MBAC Fertilizer's (MBCFF) CEO Cristiano Melcher On Q2 2014 Results - Earnings Call Transcript

| About: MBAC Fertilizer (MBCFF)

MBAC Fertilizer Corp. (OTCPK:MBCFF) Q2 2014 Earnings Conference Call August 13, 2014 9:00 AM ET

Executives

Cristiano Melcher - President and CEO

Rodrigo Pinto - VP, Finance and CFO

Analysts

Joel Jackson - BMO Capital Markets

Keith Carpenter - Canaccord Genuity

Greg Colman - National Bank Financial

Gordon Lawson - GMP Securities

Operator

Good morning, ladies and gentlemen. Welcome to MBAC Fertilizer's Conference Call to discuss financial results for the three month period ended March. The Corporation’s results including MD&A and financial statements were issued on August 12th and are currently available via the Company's website or SEDAR.

Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements.

Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions implied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information form and MBAC's other filings with Canadian Securities regulators. Except as required by Canadian Securities law, MBAC does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded and broadcast live via the internet for the benefit of individual shareholders, analysts and other interested parties.

I would now like to turn the meeting over to Cristiano Melcher, Chief Executive Officer of MBAC Fertilizer. Please go ahead Mr. Melcher.

Cristiano Melcher

Good morning, ladies and gentlemen. Thank you for joining us today for our Q2 2014 results conference call and update. Before we begin, I would like to point out that we will be following a presentation this morning. A copy can be found on our Web site or via the webcast link included in the press release. Also with me today is Rodrigo Pinto, our CFO.

Our goal for today is to provide an update on our Itafós SSP Operation and review our Q2 results. We will also share details on our inventory profiling activities and efforts to strengthening our working capital. At the conclusion of our remarks, we will open up the call for questions.

Going to Slide No. 2, update on the action plan while Q2 represents my first full quarter as CEO since joining the Company, while we faced certain challenges during the quarter and were not able to reach all our four term [ph] goals, we were able to make important and continued progress on all of the five components of this strategic plan that we unveiled at the beginning of the year. The strategic plan which is comprised of five key components ranges from strengthening our balance sheet to positioning MBAC for future growth.

I will now briefly comment on the progress made on each of the five elements. The first element, which is to put our balance sheet on a solid footing certainly has been a priority of the management team during the second quarter as it also is a prerequisite for some of the other elements. Rodrigo will give you more a detailed update but I can anticipate that we made substantial progress in the past few weeks that we are paying [ph] on the working capital facility for approximately $20 million for each percentage is expected in the next few days and that we were also very close to reaching definitive agreement with all our senior lenders on the re-profiling of our project plant.

And the second element, which is related to the optimization of our ramp up, unfortunately we were not able to achieve commercial production in Q2 as originally planned, primarily due to working capital constraints. We nevertheless are confident that with the newly obtained funding, we will be able to be on track quickly again and are anticipating now on reaching commercial production until the year end.

In terms of operational excellence, all I want to say is that we now have implemented a structured approach to pursue operational excellence within MBAC, that we are looking at initiatives both to increase our prudent productivity as well as initiative to review fixed and variable costs and we are looking forward to be able to soon communicate the results of these initiatives to MBAC.

In terms of positioning MBAC as the supplier of choice, I want to mention that we are already producing a product of recognized quality that the market is growing at a very fast pace in our target region and that our focus is now achieving consistent production volumes in order to be able to able to meet the strong demand.

And finally with regard to future growth, we continue to see that we will pursue it at an appropriate point in time and that our full focus in now on our Itafós operation. Nevertheless, we want to remember that we have a very high quality phosphate property in our Santana project, a project which is located in the fasting growing agricultural region in Brazil and which at the right point in time has the potential to become an extremely competitive asset.

Before I turn to Rodrigo for the review of our financial results and a more detailed state of our liquidity initiative, I want to spend some time highlighting some of the key developments on markets, production and sale. Going to Slide No. 5 which regards to markets, Brazil’s fertilizer industry continues to benefit from a very favorable environment. This is due mainly to our continuous increase in the planting area and intensity of the use of fertilizers, which have driven a continuous increase and demand in Brazil.

Statistics from ANDA the National Fertilizer Association in Brazil, show that consumption of all fertilizers in the country for H2 2014 was up 7% compared to the same period last year. And that consumption in the [indiscernible] region which is our region of influence was up 16%.

The compound annual growth over the last five years in Brazil is approximately 6.7% which is one of the strongest performances globally. And that is currently forecasting fertilizer consumption in Brazil of 32.1 million tons in 2014, which would be yet another record year. The Company has also witnessed a decrease in SSP imports in Brazil in Q2. As you may recall imports increased last year due to potential concerns in the Brazilian markets.

