Fertilizantes Heringer SA
BOVESPA:FHER3
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Fertilizantes Heringer SA
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Good morning. Thank you for waiting. Welcome to Fertilizantes Heringer Third Quarter of 2021 Earnings Conference Call. Today with us, we have Mr. Ulisses Maestri, Commercial Director and Chief Technical Officer; and Ricardo Cavalcanti Alves, CFO and Controller of the company. We would like to inform you that this event is being recorded. [Operator Instructions]
Before proceeding, let me mention that forward-looking statement that might be made during the 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 to the company.
Forward-looking statements are no 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 could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.
Now, I would like to turn the conference over to Mr. Ulisses Maestri, Commercial Officer and CTO of Fertilizantes Heringer, who will start the presentation. Mr. Maestri?
Good morning, everybody. Thank you very much for your presence in this call today, specifically, our conference to present the results of the third quarter of 2021. Our agenda today is the company and the Brazilian market, then the financial performance and perspectives. Before we start, I would like to make or give special thanks to the -- to all employees of Fertilizantes Heringer, who made all their best endeavors and dedication, and they have been able altogether to deliver the best ever result. Of course, with the objective of placing the company in the place it belongs and deserves, the company and the market, talking about the deliveries and the volumes.
This is not our target. Our target is bottom line. In the quarter, it was very much in line with the same quarter of 2020. We delivered practically the same 449,000 tonnes vis-a-vis 447,000 tonnes in the same quarter of 2020. The highlight is coffee, 34% of deliveries in this quarter. We have more plants in Minas Gerais, whereas the production of coffee is concentrated and also the biggest deliveries of the company were from there. And coffee followed by the other crops. And this is where we have a very big diversity of crops. We have fruit, we have vegetables at others, 26%, 34% coffee and the other is 26% overall.
There has been a slight increase, 0.4%. And this means that we were in line with the deliveries made in the third quarter of 2020 of the previous year. If we look at the 9 months, then you will see that we achieved an increase of 17.5%, going from 905,000 tonnes to 1,063,000 tonnes, coffee still being the major highlight when you look at the 9 months and the other crops, 30%, coffee, 29%. As I said before, we have operation in the large coffee production states, at Minas Gerais and Espirito Santo where we have a very significant share of the market.
21% corn, 12% sugarcane with a very strong participation in Sao Paulo with 2 units, so 12% delivered for sugarcane in the last 12 months -- in the last 9 months, I'm sorry. And when we look at the product mix, I would like to mention that Fertilizantes Heringer is focused on different products, and we have a very extensive product mix. We have a very differentiated portfolio. Foliar solubles and solar -- soil with a very good differentiation vis-a-vis the others. And I would like to mention that we continue to grow in our differentiated products, given the response that we have in the field.
So in the quarter, we grew 6% in this differentiated product, going from 47% of total deliveries to 49% from the third quarter of '20 and the third quarter of '21. And I would like to mention that these products have a very interesting appeal for the producers because it increases yield and for the company, of course, because the margin is more attractive for the company. And when you look at the 9 months, so you can see that specialty products grew by 25%, going from 407,000 tonnes at the time in the 9 months of '20. And this year, 48% year-to-date, going to 1,063,000 tonnes; from 905,000 tonnes to 1,063,000 tonnes. So this is what we delivered in differentiated or specialty products.
Currently, the company has 14 and 11 units are active and 3 units are hibernated: Porto Alegre, Rio Grande if we're going to Do Sul, and Paranagua in Parana. These 3 units are still hibernating and recently, we have reopened 2 units, one of them in Sergipe in Rosario do Catete and the other one in Goias. So today, we have 11 units with the installed capacity of 4,225,000 tonnes and storage 638,000 tonnes. This means that we have [ reliable ] capacity that is very extensive. So you can see that organically, you can grow quite a lot with the assets that we have -- the asset base that we have today. When you look at the Brazilian market, you can see that it has been achieving consistent growth and nothing different now.
And in the first half, we have already posted 15.7%. And if we look at August and has just published that, and it already represents 16% accumulated up to August, 40.6 million tonnes delivered in 2020. This will be exceeded and this is the expectation, our expectation, but at least what was delivered so far. And by that, we mean 4 million tonnes. And I'm talking about the market, which is growing, and it is still growing and repeating in the first half. Over 2.5 million tonnes or 15.7% increase on a year-on-year basis. 34.4% increase, reaching -- from 457,000 tonnes to 614,000 tonnes in the first half of '21. So this is the first part of the presentation.
