Fertilizantes Heringer SA
BOVESPA:FHER3
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Fertilizantes Heringer SA
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Good morning and thank you for waiting. Welcome to Fertilizantes Heringer's conference call to discuss the results of the second quarter of 2019. Today with us, we have Mr. Dalton Carlos Heringer, CEO; and [ Ricardo Garcia ], CFO and Controller. We would like to inform you that this event is being recorded. [Operator Instructions]
The replay of this event will be available soon after it ends for a period of 1 week. This event is being broadcast simultaneously on the Internet via webcast at the Investor Relations website, which is heringer.com.br/investorrelations. And there, you will also find the presentation for download.
Before proceeding, we would like to clarify that forward-looking statements that might be made during this call in relation to the company's business outlook, operating and financial projections and targets are beliefs and assumptions of the company's management as well as information currently available.
Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events, and therefore, they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may affect the future performance of the company and may lead to results that differ materially from those expressed in such forward-looking statements.
Now we would like to turn the floor over to Mr. Dalton Carlos Heringer, CEO of Fertilizantes Heringer, and he will start the presentation. Mr. Heringer, you may proceed.
Good morning, everyone, and thank you for participating in our call about the results of second quarter of 2019 of Fertilizantes Heringer. Our idea today is to talk about our agenda for Judicial Recovery, the company and financial highlights and the outlook. After the presentation, we will have a Q&A session should you have any questions. Those who are following us, our presentation is public. So you can see on Slide #4, we are making some remarks about the status of the Judicial Recovery proceeding.
On May 28, 2019, we submitted to the market the invitation to creditors. And right now, we are waiting for the list of the bankruptcy trustee in order to continue with this invitation and to hold a meeting to which the plan will be debated and approved in order for us to continue the judicial reorganization proceeding.
Now let's talk about the performance of the second quarter and the half year as well. So on Slide #6, you have the information about the second quarter of '19. Still quite timid volumes because of the low inventory that the company had when we filed for the judicial reorganization. So in terms of volume, 121,000 tons were delivered during 2Q '19. In a comparison with the second quarter of '18, which were 723,000 tons, the diversity of crops is maintained, and we maintain the same distribution by crop, that is to say not concentrated and encompassing quite a few crops. In terms of volumes delivered, this has to do with the seasonality of the period. So we delivered according to the reality of purchases of the region and also the seasonality of each one of the periods.
In the second quarter of '19, also still talking about product, our specialty products line represented approximately 55% of the total delivered, so we continue to maintain -- in spite of the low volumes, we continue to maintain this characteristic, which is a differentiated characteristic in terms of types of products, and they are well distributed by the crops that are buying in the regions that right now, the company continues its operations.
On Slide #7, we wanted to show you the evolution of the figures in -- from the first Q '19 to the second Q '19. The idea here is that the first quarter was a quarter in which we filed for a Judicial Recovery, that is to say in early February, so this means that the January of the company was a very low month in terms of operation. Inventory volumes were very low. So the capacity to generate businesses and deliver higher levels was impossible in the first quarter of '19.
And as you can see, there was an increase of 45.8% in our deliveries from 1Q '19 to 2Q '19. So we have an evolution from 83,000 to 121,000. So when you take the half year for the company, 204,000, we still see very low volumes. So what we should see would be a very important recovery in the volumes that will be sold and delivered during the second half of the year. And of course, these volumes will be stabilized at higher level, and this will bring about economic benefits to the company. We will see a much higher balance, vis-à-vis our expenses, and higher sales and also a recovery of our operating margins and as well as a recovery of the EBITDA for this period in the second half of '19.
So the reality of the second half historically for Heringer -- the second quarter for Heringer, specifically, it's usually lower. But specifically this year, we see a reality from the first quarter to the second quarter showing an important increase in the volumes delivered from the first Q to the second Q.
Now I would like to give the floor to [ Ricardo Garcia ], our CFO and Controller, who is with us during this presentation, and he will be covering the financials of the company. Thank you.
Thank you, Dalton. Good morning, everyone. Continuing the same trend, as Dalton said, we saw a reduction in the volumes that you can see on Slide #8, 83% when compared to the same period of 2018 in the second quarter. This meant a drop in volume of almost 80%. And from BRL 885 million in 2018, we dropped to BRL 190 million in 2019.
