,000 against $792,000,000 last year and this $1,000,000 was already expected by the company for this quarter. A bit on values per ton, which is very important to our business as well. You can see the tons sold, we had 17 1,000 tons against 10,000 last year. Revenue per ton is well washed. We are at $50 against $50 last year. And the product cost per ton decreased on 10% here, mainly due to exchange rate impact that reduced our Brazilian real our costs in Canadian dollars. In the end, gross margin of 41% against 35% last year. A bit on sales. You can see here in the left side, per quarter, the volume sold by the company. In Q1, as you can see, we came from 2018 of 0. Our effect was concluded in Q the end of Q2 2018. And then 2019, just 1,000 tons, 2020, 10,000 and now we are already on 16 1,000 in the quarter, the Q1 of the year. So that's a good comparison and you can see that in 3 years, it will come from 1,000 to 2 years basically, from 1,000 to 16,000 tons in the trimester. In the right side, revenue also shows a relevant increase and shows a trend of growth that we are expecting for the coming years as well, from 100 and 54,000 in 2019 to 510,000 and then 831,000. On sales, general and administrative expenses, as I've mentioned before, the company is investing in people, high qualified people that are 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 maxi expenses increased on 14% in Canadian dollars. And in the second line, the product delivery rate also increased. I'm going to show in the next chart as well. We are focusing in CIF, which we can control much more at the date, exactly 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 or yes, 5 expenses that we opened in the presentation. General administrativity, that shows shows to us an increase of 118. And then IT, of course, IT, general, I'm going to explain that next chart. But IT, we can say that basically we are working with sales force. For example, when we have additional expense as well, our additional people with it costs to us as well here. And then the total general expenses, an increase of 66% year on year. Now chart number 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 and sales, 14% and then freight. We can see that freight, we had like 14% our FTE in 2021 Q1. And in general, expenses also the right side. You can see that the key point here is that we had additional 12 administrative employees, headcounts increasing from 14 to 26 and also Q1 2021 expenses related to incentive compensation. The second one, yes. The last one here on chart, you can see FOB against CIF. FOB is the freight is responsibility of the customer. On CIF, it defrates responsibility of Verdi. We can see the growth here. Last year, we had only £300 sold on CIF. And this year, we had already 6,600, which represents around 14 percent of the total of the quarter. So that's a huge increase that supports the freight expenses, increased EBITDA 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 each product to be removed from our factory. What happens helps a lot our supply chain. On financial summary, a bit on revenue. So revenue from sales in Q1 was 831,000 higher than less was 831,000, about 16.5 tons sold in a price of $50 per ton. This average per ton, as I've mentioned before, is pretty similar to last year. On profitability, sales increased on 63% and the company recorded a net loss of $1,000,000 but as I've mentioned as well, in line with the company's expectation for the Q1 compared to a net loss of $792,000 last year. So this 216 1,000 increase is mainly due to additional expenses in order to continue growing in accelerated pace while upholding also the customer's expectation. And gross margin in the end was 41% compared to 35% last year. On cash, the group increased by 150% to a total of $2,020,000 on hand in the end of the quarter compared to $806,000,000 last year. One of the reasons here is the loans that we've took the opportunity to take last 2nd semester of 2020. 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 sums in the total the EUR 10,500,000 or EUR 10,300,000 that I have mentioned in the 3rd chart. You can see that most of the loans are close to 10% to 12%, what is considered a good rate. Taking consideration that the government in Brazil is close to 8.08% per year in a 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 a big devaluation in the beginning of the COVID-nineteen last March 2020. And then we had also a peak in the Q1 of this year and then now we introduced the Canadian dollars to $4.36 and U. S. Dollars 5.29 dollars But actually, comparing year on year, we are significantly the real significantly weaker than Canadian dollar and U. S. Dollar. On potassium chloride price, you can see that we had also last year after Q1 a big relevant devaluation of the potash price, CFR Santos Brazil. And now we do see a trend and we had in the last week, few weeks, an increase of the potash price closing now in May close to $3.55 to $3.6 per ton CFR delivered to Brazil. And what, of course, is going to reflect as soon in our sales price and revenue and probably profitability. In 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 increase in the coming months. This chart summarizes a bit in the year on year sales growth. The first table in the top shows the tons. You can see that 2018, 29,000 tons 2019, 119, 20 20 20, 243, and now our expectation here is close to 300 and 8,000 tons. So it's a growth of 56% around. We had in the beginning a target of 350,000 tons and the revenue of 50,000. And what we are revising so far is the revenue of BRL 55,000,000 for 2021. The 16 chart number 16, revenue, we can see this is the full year revenue 2020 in bRLs. You can see 2020 finalized BRL 35,000,000. At the end of March, we had BRL 3,500,000 of revenue, but we also had on hand at the end of the quarter additional another BRL 40,000,000 of sales. What make us confident to deliver this BRL 55,000,000 revenue target revised for 2021? Siangu, that's it. I think we are here to for Q and A section. Anything you need, I'm here to support. Thank you. 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 1,000,000 for 2021? Chris is correct. It has been a little bit drier in some regions of Brazil this year. Some 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 things. 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 55,000,000. 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. 