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 Third Quarter of 2018.
Today, with us, we have Mr. Dalton Carlos Heringer, CEO of the company; and Rodrigo Bortolini Rezende, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded. [Operator Instructions] A replay of this event will be available soon after it closes for 1 week. This event is being simultaneously broadcast via webcast at Investor Relations website of Heringer, heringer.com.br/ir and the MZiQ platform, where the slide presentation is available for download.
Before proceeding, we would like to mention that forward-looking statements that might be made during the call related to the business perspectives of the company, operating, financial projections and targets are beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantees 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, the 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 give the floor to Mr. Dalton Heringer, CEO of Fertilizantes Heringer, who will start the presentation. Mr. Heringer, you may proceed.
Good morning, everyone, and thank you for participating in this call about the third quarter of '18 earnings and also the 9 months of 2018. Today, we will be making a presentation, myself and Rodrigo, about the markets, Brazilian markets, I will cover that and the company specifics will be covered by Rodrigo, our CFO and Investor Relations Officer.
Those who are following with our presentation, we would like to start by talking on Page 3 about the Brazilian fertilizer market vis-à-vis deliveries. The third quarter was marked by a much higher delivery than the third quarter of last year, strongly driven by soybean and with a higher sales that were carried out in the first quarter of '18.
I would like to mention that we had the truck drivers strike that affected deliveries in the second quarter. And with the volumes that were sold and now delivered, which is what happened very strongly in the second quarter, the third quarter was marked by higher deliveries, 11.7% higher vis-à-vis 2017 in the same period.
Looking at the 9 months, the growth was lower, 4.3%. And for us, the growth of 4.3% will be suffering from adjustments from the 9 months of '18 to '17 closing the year with a lower growth than the one that we're seeing now for the 9 months or the year-to-date. There was a delay in the delivery of the second quarter. And so, for this reason, we have 4.3% year-to-date and we should be closing the year with deliveries around 35 million tons, which would be an increase vis-à-vis 2017 of approximately 2%. So the 4.3% will be adjusted down to 2% when we look in our outlook for the full year.
Now let's talk about the domestic production. About domestic production, in the third quarter, there was a drop of 2.2% and year-to-date a drop vis-à-vis 2017 year-to-date, 4.8% for the last 9 months and the chart that we present on the right of our presentation shows 2017 (sic) [ 2016 ], '17, '18 as well as the three quarters -- third quarter of '16, '17, '18. So you can see a consistent drop in domestic production over the last 3 years, as you can see on the slide. And this drop occurred regarding the 3 nutrients, nitrogen, phosphorous and potassium.
Now let's turn our attention to imports. So this is Page #5 of our presentation. You can see that imports in the third quarter were higher than the third quarter of '17, and also the truck drivers strike that occurred in the second quarter impacted the accounts that should be arriving slightly before, that is to say, within the second quarter and this is the reason why the third quarter has higher volumes of imports than the third quarter of 2017.
If we consider the 9 months, we can see that year-to-date, imports of 2018 were lower than 2017. It is a small difference, 1.4% less, going from 18,900 tons to 19,174 in the last -- or in the first 9 months of 2017. So when you have a higher delivery, as we saw a domestic production that is lower and the year-to-date imports lower than in the same period of 2017, we can see that we analyze these figures, then they should be reflected on much lower sectoral inventories and with a very positive impact in terms of margins in the sales mix after the changes is effected.
That is to say the recovery after the truck drivers strike that occurred in the second quarter, which means that the new sales have much higher margins that was occurring up to the truck drivers strike. And the impact on margin also reflects the sales made with lower margins in the first half of the year. But the supply, if you look at the figures that the sector has been making available shows the reality of inventories in order to meet the needs of the fourth quarter, that are lower than the reality in 2017.