Our COGS was very proportional to the volume of sales or the value of our sales. And because of that, we are -- our gross profit this year taking into account all the adjustments made because of the Judicial Recovery in the first quarter that we had, and the consequence of that in the second quarter, we were able to improve our gross profit about 100%, percentage-wise, going from 1.7% to 3.4% in 2019.
Our freight and commissions were kept at the same level, 3.5% to 4% vis-à-vis net sales. And our selling expenses and administrative expenses, still a little bit high, mainly due to the first quarter when compared to the volumes of that period but with a very positive outlook from now on from the second half of the year on financial -- net financial income or expense in this period.
We had a gain of the exchange rate variation in June more specifically. And because of that, it became positive this year, generating a net income, and the negative result was negative still for '19 but much better when compared to the same period last year.
When we look at the EBITDA line, we see that we had 11.5% adjusted EBITDA because we carried out a sale of ICMS to third parties in Minas Gerais. And in order to realize this sale, we have 50% discount, approximately BRL 10 million in losses. And because of that, our EBITDA was adjusted at BRL 21 million, not BRL 31 million.
When we look at the first half compared to the first half of 2018, we see a very similar impact. We saw a reduction in volumes as well of 1.5 million tons to 204,000 tons corresponding to 80% reduction with a direct impact on our net income, BRL 1.926 billion to BRL 326 million in the half year. And as a consequence, we also had a gross profit maintaining percentage-wise at 4.2%, 4.3%.
Nevertheless, the positive [ H2 ] now was slightly negative this year because of the volume. So the drop in volume has a direct impact on our gross profit, and our adjusted EBITDA was BRL 77 million negative still in 2019 in the first half when compared to the same period of 2018.
And also, our financial results of the previous year was very expensive because of the high volume of debt that we had and they still exist. But now with the Judicial Recovery, it does not have such an impact in terms of interest and other charges, but the exchange [ reveration ] continues to exist. But in 2019, it had a relatively positive impact, mainly in June, and our financial results was not as important. But nevertheless, it was BRL 110 million for the half year, BRL 110 million negative.
Now when we look at the profit and loss statement on Page #9, we draw comparison between the third quarter of '19 -- the first quarter to the second quarter, and we already see an important growth in volume, 45%, as Dalton said. And this financial impact has a direct impact on our gross profit. So in the first quarter of '19, it was negative by BRL 20 million. And now we already have a positive result in the second quarter by BRL 6.5 million.
Our freight and commission expenses are 3.5% vis-à-vis net sales. And SG&A, lower proportionately, vis-à-vis the first quarter, dropping from BRL 41 million to BRL 28 million and with an adjusted EBITDA of 41% negative still in the first quarter going to 11.5% in the second quarter. And as we said before, our financial expenses -- and we had revenues in the second quarter, in fact, more specifically in mid-June, approximately BRL 40 million positive. And because of that, our net financial result in the second quarter was BRL 15 million, and in the half year, corresponding to BRL 7 million, as you can see on the slide.
And the accumulated net result as a consequence of the first quarter because it was BRL 92 million negative and with a total of 110 negative in the half year mainly generated by this period that we mentioned. And when we compare to the first half of 2018, as we said, we still have a much better result when compared with the same period of 2018.
Now let's turn to Slide #10. And here, we show the distribution and production. Here, we can see that the production of SS, Super Simples, the expenses that we had in the previous period when compared to this year, they are much lower as we see an important reduction in the net expenses of that unit. And they are represented by depreciation only that keeps the unit alive. However, it's not being productive.
So in this breakdown, you can see a drop in the expenses of this unit vis-à-vis the previous period. Continuing the process of environmental license of this unit in Parana and the documents that are necessary for EIA/RIMA are -- they have a very good perspective of being solved by the end of this year or the beginning of next year.
And when we go to Slide #11 and we talk about our cash flow, this year, we had important inflows generated by recovery of taxes from the Brazilian Receita, BRL 42 million in tax credits that we had outstanding, and the same fact occurred in the second quarter of 2019 as well, generating about BRL 78 million of inflow of taxes coming from the recovery of PIS and COFINS taxes of this operation. And with that, our cash generation for the period was positive.
In spite of all the oscillations and variations that we have in terms of accounts receivable, accounts payable, we had this from the Brazilian IRS with an important cash generation mainly regarding financing and also because of the operating results of the business. So when we compare the second quarter to the first one, we see that most of it was generated mainly in the second quarter when we take into account the whole half year.
