Fertilizantes Heringer SA

BOVESPA:FHER3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and thank you for waiting. Welcome to Fertilizantes Heringer Second Quarter of 2020 Earnings Conference Call. Today with us, we have Mr. Dalton Carlos Heringer, CEO and Investor Relations Officer; and Mr. Ricardo Garcia, Head of Finance and Controller of the company. We would like to inform you that this event is being recorded. [Operator Instructions] There will be a replay facility for this call for 1 week. This event is also being simultaneously webcast through Heringer's Investor Relations website, heringer.com.br/investorrelations, where the slide presentation is available for download.

Before proceeding, we would like to mention that forward-looking statements that might be made during this call in relation to the company's business perspectives, 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 relate 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 also affect the future results of the company and may cause results to differ materially from those expressed in such forward-looking statements.

Now we would like to turn the floor over to Mr. Dalton Heringer, the company's CEO and Investor Relations Officer. He will start the presentation. Mr. Heringer, you may proceed.

[Dalton Heringer, executive]

Good morning, everybody. Thank you very much for participating in our call to talk about the result of the second quarter of 2020. Our agenda for today, start with the discussion and analysis of the company and the Brazilian market and the operating results or realities. And then Ricardo Garcia will be making a presentation about the financial performance of Heringer. And then I will come back, and I will be talking about the outlook and the conclusion of our presentation.

Those who are following us on Slide #4, please. Here we have the quarterly deliveries, the volumes and the crops, the crops for which the volumes were delivered, as you can see on the slide. If we draw a comparison with 2Q '19 and 2Q '20, you can see that there was a very important growth, 53% in volumes and I think we should remind you that the first quarter, the figures were even higher. We had a performance that was even higher proportionately than in the second quarter of 2020, because in the second quarter of 2019, we already had some degree of recovery in the process of judicial recovery that we had filed in 2019.

So the basis for comparison was very low in the first quarter, but the comparison basis for the second quarter of '19 was higher and in spite of that, you can see that we had a very important growth, 53% year-on-year from 121,000 tonnes to 185,000 tonnes. And I would like also to highlight that we had a very similar distribution of cultures in '19 and '20. You can see that we are maintaining the company profile of having an effective participation in all the crops. There was no specific concentration in one specific crop, but you can see that there is a very wide and very diversified range of crops that we sell for. As I said before, as I said before in the first quarter, we had even higher percentage of growth.

And those who are following us, please go to the Slide #5. In the first half, 457,000 tonnes delivered vis-à-vis 203,000 tonnes in the first half of '19, 125% increase for the half year. So you can see very clearly the recovery that the company has been delivering after filing for court-supervised reorganization and all the procedures that we have been adopting. You can see that the performance is bringing about a very high operating gain. You can see that the recovery is happening as planned, so 125% increase year-on-year comparing the first half of the year. And likewise, in the part of crops, you can see that there is no big change. We keep our very diversified profile of sale per crop.

On Slide #6, those who are following us in the presentation. Here, we draw a comparison of the first quarter of the sector and the comparison with the first quarter of the company. So you can see that there is a delay in the statistics of Brazil. So we have brought you the information of the sector compared to our information in terms of quarter. You can see that the quarter -- the sector has been growing consistently around 2%, 3%, and in some years, a little bit more, in some years, a little bit less. And in the first quarter of 2020, you can see the statistics that show an increase of 13.2% coming from 6.6 million tonnes to approximately 7.5 million tonnes for the sector. This 13.2% had the impact of a very short period, of course, and most probably in the year, we will have growth again but it will be lower than the 13.2% that we had in the first quarter of 2020.

Now drawing a comparison with Heringer. In the case of Heringer, you can see that the increase was much, much higher than the 13% that is already high. We came from a recovery from a quarter that was very much impacted in '19 with only 83,000 tonnes vis-à-vis 272,000 tonnes that we delivered in the first quarter of 2020. This is a year-on-year comparison. And still talking about the fertilizer sector overall in relation to raw materials, there were drops in the local production compared to '19, 8.2%, and this drop was basically in 2 raw materials. It was basically the production of MAP and urea of Petrobras because the units were stopped and these units were leased a couple of months ago. And very probably still within 2021, these plants will resume operation. But right now, they are not operating and for comparison purposes, the production of -- local production of raw material for fertilizers had a drop of 8.2%.

And when we see that we had a drop in local production and increase in deliveries, the alternative to have the raw material available in order to make the products, you can see that the balance has to be tackled via imports. So there was an increase of 10.8% in imports reaching 5.6 million tonnes vis-à-vis 5 million tonnes in the first quarter of '19. That is to say, 600,000 tonnes more in order to meet the demand because of the higher deliveries and also because of the local production that was lower.