Now let's turn to Page #6. We saw a price hike in raw materials for fertilizers, the main raw materials both in dollars and in reais. So we show in 2 slides that the prices of phosphate products went up, potassium higher, nitrogen higher between September '17 and September '18. But if we analyze June '18 up to September '18, a shorter period, you can see that in the last quarter, the reality continued in dollar terms, U.S. dollar terms. Taking into account the devaluation of the real that occurred in the last few months. And when we analyze this hike that occurred in U.S. dollars, in reais, given the characteristic of the sector, which is to have a major part of its demand for imported raw materials, the prices in reais were much higher than the hikes that we saw in U.S. dollar terms.
So in this case, we have 2 examples here. Urea with a variation of 50.3% in the year, in the case of potassium 42.5% in one year. So the increase in prices of these raw materials has been making an impact on our working capital, and we have already talked about that in the previous call and we're talking about this in this call. However, the company is paying attention to that and looking for alternatives in order to continue looking for margin improvement according to the reality of the net new sales.
So now I would like to turn the floor over to Rodrigo. He will continue the presentation.
Thank you very much, Dalton.
Could you please go to Slide #9 now? And we will start by talking about the geographical distribution of Heringer for 2019. Due to the lower volumes delivered, mainly in the third quarter and also the year-to-date results, the company made a decision, and the decision was not to renew its outsourcing contracts for 2019. So for 2019, we will not be renewing the Patos de Minas unit in Minas Gerais as well as Bebedouro in São Paulo and also São João do Manhuaçu in Minas Gerais.
This way, the company will be operating in 2019 no longer with 19 mixing units, but with 16 mixing facilities, 15 owned units and 1 leased unit, the Rondonópolis unit was leased, with 1 production facility of SSP and a total installed capacity that was 6.5 million tons in the last 2 years, now we will be reducing the installed capacity for 2019 going down to 6.2 million tons. So we will have 2 plants in the Northeast, we will have 4 facilities in the Midwest, 3 units in the South and the remainder of the units in the Southeast.
Continuing the presentation, please turn to Page #10 of the presentation and we will be talking about the volume delivered in the third quarter and also the year-to-date volume. As you can see on Slide #10, there is a reduction in deliveries for all the crops in the third quarter. Whereas the market went up 11.7%, we dropped 35.4%, with a lower drop for the soybean crop due to our sales portfolio, which was more concentrated in the first quarter and it was -- the delivery was postponed because of the truck drivers strike during the second quarter to the third quarter. And we believe that it has already occurred in the market as a whole.
For the company, that delivered 1.3 million tons in the third quarter of last year delivered approximately 880,000 tons in the third quarter of this year and the drop for the soybean crop, we delivered 389,000 going down 13% to 337,000 this year; corn 144,000 going down to 71,000; coffee, a major drop from 242,000 to 125,000 tons; sugarcane, 285,000 going down to 149,000 tons, about 48% drop; and the other crops about 300,000 going down to close to 200,000 in the third quarter of 2018.
Now let's turn to Page 11 and let's talk about year-to-date results regarding deliveries. Last year, we delivered approximately 3 million tons in the first 9 months of 2017. And in the 2018 year-to-date, 2.5 million tons, a drop in the volumes delivered by the company of about 17% and the market in the period grew by 4.3%. The drop in the volumes delivered both in the third quarter and in the first 9 months of the year happened because of the higher challenges regarding the company's working capital due to the higher prices of fertilizer raw materials in U.S. dollars in the international market over the whole year, and more concentrated in the last 6 months and from the second quarter to the third quarter and higher prices in reais of the materials due to the devaluation of the real in the first 9 months of 2018 of about 20% devaluation. And another factor that has been impacting the company's volumes in the first 9 months of the year has to do with logistics in the Port of Santos because we have much longer queues than the average for the year for this specific port due to changes in the rules for vessels mooring. And I would like to mention that the region that is encompassed by the Port of Santos is extremely important in the volumes delivered by the company.
Now let's turn to Page #12, specialty products. As you can see on the slide, the volume delivered dropped by 17%, as we said, and the volume of specialty products going down 19%, conventional 15% in 9 months. While the company delivered almost 1.4 million tons of differentiated products last year, this year or year-to-date, 1.1 million tons. Conventional products, 1.6 million tons almost last year, and now 1.4 million year-to-date.