While overall fertilizer demand consumption continue to grow ANDA predicts that Brazil’s imports of SSP will decrease to approximately to 400,000 tons in 2014 from approximately 870,000 tons in 2013. The Company believes that this should lead to an improved competitive environment for MBAC’s product in its target region. It is worthwhile mentioning that Brazil has the objective of reducing its dependence on imported fertilizer, given the strategic importance of fertilizer for the Brazilian agriculture, one of the largest sectors in the Brazilian economy and one of the Country’s principal export engines.

Now in Slide No. 6, commenting on the production. As I mentioned we had working capital constraints in Q2 which limited purchase of supply and spare parts and that’s resulting in lower than expected production volumes. We nevertheless ended up producing more than 42,500 tons of SSP which represents our highest quarterly total to date. With the restructuring of our debt and exit to new working capital we believe that we’re in a much stronger position and will be able to ramp up production quickly through the balance of the year.

To drive sales impact into strong demand for fertilizers in our core markets we’re also providing customers with double of its purchased SSP products in one ton bags as well as standard gold delivery. In addition, we are also providing customer stability to have micronutrients added to the SSP providing a broader product offering. Both of these initiatives are now fully operational and are expected to generate additional profit margins. Our new sales initiatives combined with strong demand has contributed to purchase commitments of 139,000 tons of SSP through the balance of 2014. Of that 139,000 tons of purchase commitment we have already received advance payments for 81,000 tons.

Also, we are being able to make consistent progress with the development of our reputation among clients due to the high quality of our product. These signs are very encouraging and give us confidence as we head into the second half of the year.

I would now like to ask Rodrigo to discuss highlights of our financial results.

Rodrigo Pinto

Thank you, Cristiano and good morning everyone. During the second quarter the company had lower than expected levels of working capital. These financial constraints affected the company in purchasing consumables and spare parts causing delays and leading to operational inefficiencies. As a result, the Company did not achieve commercial production during the quarter as previously planned. We continue to capitalize on revenues and cost related to Itafós Operations to property, plant and equipment.

With an improved financial position expected as a result of the new working capital facility and Senior Lenders' Proposal on that expansion, the Company expects to resume accelerated ramp up. We also expects to declare commercial production until the end of this year. I’ll share more details on liquidity initiatives after a review of our financial results. Looking at our income statement, there are few highlights worth discussing. Based on products deliveries in second quarter, we generated pre-commercial revenues of $7 million. We also experienced an unrealized foreign exchange gain of $0.5 million.

We experienced a significant decrease in selling, general and administrative expenses of more than $600,000 as part of a long term objective of cost containments that we put in place. We received net cash proceeds of $6.7 million on securitization of our CELTINS notes receivable. By securitizing these assets now instead of receiving cash in future years, we incurred a loss of approximately $2 million on the de-recognition associated with the time value of money of these receivables.

Completing the transaction allowed us to meet certain working capital requirements during the quarter. Our total net loss for Q2 was $7 million or $0.04 per share basic and diluted. On a year-to-date basis we incurred a net loss of $1 million or $0.01 per share basic and diluted. I’d like to now turn to the balance sheet.

Due to the liquidity initiatives being outstanding at the end of the quarter, we ended Q2 with banking debt net of $1.3 million. As I mentioned last quarter, our long term debt was reclassified for current liabilities due to the debt service reserve account issue.

Subsequent to the completion of our debt extension, we expect that this issue will be resolved and our debt amount will be reclassified to long-term liabilities next quarter. This will again better reflect economical reality of MBAC's debt.

I'd like now to update you on certain financing initiatives we’re in the process of completing. These initiatives are designed to strengthen our balance sheet and give us access to working capital necessary to ramp up production and achieve our targets for the year including reaching commercial production. The issue of working capital has not changed from the April when we indicated approximately $40 million would be sufficient to fully fund the business. Regrettably, our comprehensive solution did not occur then and has occurred piece meal basis, although significant progress has been made.

Subsequent to quarter end, we have completed negotiations and obtain final approval from a major lender in Brazil for a new credit facility of over $18 million, which is expected to be partially disbursed within the next several days. In addition to the new working capital, we have also received the proposal from our senior lenders that provides for the extension of our senior debt. I am very pleased to say that negotiations are very near completion. Given the advanced stage of negotiation that we are in and that we have to be mindful of confidentially conditions, I can only discuss the key elements of the re-profiling in broad terms.