So let's turn now to Slide #7, in which I would like to talk about the situation of the plants. The company has 9 plants in operation in the second quarter of '19. And if you look at our history, when we filed for the judicial recovery, we carried out the -- we carried out a change with streamlined structures. And right after we filed for judicial recovery, we started operation in 7 plants and many others are not operating. And still in 2019, we have the possibility of returning or resuming operation in the Três Corações mixing unit, and we did that at the beginning of October last year. And now in June 2020, we resumed operation in the Dourados unit in Mato Grosso do Sul. And as I said before, we have 9 units in operation today. And the hibernated units are 6, so 6 hibernated units. And we have the possibility of, maybe in the future, resume operation in some of these units that are hibernating. And those who have followed our judicial recovery plan, you can know that we have also the possibility of selling one of the units, one of the mixing units. So the plan has this possibility, either of resuming operations or selling a unit.

So we have a mixing capacity today of 3.5 million tonnes, storage of 540,000 tonnes, approximately. Of course, the mixing capacity or the installed capacity is still being used at a lower level. That is to say, we still have a very big potential for growth vis-à-vis the installed capacity that we have in the company's operations. So this means that we have the possibility of continuing our growth with what we have today of installed capacity.

And I would like to thank you very much for following our presentation. And now I would like to turn the floor over to Ricardo Garcia, and he will be talking about the financial performance of the company. Thank you.

[Ricardo Garcia, executive]

Good morning, Dalton. Thank you. I will be talking about the financial performance of the quarter and the half year. Slide #9, the statement of profit and loss. We can see that the volumes grew at 53%, going to 184,000 tonnes, and this impact is on the net revenue that was -- it had an increase of 54%, mainly caused by the increase in volumes and by the current policy regarding price increases. 10 percentage points here, increasing BRL 6.6 million to BRL 41.4 million this year, which means an extremely big increase.

Freight and commissions continue to be aligned 3.5%, 3.1% vis-à-vis net revenue. It's important to mention that the decrease that we had in SG&A in 2019 represented 5% of net sales, dropping to 8.5% besides the reduction in absolute figures and this comes from the restructuring started in 2019 with the judicial recovery and by the correct decisions made by the company management, with a positive EBITDA in the second quarter of BRL 16.8 million, 5.7% higher and when compared to 2019, 11.5% negative. It's an important point of recovery in the strategy of the company. And with the devaluation of the real vis-à-vis the dollar, we had BRL 43.6 million net financial expense. When compared to the second quarter of '19, it represented almost BRL 55 million negative, so BRL 47 million negative, representing 16% of the net revenue.

It's important to remind you that this financial expense does not have any cash impact because it is basically the debt that we have in foreign currency in our judicial recovery and the effect -- cash effect will be felt maybe as of 2023 when we will have the payment of the amount referring to the court-supervised reorganization.

Let's go to Slide #10, where we identify a major growth in the first half vis-à-vis '19. As you can see on the slide, starting from 204 million -- 204,000 tonnes to 457,000 tonnes, as Dalton mentioned during his presentation. BRL 681 million net revenue compared to BRL 326 million. Gross profit, 11 percentage points of the net revenue. And when compared to 4.2 last year, you can see that this is very important.

Let's talk about the freight and commissions. 3% to 3.5% of the net revenue showing the performance of the logistics management that is kept very stable. SG&A, much lower when compared to 2019 as happened in the first quarter as well. 21.5% of the net revenue in the first half of this year represented 7% of the net revenue, BRL 20 million less than in 2019. The EBITDA was positive 3%, BRL 20 million, and net revenue, as happened in the second quarter as well, was BRL 276 million negative, with no cash impact, as I said before, and the net result, BRL 252 million negative.

In the balance sheet, when compared to the second quarter of '19, you can see that this also refers accounts receivable, BRL 133 million and BRL 154 million. This shows, thanks to the increase in volume, a better performance in our receivables. And the same, BRL 350 million to BRL 423 million in inventories, also because of the increases in volume that we have already referred to. If we look at taxes receivable (sic) [ recoverable ] is BRL 161 million, BRL 314 million this year. This justifies the drop because of the -- referring to tax credit that we have especially PIS and COFINS and impacted basically by the depreciation in the period.

In the current liabilities, in the second quarter of '19, we had accounts receivable in [ BRL 22 million ]. And this transferred to noncurrent because of the -- we have BRL 356 million in trade accounts. And most of that is for payment -- with the payment of some assets that are already earmarked. So you can see that our loans -- our loan situation brings about credibility in the market and in our sales and our accounts receivable. As I said, our shareholders' equity was impacted by the devaluation of the real vis-à-vis the dollar, but no cash impacted our deferred asset. Our deferred income tax...

[Technical Difficulty]

The interpreter apologizes but the sound is not good. Working capital, as you can see on Slide #12, you can see the major impact that we had on our working capital as of the end of 2019. We had the realization of our transfer, that is to say, our debt that was a short-term debt up to the end of 2018. And with the ratification of our court-supervised reorganization, we had right conditions to extend our debt with the recalculated value and renegotiated amount, BRL 1.2 billion impact on our working capital from BRL 780 million negative. There was an impact to BRL 107 million and maintaining it stable in the first quarter and the second quarter of '20.