The company went from 628,000 in specialty products in the third quarter of '17 to 412,000 in the third quarter this year, a 34% decrease, ended the third quarter of '17, 730,000 tons, going down to 464,000, meaning a drop of approximately 36%.
When we talk about the share of the specialty products vis-à-vis the overall volume delivered, we practically see stability there. So in spite of the fact that we grew in the share of specialty products in the third quarter of '18 vis-à-vis the third quarter of '17, reaching 47% vis-à-vis 46% in the same quarter last year. In the first 9 months of this year, there was a very slight decrease going from 46% in the 9 months of '17 going to 45% year-to-date '18, practically maintaining a good share of specialty products in the period that we are analyzing today. And another information -- additional information about specialty products is the fact that now in 2018, the company will be launching another product of its Foliar line, FH ATTIVUS formed by nutrients combined with new complex technology that acts in a strategic way, and this will be launched by the end of this year increasing the metabolism of the plant, especially in thermal, hydro, nutritional, stress situations.
And we continue to maintain our policy of delivering top-quality products in the Solo line, in the Foliar line and the fertigation line to its customers. Also, we have seen a difference in the gross margin specialty vis-a-vis conventional in the last 3 years in the first 9 months of each one of these years. And the difference in the gross margins of the specialty products vis-à-vis conventional products, in the first 9 months of 2016, this was 5.6%, improving to 6.2% in the first 9 months of '17 and now year-to-date 2018 reaching 8.3%.
Now please turn to Page #13 and we will be talking about the financial results of the company. Volume delivered in the third quarter was 876,000 tons, 35% lower than the same period last year when the company delivered 1.3 million tons. In the first 9 months of this year, the volume was 2.5 million tons dropping by 17% vis-à-vis the almost 3 million tons delivered in the same period of 2017.
Net revenue in the third quarter of '18 was almost BRL 1.2 billion, but it was 20% lower than the third quarter of '17 when it was BRL 1.48 billion. In the first 9 months of this year, net revenue dropped only 5.7% because there is a higher price in reais for fertilizers this year, a combination of higher prices in dollars of the raw materials for fertilizers and also the higher exchange rate. And in spite of a drop in 9 months of 17% in the volumes delivered, the drop in the net revenue was only 5.7%. So last year, the company had BRL 3.3 billion in net revenue. In the first 9 months of 2018, we had BRL 3.1 billion.
Gross profit was BRL 75 million in the third quarter of '18, almost 40% lower than the same period of 2017 when we had BRL 125 million. In the first 9 months of this year, the gross profit was BRL 157 million, a major reduction of 46% vis-à-vis the BRL 292 million that we had in the first 9 months of last year. Thus, the gross margin in spite of being higher in the third quarter, which was higher than the second quarter this year and higher than the first half of this year, respectively, 1.7% and 4.6%. So the gross margin of the third quarter was 6.3%, which is much lower than the third quarter of '17, 8.4%.
In the first quarter of '18, we had deliveries -- our major volume delivered of sales made in the first quarter for clients in the soybean crop area due to the truck drivers strike. In the second quarter, not the whole volume was delivered over the second quarter and a major part was delivered in the third quarter. So we had new sales in the third quarter with lower volumes but much higher margins. And at the same time, delivery is a legacy of the portfolio with much lower fertilizer prices than the hikes that we saw in the third quarter, and ultimately, this impacted the margins for the period. So in the first 9 months of 2018, the gross margin was 5% vis-à-vis 8.9% in the first 9 months of 2017.
Freight and commissions dropping in the third quarter BRL 60 million, 5.1% of the net revenue. And last year freight and commissions were higher BRL 75.3 million, also with 5.1% of the net revenue. So drop in the volume and drop in the freight and commissions in the same proportions, maintaining the same proportion of the net revenue. In the first 9 months of the year, freight and commission also dropped, reaching 4.8% of the net revenue of BRL 150 million, ended the first 9 months of '17, BRL 162 million, reaching 4.9% of net revenue, practically maintaining the same percentage in this comparison.