We will be granted some relief of principal and interest repayments for deferrals. The neat terms once executed, we will represent a significant milestone for the Company. I want to take this opportunity to thank our senior lenders for their continued support and efforts at extending our debt. While this exercise has taken longer than initial expected, the effort has been worth it. Together with MBAC Senior Lenders we are able to come up with terms that are more beneficial for the Company.

The proposal now remains subject to only final approvals as well as negotiation of definitive legal documentation. These developments are expected to be completed within the coming days. As soon as the debt expansion is finalized, we will provide an update to shareholders.

I would like now to turn the call back to Cristiano for his closing remarks.

Cristiano Melcher

Thank you, Rodrigo. On balance I can say, we are making steady and continued progress. Production is ramping up. Sales are growing. Product quality is high. Interest liquidity initiative soon to be completed. We are ready to shift all of our focus to take advantage of our logistical cost advantage and capitalize on Brazil’s strong agricultural fundamentals. I also want to take this opportunity to thank our shareholders for their patience as we have worked to resolve our liquidity issues. I am confident that we’re turning the corner. The ease of working capital constraints has reenergized everyone at the Company and we are all committed to achieving MBAC’s full perfection.

Thank you for listening. I would now like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Yes, thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. In the interest of time, we will limit individuals to three questions. (Operator Instructions) Your first question comes from the line of Joel Jackson with BMO Capital Markets. Your line is open.

Joel Jackson - BMO Capital Markets

Okay, thanks. My question would be this. If I look at what your implied volume guidance is for the rest of year, we are implying it seems that you run on average below commercial production rates for the next six months to reach the mid-point of your volume guidance. So is this because you plan to build inventories through the end of the year or is this because you may not reach commercial production by the end of the year? Thanks.

Cristiano Melcher

No, Joel, basically I mean we, on average, will be below commercial production, but our intention is to reach the level of commercial production which is 25,000 tons as soon as possible. At the end of the year typically we have lower than average production volume and we are expecting lower production volume. Particularly in December we typically -- fertilizer companies typically shut down for at least one or two weeks for regular maintenance and it’s the low season anyway. So it’s a little bit aggressive to seasonality as well.

Joel Jackson - BMO Capital Markets

Okay now second question is if you are able to solve your short-term liquidity issues, get to commercial production, I know it’s early, but when do you think you can get to full production and what is your reason for volume range for 2015?

Cristiano Melcher

Joel basically we, -- all that has hold back in this last quarter was working capital. Our plan has proven capability of producing above commercial production rates, closer to full capacity. On all of the plants we achieved full capacity rates that given periods of time. So our expectation really is to achieve full capacity within 2015. The earlier the better obviously, but currently we haven’t changed our 2015 guidance. We still are sticking to the same 2015 guidance which we released last quarter.

Joel Jackson - BMO Capital Markets

Okay, and finally we see a big transition right now in SSP dynamic in your region with Yara [ph] buying a 50% stake in Galvani, including the Northern plant in DEIA, what impact would that have on your business, on your sales as you’re the customer going forward? Thanks.

Cristiano Melcher

So, we basically see this development effect as very positive part of sector as a whole. It basically demonstrates the strategic attractiveness of fertilizer assets in Brazil that typically for ourselves one has to keep in mind that Galvani's production split is approximately one third total to our target region and two thirds in the Southern part of the country. So effectively, it’s only one third of their capability which I think our area. We basically see that the demand in this area has been growing very quickly, the supply demand fundamentals' in the area will not change. So the supply will be the same for foreseeable future. The demand is growing. So, we definitely don’t see any competition issue which may affect this. I guess the fact that there is industry consolidation certainly tends to get appreciated with tight discipline and that’s another factor that can benefit this.

Operator

(Operator Instructions) Your next question comes from the line of Keith Carpenter with Canaccord Genuity. Your line is open.

Keith Carpenter - Canaccord Genuity

A couple of questions. Rodrigo, how do we account for the -- I think it's the 81,000 tons of prepayment? When does that -- how does that flow through and when would we see that?

Rodrigo Pinto

Keith, we have this as a deferred revenue on our balance sheet as a liability. The funds has been received already and once we deliver the product associated with the prepayments, we are going to reduce our liabilities and recognize the revenue, assuming we reach commercial production.

Keith Carpenter - Canaccord Genuity

Can I ask you this, just to understand that, have you guys used this money in your working capital or is it something where we would expect that to be a benefit to your income statement balance sheet going forward?

Rodrigo Pinto

The money has been made available to the Company and its part of our working capital. From the income statement perspective you will only see these amounts in the income statement once deliveries are made.

Keith Carpenter - Canaccord Genuity

Can I ask you, from the extension of the principal and interest, two questions on that? One, does that work such that whatever is extended as an example if something later this year is extended by let’s say two years, is everything within that particular lender extended out two years? That’s the first question. And then the second part to that, once you -- assuming you guys announce that and you said in the coming days, is your working capital situation result as you see right now or do you need other working capital beyond that?