On Slide #13, we see the negative impact, mainly caused by the financial expenses generated by the devaluation of the real vis-à-vis the dollar. Basically, this is the main impact on our cash flow. All the other figures were kept stable and some with benefits in accounts receivable inventory, as I said before, generated by the increase in volume, and you can see that our cash flow situation was kept quite stable.

Basically, these were the data I wanted to convey to you, and I would like to give the floor back to Dalton. Thank you very much.

[Dalton Heringer, executive]

Thank you, Ricardo. Basically, what we saw in the financial performance was a major recovery in terms of margin and a positive performance also in terms of EBITDA and cash being kept at a very good level in the quarter. And there was no drop in the short-term cash so our investments, as I said before, are quite low. We do have the production capacity for more than what we are doing right now.

Our payment process for short-term debt is very low. And what we had scheduled in our judicial recovery that was approved is already happening. That is to say, the labor payments are totally on schedule and on plan according to our creditor's agreement that was approved and ratified. So you can see that our financial performance is very satisfactory. And the only variable that we have and has a bigger negative impact on our results is the exchange rate variation that was extremely strong in this period.

Nevertheless, there is no impact in the short run. So we only have our dollar debt to be paid in over 2 years' time, that is to say, counting from today. So we have no idea what will the exchange rate be in 2 or 2.5 years when they come due. So overall, the financial performance is having a very important recovery and a very important recovery in the operation as well.

And going to the conclusion and the outlook which is the last part of our agenda. On Slide #15, I have brought some news and some headlines that show the situation of the Brazilian agribusiness industry. If we carry out a specific analysis of the Brazilian agribusiness, and you can see that the performance is positive compared to all the other sectors in spite of the very big and complex problem of the pandemic. So the agribusiness has not come to a halt. It is an essential business. It generates jobs and it generates sales and it generate exports, that is to say, an inflow of dollars into the country. And the government has been dealing with agribusiness in a sensitive fashion. That is to say, they have -- the government has a degree of sensitivity not to create additional problems for the sector as a whole. So I can say that the evolution of the agribusiness in Brazil has been having a very good performance.

And let's go to Slide #16 now about the imported raw material prices. When we talk about raw materials in dollars in the last quarter, you can see that there have been no significant changes, and the variations in the main raw materials in the last quarter were very small if you compare to the historical levels. And sometimes, we can see bigger oscillation and the biggest one was in urea -- in nitrogen and urea, more specifically. They usually oscillate more than the other 2 imported, which are MAP and phosphorus. As you can see, that MAP is representing here the phosphorus line, and so there was a drop in 10% in urea. However, you can see that the prices were rather stable in this period.

Now let's turn to Slide #17, where we see the barter ratio that is rather favorable for the main crops that require fertilizers in Brazil. We mentioned sugarcane, corn, coffee and soybean, and these 4 crops have a reasonable or reasonably favorable behavior in terms of barter ratio. And because of that, the farmers are very much interested in investing in fertilizers because it's totally impossible to have productivity and view that the level that you have in Brazil without the adequate use of fertilizers. And it is even better when you have the barter ratio for agriculture product vis-à-vis fertilizers and the favorable barter ratio makes farmers more interested in acquiring fertilizers.

And concluding our presentation on Slide 18, we can see an increase in production of grains in Brazil, once again, and you can see that for the first time ever, it went beyond 250 million tonnes, so we do not have this totally calculated yet. The CONAB update this on a monthly basis. But very clear, you can see that we have broken this limit. That is to say, it's a historical level followed also by historical exports not only of grains but of agribusiness as a whole. That is to say, meats and all kinds of production of our farming product. So these are very positive factors. And we see with favorable eyes the continuity of world demand for Brazilian products.

So we are very bullish with the process of court-supervised reorganization process and continuing with the process of the Brazilian agribusiness. And you can see that we have done our homework in spite of very serious problems that we faced so much so that we had to file for judicial recovery. But you can see that this process is bringing the benefits that we expected and that we needed. So we are doing our homework, and you can see that we are recovering margin, we are recovering volumes.

And so this is the information I wanted to bring to you. I would like to thank you very much for being with us. And now we would like to open for questions. In case you have questions, we are available here and we will try to answer your questions. Thank you very much.

[Operator]

[Operator Instructions] As there are no questions, we would like to turn the floor back to Mr. Heringer.

[Dalton Heringer, executive]

Thank you very much for participating in our call once again. And you can see that our performance is much higher when we compare to 2019, which was a very tough year, and we had to make very tough decisions, but they were important in order to generate all these benefits that we're already reaping now. And I would like to reiterate that agribusiness is bringing huge benefits to Brazil in this very tough situation of the pandemic. And agribusiness has been showing the world that we are trustworthy and we have products with good prices and good quality. Once again, I would like to reiterate these points. And once again, thank you very much for participating, and we wish you all a very good week.

[Operator]

Thank you very much. The Fertilizantes Heringer conference call has come to an end. Please disconnect your lines, and have a good day. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]