SG&A net of freight and commissions falling 13% in the third quarter, BRL 49.5 million vis-à-vis BRL 57 million in the same period of last year, representing 4.2% of the net revenue vis-à-vis 3.8% in the same period in 2017. Year-to-date 2018, SG&A net of freight and commissions dropped by 2% reaching BRL 156 million vis-à-vis BRL 159 million in the same period 2017, representing 5% of net revenue vis-à-vis 4.8% of net revenue in the previous year.
EBITDA in the third quarter of '18 was negative by BRL 24 million lower than the third quarter of '17. EBIT (sic) [ EBITDA ] was positive by almost BRL 15 million, representing a negative margin of 2% of the net revenue, whereas in the third quarter of '17, it was positive at 1%. So we can see here an improvement in the EBITDA margin and the EBITDA vis-à-vis the second quarter because it was negative by BRL 63 million in the second quarter of '18, going BRL 24 million negative in the third quarter due to the deliveries basically for soybean crops and the legacy of the portfolio that was delivered in the third quarter as well, but still much lower than the same period last year. So year-to-date 2018, EBITDA was BRL 116 million negative, lower than the same period in 2017, which was BRL 20 million positive.
Now talking about net financial expenses. Net financial expenses in the third quarter were BRL 90 million higher than the third quarter of '17 reaching BRL 17 million and this amount is made up of net income, EBITDA BRL 39 million, exchange rate negative variation of BRL 68 million, net revenue from hedging operations BRL 17.5 million. In the first 9 months of this year, net financial expenses went up vis-à-vis last year reaching BRL 311 million vis-à-vis BRL 137 million in the first 9 months of 2017, impacted by a strong exchange rate devaluation of 21% in the period.
And this amount is made up by net interest, discounts given, expenses related to adjustment to present value, among others, BRL 103.5 million, exchange rate variation -- negative variation BRL 292 million and revenue from hedging operations, BRL 85 million. In the third quarter, the net result was negative BRL 117 million, lower than the net income negative of BRL 10 million, negative. In the first 9 months of '18, the net income was negative BRL 441 million, lower than the negative net income of BRL 102 million in the first 9 months of '17.
The company uses hedging operations in order to mitigate the exchange rate, import of raw materials, and on September 30, we had NDF swap contract $202 million, $193 million, BRL 4.05 average weighted and BRL 3.86 here. And also during this period, in the first 9 months of 2018, the company had no contracts -- no covenants, no financial covenants.
So could you please turn to Page 14, where we will be talking about the Paranaguá branch. The company is carrying out a new environmental licensing process according to a judicial decision by the court. And we expect to resume production as soon as possible, very soon, maybe in 2019.
Now Page 15, where we talk about our working capital in the company. We have inventory days, accounts receivable days, accounts payable days. So you can see that the company's working capital reflects the seasonality to which we are exposed. So in comparison with the same quarter of the previous year always and in our view, this is the most adequate comparison in order for you to understand our business model.
So we can see accounts payable days, including the FINIMP operations at 155 days in the third quarter of 2018, higher than the 124 days in the third quarter of '17. Accounts receivable days closed at 25 days in the third quarter of '18, lower than the 30 days of the third quarter of '17 and this reduction in accounts receivable days in the third quarter of '18 also reflects our strict credit assignment policy.
Inventory days during this period reached 21 days, inventory days vis-à-vis 22 in the same period last year. But if we remove the advances from clients, the inventory days were 47 days, very much in line with the 46 days of the third quarter of '17.
We use credit lines from suppliers, from banks for our working capital purposes and the higher prices of raw materials for fertilizers vis-à-vis the last 2 years, and it has faced higher challenges vis-à-vis our working capital with a direct impact on the volume of the first 9 months of 2018.