Now I would like to give the floor to Ricardo Cavalcanti, our Head of Finance.
Thank you very much, Ulisses. Thank you all very much for participating in this presentation about the results of the third quarter of 2021. We are reporting very positive figures, and they are very significant, be it in terms of margins or sales volume and of course, our bottom line, a very positive quarter. So I would like to thank everybody in the company for delivering these results. As Ulisses said before, everybody who works for the company who made their best endeavors and who have helped the company to deliver very good results. There were some delays in rainfall during this quarter and as a consequence, in the orders placed by our clients.
But in spite of that, we had a very interesting volume delivered. And as everybody knows, we are having another level of supply cost. And we are maintaining our margins, as was said before. In the third quarter, we had a stable volume, as was said before. Net revenue that contemplated the need for maintenance of our margins because of the increase in the cost of our supplies, our inputs. They are global suppliers kind of supplies, global, exception made to the countries that are independent and that are self-sufficient in terms of the supplies.
And as we have a new situation regarding costs, we had a gross profit. For those of you who are following our presentation, we are on slide number 11 and the gross profit of BRL 308,750,000 corresponds to 23.5% of our net revenue compared to the third quarter of 2020 of the previous year. That is to say, on a year-on-year comparison, we will be talking about an increase of 15.9% of our net revenue going to 23.5%. As I said, this is a major growth. When we talk about the new level of sales, we are referring to absolute figures, 3x the margin in terms of value. And this is very important because we have a better dilution of freights and commissions, which is a line that is predominantly variable, but it gets diluted because of the sales volume and our SG&A -- our SG&A as is mentioned in English, we have BRL 29,574,000 in this quarter. Of course, the weight is lower in the revenue structure.
And we will have, as a consequence, an EBITDA of BRL 257 million or over BRL 257 million, 19.6% EBITDA. In our market, we are talking about a very good profitability. We can see that the EBITDA margin of this quarter that we are analyzing now is higher than the gross margin on a year-on-year comparison because it was 15.9%. So we are talking about a very interesting process in terms of margin improvement. And finally, going to our bottom line to our net income, so we had the financial result and the income tax that is included in our financial statement, but our net result -- our financial result had a loss of BRL 113 million, and a significant part of this loss or more than 50% of this loss of this net financial result has to do with the variation of the exchange rate. And the other one is the financial cost of our current debt and also mature in the long run. So for the overall result of the quarter, we are talking about a net income, a net result of BRL 101,317,000 in spite of the negative impact of the exchange rate variation, unrealized because it is posted for accounting purposes, but it does not mean a disbursement because there was no maturity of our debt in the period. It just adjusts the obligation. For those of you who are following the presentation on this slide and the number of the slide is 10 and not 11, the number is 10.
Still on slide number 10, we see EBITDA being mentioned here on the footnote. It is the best EBITDA ever posted by the company in one quarter. And it is more than 4x the EBITDA delivered in the same period in 2020, a record profitability, therefore. And the net income is higher than BRL 100 million in one single quarter, which is very significant as well.
In the presentation, we also have our financial expenses that we have just mentioned in the presentation, it was on page number 10. And now let's go to page number 11. We can see that the exchange rate variation, of the BRL 113 million, it accounts for over half, that is to say BRL 69 million.
You can see that we mentioned non-realized which means that it has not been paid or converted into cash. It has not been realized. And this is the way we refer to that in the financial sector. So it has not been paid. And the remainder, BRL 44 million, have to do with the interest of the debt that we have in our judicial recovery plan. Therefore, it is not realized either. And another part of this amount or in-built in this amount, we have the financial expenses related to short-term debts that are loans and working capital for the business as usual situation of the company.
And we have the income tax and social contribution and depreciation. And overall, we have now the net result, BRL 101,317,000 already conciliated or reconciliated, as we said before.
Now let's turn to page 12, year-to-date results. So you can see that the trend is very similar because the volumes are growing 17% because we had the first half with the volume going up 34%, although in this quarter, we have had stability. In the 9 months, we are talking about a 17% increase. And then gross income, as Ulisses said, our focus is on margin. Our focus is total on margin and BRL 664,033,000 (sic) [ BRL 564,033,000 ].