Now I would like to give the floor back to Mr. Heringer, and he will continue the presentation. Thank you very much. And we will be available to answer your questions.
Thank you, [ Ricardo ]. I would like to highlight once again a point that has already been raised by [ Ricardo ]. On the previous slides, in spite of the Judicial Recovery still in its inception, we have already been able to carry out an operation in terms of scale and we start to see monthly increases.
Every single month, we are being able to have an operation at higher and higher levels, increasingly higher, and we continue to comply with the decision -- judicial decision of Paranaguá that allowed us to have a licensed plan for the production of SSP, complying with a judicial decision that provided for a new mandatory license with the environmental agency, the Instituto Ambiental do Paraná, the Parana environmental agency. And we have already filed all the documents, and they are being analyzed -- or the documents are already being analyzed.
So as [ Ricardo ] said, most probably, by the end of this year, we will be able to announce some news about the compliance with this judicial decision. So we're continuing with this licensing process that is already underway. And cash, although it is still low, it was enough. It was sufficient to grow our operations. So we have been able to maintain an increasingly [growing] operation on a monthly basis, and this is another point that I would like to highlight.
And the reality of the second half will be better and will be better adjusted in terms of the cash generation of the period and also the EBITDA and also serving agriculture in the areas where we are operating right now. So those of you who are following us with our presentation, we still have a few charts that show the reality of agriculture and the trend in terms of raw material prices.
So on Slide #12, we have the main raw materials for hydrogen and phosphorus and potassium. And you can see here that most probably, we -- if we analyze from where we are now and the previous 12 months, you will see a reality of prices that have a downward trend. And because of the dollar price for fertilizers, it will depend on the exchange rate. That is to say the pricing Reals for us but the trend in dollars, in U.S. dollars, is of a stable price for many of these products and some of them with a downward trend. So the -- for the main raw materials that fertilizers use.
Brazil is about to finish a harvest now and -- of the main crop, and going to the second crop now with the reality that is very good. We will probably have, based on the most recent analysis of CONAB, we will have record harvest when you add the main crop and the second drop in the regions where you have these 2 crops.
So there is the outlook, in spite of the agricultural prices, in some regions, be worse than last year. If you look at cereals, there is a trend towards an adequate revenue generation in order to be able to finance the cost of future agriculture. So for '18, '19, you see a trend of a record harvest and per revenue and per volume coming from the purchase of fertilizers at record levels, and this is a long-term trend.
We see demand from 4 agricultural products in the future improving. Brazil recently signed an agreement that I consider as extremely important for the future of Brazilian agriculture, the agreement with the Mercosur and with the European Union. And the European Union, in spite of having enough population that is stable overall, it is not growing, still has a very high demand for agricultural products. And with the reality of subsidies that is still high, decreasing over time, but still high. And with the reality of the agreement signed, we will be able to grow the exports of Brazilian agriculture product to this extremely important market, that is the European Union as a whole.
So this is the end of our presentation. So now we would like to open for questions and we remain available to you. Thank you.
[Operator Instructions] If there are no questions, we would like to give the floor back to Mr. Heringer for his closing remarks. Mr. Heringer?
Thank you very much for participating in this call about the result of the second quarter, and I would like to highlight the great work that the company has been carrying out to bring the company back to stronger levels and as a consequence, improving our results and also improving the level of our expenses. So we have been quite successful in this effort. And usually, when a company is undergoing financial stress such as is our case, sometime the companies are not able to keep a stable operation and resuming it. And I would like to mention and stress that this is not our case.
Yes, our challenge is big. We have a huge challenge ahead of us. However, we can manage it, and we are managing it in order to go back to an operation that may give us scale in order to reach a balanced situation and having our capacity according to our recovery plan that we believe will be approved in the next few months. And continuing with the process, the company has the necessary maturity for that, has the necessary structure and have clients that are placing their bets on our product and that trust us. So the idea was to make our best endeavors. Our whole team is supporting us in order to continue this process.
So once again, we would like to thank you very much for your trust, for your confidence, for your participation in this call. Thank you very much.
Thank you very much. Fertilizantes Heringer's conference call is closed. You may disconnect your lines now, and we wish you a very good day. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]