1, we don't have any conversation ongoing with any bank, Canadian bank 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, in U. S. Dollars, and when your operations or in Brazil in a weak currency, very volatile, it's often more prudent for you to be borrowing funds locally. And when you adjust rates from a strong currency, when you adjust interest rates from a strong currency to a weak currency, quite often, they translate to be equivalent, let's put it this way. Felipe, would like to add anything to Mark's question about Yes. Just one point that I think it should be good to highlight that we've got to low in strong currency, as I've mentioned. I know it would be cheaper, the interest rate per year. However, we would need to hire a hedge financial hedge here in Brazil hedge. And then this would cost maybe 8%, 10%. You can say in the perspective of pandemic situation like we are, it might be also even not achievable. So in the end of the day, the cost could be much higher and it seems to be cheaper, but in the end of the day, it might be higher. So I prefer the company prefer to take these loans in Brazil with our currency and to avoid this currency mitigation even though that's not that cheap, this kind of loan here. Having said that, Philippe, if you could you please stop sharing your screen? So we have a sorry, sharing your presentation, your but Mark, by all means, if you want to lend us some money, we're open to it. We're open to listen to proposals. And if anyone watching on this presentation watching this presentation on 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, investment banking. So we are always open to listen and to evaluate all the ideas for a fact. The next question comes from Jeff, who is asking, have you noticed any change in farmers' attitude to try 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 you talk to farmers, they a lot of them, they aren't 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 2 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 they are produced locally, even when they are produced 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 in Brazil, 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 Philippe mention the value of pre sales orders when projecting your revenue for 2021? Did he say BRL 40,000,000 or BRL 14,000,000 preorder sales in Q1 for 2021? Do you want to answer that one, Flavio? Yes. BRL 14,000,000,000, we had preorders in the end of Q1, which is pretty higher than last year. What makes us more comfortable to achieve the BRL 55,000,000 in the end of the year? Thank you, Filipe. The next question, thank you, Juan, for attending our call. Thank you for being our loyal customer in Brazil. And Juan 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 fineness. The setup of this operation is what was developed with 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 bulk 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 two, 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 headcount 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 realize 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 we improve our systems, for example, we are setting up SAP now for the admin SAP, for the admin sector as we're getting ISO. So 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 their day to day activities. Let's put it this way. But very experienced people and very good people, they would completely blow up our treasury. Our costs would literally be 5 to 6 times greater than what it is in terms of admin, in terms of sales. What I'm answering now here also applies to sales, 5 to 6 times for us to get very good people and very experienced people. You would be looking at 5 to 6 times 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 Verdi. 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 the 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 for some of the 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 up between those 3, you would have 1 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 one person there who would be experienced and but 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 be looking to Verde because it really believed 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 people, recently graduated or 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 3rd approach we took and which was to hire this extraordinary quality of people, but lots of them still not experienced enough. And with a 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, but a really good one is No Rule Rules about the culture in Netflix. There's another good book with great value of 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 Otto. I'm worried about logistics. What is the plan to transport the production growth? Otto, that's an important worry. It's something we 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 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 the roots we're currently looking at. So we have this aggressive database. And the 3rd 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. Aldwin, which allows you to create to get a square any place in the world 5x5 meters and that square will give you 3 words, which if you give to anyone, they can find precisely that square in a map. One problem we would have in the past was that a farmer should tell the transportation companies or to 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 purchase 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 service 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 G and A general admin expenses, which appear to be 65% up? What proportion of the increase is 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 That's George Sandler. There is another question from Dan. He's still through a chat. This is not in the Q and A, but he's asking FOB against CIF, now around 1 third 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 exactly 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 of 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 selling much more than that. So what makes us two 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 Christian 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, in the full year, maybe it's going to remain on 30% CIF or even 40% to 50% CIF. Thank you, Felipe. I would like to acknowledge the presence on this call of Doctor. Derek Frey. What a pleasant surprise to see you here, Professor Derek Frey. It's a great honor to have you participating in our presentation. I really look forward to connecting soon with you again. Professor Derek Frey, for some of you who 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 Frey is a fellow of the Royal Society. He's one of the most distinguished scientists in the UK and no doubt one of the smartest people I've ever had the pleasure of meeting. And one sentence, Professor Derek Frey, you taught 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 us talking, have the meeting in your office and you turn to me and say, Chris, I like finding simple solutions for complex problems. That has been extremely inspirational, both for me and I'm sure for several people to whom have shared this story. So thanks a lot for attending our presentation. I can see I think there's another question. So the other question by Ian. So has last year's bonus been paid in this year's figures? I don't want to ask No, that was another type of incentive paid this year. The last year was paid, yes, this year, but it was allowed booked in 2020 results. Any more questions, ladies and gentlemen, before we complete our Q and A and Q4 conversation. So Jeff, so Jeff has asked, question for Filipe. What's the average amount of time that you collect from farmers? Well, 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. Thank you, Felipe. So it doesn't seem to have any more questions. But as always, we are equally available via e mail, via 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 yourself, might be interested in joining us on our quest to improve the health of the planet and the health of everyone. So thanks a lot again and stay safe. See you soon for the technology launch Q and A session, which by now I would expect all of you either on YouTube to know about it already or if you're watching it live to have subscribed, so we can have another Q and A session, which I'm looking forward to in a few days. Thank you very much. Bye bye.