And we can see that it is much higher than the 13.6% in the previous period in spite of a higher sale and the profitability higher as well in the case of the gross margin. Freight and commission, predominantly variable here. It was 3.1%, and now it is 2.4%. SG&A very much in line with our trend. They are mostly fixed expenses and other net operating revenues. We have a capital gain of an asset that we sold during these 9 months, and it was in the first half of this year. And it goes in the accumulated results, about BRL 33 million -- BRL 31 million in the footnote, the gain from this operation of the Uberaba unit, the sale of the Uberaba unit. So this is the capital gain. So it is an accounting gain. We have an EBITDA margin that comes from our operations of BRL 467 million, 17.8%. And once again, we can see that it is a gain, which is higher than the gross margin in a year-on-year comparison.
And the net financial result, still a loss because of the exchange rate variation because there was a depreciation of the real. During this year, we have about two-thirds of our debt denominated in foreign currency. And this is why we have posted this exchange rate variation, but no cash effect. And I would like to remind you that the debt in the judicial recovery or the bigger ones are long run. The next ones will be maturing in December 2023. The net result, BRL 238,589,000. You can see that this period was very satisfactory and in our presentation.
Well, let's go to page number 13 now. We have the last 12 months, and this is a metric that is very often used. As we do not have the last quarter of the year for this comparison for this metric, we took the last 3 months of last year.
So it goes from the 3 last months of 2020 to now. If we were to have on last semester, similar to this one, it would be BRL 3.4 billion result in the last 12 months. So the EBITDA higher than BRL 500 million and BRL 284.416 million net result. This is a metric that replaces the non-occurred period. So it considers the same period in the previous year. So the last quarter of 2020 until the end of the third quarter of 2021. So we would have BRL 3.4 billion result and BRL 284 million in terms of net result. So we are still waiting for the last quarter. On page 14, we have a chart illustrating this, our profitability. On the left, we have the third quarter of the year compared to the third quarter of the 2 previous years.
We go from an EBITDA of 2.4% going to 9.1% and now 19.6% and the gross profit from 12.1% in 2019, going to 15.9% in '20 and 23.5% in 2021. What we can see is the strategy to recover our results being put in practice and giving these results already in audited figures. So on the right, we have the last 12 -- last 9 months. We see the same trend, EBITDA margin in the last 9 months reaching 17.8%, an upward curve, and gross profit reaching 21.5%, talking about this quarter and talking about the last 9 months. So you can see that our profitability has reached very satisfactory levels.
Now I would like to say a few words about our working capital situation. In the presentation, you can go to slide number 15. And what we have here is that we had a need for working capital. That is to say the amount of the inventories undelivered still and accounts receivable still not received, and this is what we call the need for working capital. BRL 750 million in 30 September (sic) [ 31/12/2020 ] due to our activity of volume and the cost of supplies and the value of the sales almost doubling, [recording] BRL 1,384,000,000. So you can see the need for working capital in '19 was BRL 507 million, BRL 243 million in the next period and then going to BRL 1.4 billion approximately on September 30, 2021. This is the need for working capital that has to be supplied by internal profitability or funding that is through a financial institution.
And if we reconcile this, we see that in 2021, we had BRL 881 million of this need supplied with our own capital generation and BRL 503 million from the funding from financial institution. And the relevant information here is that this year, we started with BRL 483 million of our own capital covering these needs for working capital. I'm looking at the blue column here in the middle, December 31, 2020. And we had BRL 267 million in order to supply the need for working capital when we migrated to almost twice the amount of working capital needed on September 30. So this need was increased by BRL 633,811,000.
And of these, the information that is relevant here is that due to our good profitability, we had an EBITDA that allowed us to leave almost BRL 400 million or two-thirds of the need to help in the increase of this working capital need. And now we are referring to the red column on the right of the presentation, and only one-third of this increase in this need, which was BRL 663 million; one-third BRL 235 million, we resorted to external funding because of the profitability that cooperates for this increase in working capital needs. We must notice that in our fertilizer business, there is this intrinsic seasonality. With the construction or the buildup of inventories in this period quarter in the second quarter and the third quarter as well.
And then the use of the inventories in months that are not so strong in terms of sales, which is the first quarter of the following year. So this inventory buildup is totally normal, and this short-term funding as well and this has to do with seasonality and the buildup of inventories. And also, we have the issue of imports that they have a transit time. And payments are paid in advance. And this is why we have this high need. And the information is that our profitability has the capacity to supply the necessary amount, two-thirds of this increase, we can cover with our own generation.