Now could you please turn to Page 16, where we talk about the company's cash flow in the quarter. Income before income tax and social contribution, BRL 126 million negative, expenses with no cash effect, BRL 40.7 million, basically formed by unrealized hedges, amortization and depreciation.
We see a net reduction in the asset accounts, basically concentrated in the reduction of inventories and accounts receivables and also, we see a reduction in our liability accounts of about BRL 128 million and the amounts are concentrated in advances from clients and also operations of import financing.
Cash flow from operating activities, positive BRL 7.3 million. Cash flow from investment activities negative BRL 1.5 million. Free cash flow positive BRL 5.8 million, cash flow -- negative cash flow from financing activities, BRL 33 million negative and the cash was BRL 32 million.
On Page 17, I conclude my presentation and I will turn the microphone over to Dalton.
The company is the only fertilizers company listed in B3 in Novo Mercado. The company has 99% of free float with Brazilian investors almost 2,700 investors, including foreign investors, controlling group 51.5%, OCP 10%, Nutrien 9.5% and free float 29.5% (sic) [ 29.0% ].
I would like to thank you for your time for the opportunity and now I would like to turn the floor over to Dalton.
Now we're going to the conclusion of our presentation. In terms of outlook, Brazil harvest is the second biggest harvest in the history, a little bit lower than the '16 '17 harvest, however, estimating a very robust harvest for this year. In principle, the weather conditions are very good and we could achieve similar figures for the next harvest similar to the one that we had in the 2 last cycles. Because of that, the levels of fertilizer demands are quite stable with a strong recovery from the drop that we saw in 2015.
And if you turn to Page #20, you can see that Brazil had a very big drop from 2014 to '15 in terms of fertilizer consumption. And over the last 3 years, '16, '17, '18, we see consistent growth in the last 3 years, recovering very quickly from the drop in 2015. And what we expect for this year is a total consumption in terms of deliveries for 2018 of 35 million tons, around 2% higher.
Brazilian agriculture continues to bring a lot of benefits to the country in terms of commercial terms, and Brazil is competitive in agricultural production. Recently, we had an election in which the current elected president has been showing quite a lot of interest in bringing the Brazilian agriculture to a higher level of recognition, having an even higher visibility than we had already achieved for this agricultural production, and of course, this is one of the biggest strengths of our country. So we will continue to place our confidence in the capacity of our agriculture and this reality has a direct impact on fertilizers and on fertilizer consumption.
This is what we had programmed for today. And now we would like to open for questions from you. Thank you.
[Operator Instructions] Our first question comes from Mr. Prado Henrique.
I have a question about the company's valuation. In your opinion, in the case of a possible sale, how much would Heringer be worth considering what it already represents to the market?
Good question. There are many criteria, this is Dalton, in terms of the company's valuation. As you well know and the market knows, in the last three quarters, we have faced very challenging situation with negative EBITDA for 3 consecutive quarters. And looking ahead, we have a very positive reality in the market where we operate and as we have said, not only in this call, but also in the previous calls, due to the effect of the dollar and real prices of fertilizers and the challenge that we face vis-à-vis working capital due to the negative shareholders capital that we have because of the results of the second quarter, and we also have a characteristic of a small cap in which the interest of acquisitions and sales make the situation very volatile in the pricing by the market, but this is not the only way you have a valuation. There is more than one way to have the company valuation, and very frankly, it's very difficult to give you in one single answer because there are many variables that are involved. So Rodrigo, would you like to add something?
I think you have already answered. The company does not give this kind of guidance, and of course, the market is struggling. We're facing a very different year than the ones that we had before. You can see that in the first 9 months of 2018, the EBITDA of the company was not positive and we have already had negative net results in this period in other years, but always with a positive EBITDA. This is a year in which the margin is lower than what we would desire. And also, as we have always -- as we have always warned you in the press releases of this year, this is a big challenge for this company's working capital situation due to higher prices in dollars on the raw materials for fertilizers. Also the challenging year because of the presidential elections that is already over, but we had a very major impact on the exchange rate variation because of the presidential election, so with higher challenges financially for the company.
