Q3 2020 Selling and General Administrative ExpensesHello Fellow Verde Shareholders,
As I am sure you have gathered, retired former CFOs, CAs and CFAs (and especially those of us who are all four) like nothing better than to read through recently released quarterly reports and their accompanying MD&A documents and news releases. Especially with fresh coffee in the morning or a glass of wine after dinner, and even more so when Covid 19 restrictions has us parked at home.
Some of you seem to appreciate the due diligence work I undertake for my family's investment portfolio, and have encouraged me to continue sharing my observations and promoting comment and discussion among shareholders, potential investors and hopefully in a roundabout way with the leadership and management team at the Company. Here is my latest covering the S&GA expenditures reported for Q3 2020.
These expenditures are primarily incurred in Brazil, although some of the significant salaries are still denominated for some strange reason in Canadian dollars. This means that certain key officials living in Brazil and dealing with personal expenditures in the local currency received in effect a 28% increase in their local compensation. I am pretty sure most of us did not enjoy a 28% increase in our annual income this year - perhaps this is a situation the Compensation Committe of our Board might take a look at?
Given the local currency cost, I have recast the Q3 numbers into Brazil Reals, as shown below:
Sales and Marketing
2020 R$1,146,000
2019 R$1,462,000 Decrease of R$316,000 (21.6%)
I believe this decrease reflects the full cost of the termination of the new VP for Sales and Marketing who was hired in early 2019 and fired in September of 2019. There was an accrual of R$320,000 at the end of Q3 to reserve for his claim of wrongful dismissal which I believe is still pending. This means that the Sales and Marketing expenses are otherwise flat, which given a 68% in sales volume suggests the team is becoming more efficient and effective.
Goal for Q4 and 2021 - try to remain within the actual expenditure envelope or budget, while significantly growing sales.
General Administrative expenses
2020 R$899,000
2019 R$718,000 Increase of R$181,,000 25.2%
I believe this kind of increase iin an overhead cost is unacceptable - senior management needs to get an immediate grip on these expenditures and bring them back to a more reasonable baseline. The MD&A states; "These costs are comparable with Q3 2019 and year to date for the previous year". I'm sorry, a 25% increase is not "comparable to last year", or at least wasn't when I was providing explanations for financial variances as a CFO. I am not impressed.
Goal for Q4 and 2021 - set a budget for 2021 of no more than R$700,000
Distribution expenses
2020 R$989,000
2019 R$318,000 Increase of R$671,,000 211.0%
OK, so sales increased by 68% in Q3, so we expect distribution costs to increase. But by 211%? Really? I strongly believe that this is an expense category that requires more analysis and control and would benefit from ongoing focus from all levels of management. Our improving Gross Margin on sales is being eroded by letting more costs than necessary sink down to the "selling expense" category. The MD&A suggests that because the volume sold as CIF (Cost Insurance and Freight) has risen from 2% to 14% of sales, this explains the 211% increase. This does not compute, unless somebody is approving and paying grossly over priced insurance and freight rates. Time to bring in the auditors to have a look.
Goal for Q4 and 2021 - set a budget for 2021 that is matched to the percentage increase in sales and then managed within that envelope. Retender insurance and freight services.
Legal, Professional, consultancy and audit costs
2020 R$600,000
2019 R$292,000 Increase of R$308,000 105.4%
Here we go again. MD&A - this increase was as a result of increased consultancy fees. What type of consulting? Who did we pay as consultants and why were they selected. As a board member I would want to see a detailed accounting of these payments and to understand why existing management does not have the organic skills to undertake this work.
Goal for Q4 and 2021 - set a budget for 2021 that is set back to the 2019 baseline and have the board review and approve expenditures.
Ok, time for another glass of wine. Let me know if you have other thoughts on these expenditures.