Rodrigo Pinto

Keith, unfortunately I'm in a tough position here due to confidentiality with the senior lenders. I cannot disclose the key terms. But it’s been, yes, it’s I guess our assumption is it’s reasonable. We’re trying to disclose these terms as soon as possible and we’re near completion and I’ll make sure that I update all of you with all the details once I’m allowed to.

Operator

Your next question comes from the line of Greg Colman with National Bank Financial, please go ahead.

Greg Colman - National Bank Financial

Yes, guys just a couple of questions there. We back into imply that SSP price of about $182 a ton. That’s kind of below the run rate we were expecting. Is that due to discounts or incentives or is that split their market? It looks like right now, just trying to get a feel for that.

Rodrigo Pinto

Okay, no, basically I mean we’re seeing higher prices currently. Prices are above $210. That’s what we’re seeing in the region now. I guess these prices reflect the negotiations that we have done at the beginning of the year when we’re able to secure large amounts of sales commitments, however, at average prices which were relatively lower than the once that we have seen currently and reflect $182.

Greg Colman - National Bank Financial

And, sorry keeping with that, is any of the additional contracts or lock in or presales that you’ve done -- happen now, is that, it’s fair to assume that’s happening at a similar discounted spot?

Rodrigo Pinto

We are seeing a price progression as we move forward in the year. So, basically the prices that we are achieving currently are higher, as I mentioned above $210 on average but we always have to take into account the average prices that we have in our portfolio of sales.

Greg Colman - National Bank Financial

Okay, great and then just follow on I know you run at commerciality, but can you give us an indication of what COGS are shaken out on a per ton basis as you kind of trip up and close to that commerciality level?

Rodrigo Pinto

Yes, well, basically we still are capitalizing our costs as we have not declared commercial production yet. So we don’t have a very clear indication of that number. I guess it’s – as we produced lower tonnage than expected, obviously our fixed cost were not diluted as anticipated and our cost probably are bit in excess of what we had anticipated.

Operator

Your next question comes from the line of Gordon Lawson with GMP Securities. Your line is open.

Gordon Lawson - GMP Securities

My first question was answered, so I’ll switch to my next. What other sources of financing do you have available, or what sort of -- what level of negotiations are you currently at in terms of shoring up balance sheet for working capital purposes?

Rodrigo Pinto

Basically we’re looking at different alternatives of working capital, particularly with lenders primarily in Brazil, at different stages of negotiation. Those are conversations that we have on a continued basis and we’ll develop as we meet them more.

Operator

Your next question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson - BMO Capital Markets

Thanks for the follow-up. On sulfuric acid, just wanted to know, have you sold any sulfuric acid so far in the first half of year and what sort of selling prices would you expect in the second half of the year and are these sales more because you weren’t able to get the SSP volumes you saw in the second half of the year, so you’re settling more surplus than you would have thought? Thanks.

Cristiano Melcher

Yes, that’s correct. Joel, we had sales in the first half. We are planning continued sales in the second half of the year. The fact we are producing less SSP obviously frees up capacity at our sulfuric acid plant and we are able to produce more sulfuric acid plant. I guess it’s important to highlight, there is sufficient demand in the region. So we are able to easily place that test product that we have and obviously by running the sulfuric acid plant at capacity which is a plant that has already proven ability to work at full production rate. We have the added benefit of the energy credit because we have a coal generation facility attached to the sulfuric acid plant. So it also reduced our energy cost.

Joel Jackson - BMO Capital Markets

Okay so extrapolating that, maybe you could just tell us how much sales you did in this first half of the year for sulfuric acid because what you’re seeing is your average realized price for SSP was not $182. It would have been less. Can you help us understand that plus what the SSP price realization was in the first half of the year? Thanks.

Cristiano Melcher

Yes with regard to volume, we are roughly in the region of 20,000 tons of sulfuring acid sales of roughly $165 per ton.

Joel Jackson - BMO Capital Markets

So I'm just confused because you guidance is you’re going to sell about 22,000 tons for this year. So that means you basically sold all of it in the first half, is that correct?

Cristiano Melcher

I think this is for the second half, Joel.

Joel Jackson - BMO Capital Markets

Okay, so what was your realized SSP price in Q2?

Cristiano Melcher

In Q2, SSP $182.

Operator

There are no further questions. I’ll turn the back to management.

Cristiano Melcher

Right, if there are no more questions, I would like to thank you all for participating. I look forward to our next quarterly call update.

Operator

This concludes today’s conference call. You may now disconnect.

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