[Operator Instructions] Our next question comes from [indiscernible].
The effects on the balance sheet in the last -- in a way this affects liquidity mainly in the short run as the loans from suppliers ultimately finance a negative cash generation. At that point, that was our attention, and it's important for us to try and visualize what is the company's strategy to be to change the situation, to reverse this situation, where we see a strong financial liability in the short run and the supplier financing line that is quite extensive and this has a very strong impact on your liquidity?
On Page 15 of the presentation, we have already talked about the company's working capital situation. Sure, this is a factor which encourage the company finances, its receivables and the inventory turnover by using import financing and also the suppliers, and what we saw which was different from the previous years was the lack of the EBITDA generation that we saw in the first 9 months, mainly in the second quarter in which the company had a gross margin of only 1.7%. In fact the company and the controlling shareholders are paying a lot of attention to our indebtedness and our shareholders' equity and has already been discussed during the board meetings from 9 and 29 of August. So this is a situation, new possibility as well, the company has already reviewed. Not just area of operations, but the way we operate with the nonrenewal of 3 outsourcing contracts for next year, as we have already said during the presentation, but as Dalton said, we're in the Brazilian agri business, and after all these volatilities then because of the elections and the impact coming from a devaluation of the exchange rate and all this had a negative impact on the first 9 months of 2018. However, looking ahead, we are the fourth largest fertilizer market in the whole world and with the fastest growth and opportunities exist and they will continue to exist.
Fernando Dantas, you may proceed.
My question is along the same lines of the question that has just been asked and Rodrigo has already answered. On August 9 and afterwards on the 29th of August during your board meetings and more recently on the 13th of November, it was said that the executive board of the company is preparing a plan, contemplating strategic options that would eventually improve the financial situation of the company, that is to say generating a positive impact on shareholders' equity. Well, this was written on the minutes of August 29. And the plan, it seems to me that it is not ready yet and it seems to me that you will be submitting this on December 13. And as minority shareholders, could we learn some details about what you are considering or will this only be made public on December 13?
This is Dalton, Fernando. Thank you for the question. Part of what is being planned is already being executed. For instance, the reduction of the 3 units was part of the process, and as Rodrigo said, we know of the challenge regarding working capital for the company. So during the board meeting, while we have members that are appointed by our shareholders and the control group had shareholders agreement and 2 companies that produce raw materials that are foreign have been contacted. And in our board meeting talks and with other members as well, we're discussing all the feasible alternatives in order to solve or tackle this challenge that became stronger in the second quarter when there was an impact on our results and because of that, we had this negative situation of our shareholders' equity. And we are also controlling very strictly our SG&A. And part of the process of what we're planning is already being executed with reduction of SG&A and the future reductions also of other expenses and the adaptation of our workforce for the reality of demand that will be imposed by our working capital situation, and we are working on all the fronts. So I have no additional details to inform you now. However, part of what is being planned is already being executed. Okay, Fernando?
[Operator Instructions] As there are no more questions, we would like to turn the floor over to Mr. Dalton Heringer for his closing remarks.
Once again, thank you very much everyone. Thank you for participating in this call of the third quarter of '18 earnings. And repeating, in spite of the challenges that we are facing, the Brazilian agri business brings us a lot of hope in terms of continuity of our business, of our activity and the company's success. We are celebrating 50 years of age. We have a track record. We have our history. We have great products. We have good assets, and the company has been working hands-on to solve the situation that is basically limited to the working capital situation and also the shareholders' equity, and the margins of the sector today are already becoming more positive than they we were in the first half of the year. So all this price increase could have led to an important drop in terms of consumption because the price of fertilizers went up steeply, however, this is not happening. So we're going to look for solutions for this problem that we're facing now. And we believe that we will be able to hold our next call with a good perspective for our future. So thank you all very much.
Thank you. Fertilizantes Heringer's earnings conference call is closed. Please disconnect your lines, and have a good afternoon.