Since I published my write-up on Verde two weeks ago, some important pieces of information have come out.
First, there was the earnings-release of Q2. As I suggested in my write-up, there was a beat on the top-line (24.9M CAD versus 22.0 guided), with higher sales prices than guided (123 CAD per ton versus 109 guided). However, net profits were lower (0.19 CAD/share versus 0.21 expected) because the costs were significantly higher than expected. This surprised me, since this revised guidance was issued in May, so I assumed they had good visibility on the costs for Q2. On the other hand, oil prices that determine a significant proportion of their (transportation) costs, have have indeed made significant highs in June. So all-in-all, these results were a bit below my expectations. Oil prices are now again bit lower.
Another topic is the capacity expansion (plant 2). Here, the company said that the first part will be commissioned in (late) August, and the second will be operational in (early) Q4. Each part will add 1.2M tons (versus 600K currently) per year (or 100k/month). The guidance is 350k tons for Q3. The current name-plate capacity is 150k tons/quarter. This brings the total official capacity to around 250k if the expansion is active on September 1. It is possible if not likely that they beat the name-plate capacity, but I think it will be tight to get to the 350k tons. Possibly they make up for it with higher margins or with higher sales in Q4 (when they will have much more capacity than guided sales), but this remains to be seen.
All these things matter, but are rather short-term effects. There were also some positive updates relevant for the longer time.
The company announced a partnership with Grupo Lavoro, the largest distributor of agricultural inputs in South America. Verde currently has around 6000 clients and Lavoro 55000, so if a meaningful fraction of these clients will buy from Verde, it will boost Verdes client count. I think this partnership is also a nice stamp of approval for their products and more such partnerships may come.
There have also been some interesting pieces of information on the earnings call.
Somebody asked about the possibility of Carbon Credits (which I also mentioned in my write-up). CEO Cristiano Veloso gave a quite interesting answer:
The other day I heard something quite interesting: it’s a phosphate company, claiming that they expect to be getting absolutely all the revenues, from (all the profit from) Carbon Credits. So in other words, the farmer wouldn’t need to pay for it, just the Carbon credit, which this company is sharing with farmers, is going to and has been already building their business. So it is something we should probably be starting to focus a little bit more of our attention towards. We are doing some stuff. We are doing some studies and are looking at it. But my time personally and my focus hasn’t been a lot on it. That was a little bit of an eye-opener.
Obviously, if something similar would be possible for Verde that would very significant. I also like his transparency about underestimating it in the past, and adapting to the new information.
They are already selling glauconite with added microbes. “Bio Revolution” is their commercial name for this and I called it Verde 2.0 in my write-up. They had a big sale of it in the previous week with 5000 tons. Their costs to add the first microbe (B. Aryabhattai) are less than 1 Brazilian Real per ton and they charge 40 Real per ton for it, which is basically all gross margin. It has a meaningful but not very big effect on the total price per ton (around 8% at current pricing). This may become more important if the potash price drops or if they can charge this for multiple types of microbes in the same ton of glauconite. It may also drive sales growth since I think the added value is more than what they charge. In fact, the CEO said he thinks eventually all farmers will order the added microbes.
The American listing they are working on will be on the NASDAQ (and not NYSE)
In conclusion: I have reset my expectations for the earnings this year, but the growth momentum of Verde 1.0 and Verde 2.0 are still strong.
You can see the full earnings call here:
Cristiano Veloso also pitched at the Cannacord Growth Conference recently. You can find his presentation here.
Disclaimer: I am long Verde, consider me biased. This is no financial advice. Do your own due diligence.
My top stock - really enjoyed the writeup. Always appreciated!
Could you reveal your revised eps of Verde?