So as a result of this profitability and this working capital, we have the information about cash flow. And that here on the presentation we have on page 16, we reconcile with the results before taxes of the 9 months. Before taxes, we had BRL 315,857,000 during the same period of January to September this year, expenses that do not affect our cash, the non-realized or unrealized exchange rate. We have the impact -- non-cash impact. You can see the unrealized one, as I said before. So we can see here the operations due to the inventory buildup that we referred to, we had a reduction in our asset account, leveraging the need for working capital. So we see that the cash flow of operating activities was negative because the profitability covers a significant part of our need for working capital, as we said before.
So this need generated by our operating activities, and we see here the investment BRL 67,341,000. And we have also the 2 plants that were hibernating before and that Rosario do Catete in Sergipe and Rio Verde, Goias. These 2 units received a low investment, but they were necessary anyway in order to reactivate the plants. And the payback or the return on the investment happens in just a few months, 3 months, in fact, on average. So we have this investment activity here of BRL 67 million, including the investments to reactivate these 2 units. So the free cash flow, which is the amount that is necessary and that has to be supplemented with funding from financial institutions.
If the free cash flow was negative by BRL 260 million, there were some funds in cash, and we went to the market, and we raised BRL 231 million, and then we reconciled and we closed the quarter covering at a satisfactory level. I would like to remind you that this is a seasonal situation. And the way this cash need varies quarter-on-quarter. It varies quarter-on-quarter. So overall, or year-to-date, they are normalized. They go back to normal. And up to September 30, which is the period that we are showing, we have a strong leverage. So our strategy aims at productivity and sometimes we have to resort to a financial institution, which covers our short-term needs in a very satisfactory fashion. Ulisses?
Thank you, Ricardo. Talking about the outlook, let's refer to raw materials first. What we saw this year was the increase, a consistent increase. You can see September '20 to September '21 on this chart on page 18. You can see a substantial increase in U.S. dollars. MAP, 81%; Urea, 200% (sic) [ urea +91%, potassium chloride +200% ]. And we see the chart that is representing September 2021. And all these raw materials have already increased in prices considerably. Urea that you can see here, it is over $800 today. Prices are at a very high level overall, all the raw material that we use. And on the other hand, in spite of the very high prices we have -- we don't know whether we have already reached the maximum or if this trend will continue.
But in spite of that, we have had no problem with shortage or difficulty in terms of acquiring these raw materials. So the news about the Brazilian Agri business, as we said, exports going up; rainfall, very good. We have already planted. It was a very early planting of soybean and corn going very well and things are going in a very interesting way for Brazilian agriculture.
And when we look on page 20, the chart about the national or domestic production of grains and planted area vis-a-vis fertilizer consumption, one thing leads to another. So you can see that the production of grain goes up and the consumption of fertilizer goes up as well. So CONAB refers to a new record harvest of 287 million or 290 million tonnes. So the outlook for the market is very good in which regard volumes. So our expectations are very positive for the next quarter.
Now we would like to start our Q&A session for investors and analysts.
[Operator Instructions]
I answered the question in my previous -- in spite of the high prices,-- well, first of all, [Pedro Calizo], thank you very much for the question. And the question is the following. Are we facing difficulties regarding buying raw materials? As I said in my presentation, prices are going up substantially. And logistics has been a problem such as in the situation. And this is nothing new. This is something that started quite a long time ago. And during a period, we had a certain degree of concern with that. But we have no difficulty whatsoever in terms of acquiring the raw materials. We have never faced a difficulty, and we have no concern regarding the availability of these raw materials.
[Operator Instructions] We have a few questions here from [Josebeck]. For some time, you see some moves in the market, what the evaluation of the -- we are in a process of judicial recovery. As you all know, and our biggest focus is on our internal objectives. So we have to reach our margins, reach our results. We have targets. And of course, there are some moves in the market. We are aware of that. However, our target is our results is our bottom line, and this is where we have been focusing. We intend to recover the company and bring it back to the level that it deserves.
Are we going to open other plants? As we said before, this is from [Wa Zi]. Thank you very much. We have already reopened in the last quarter 2 of our plants, one in Sergipe and another one in Goias. And we have 3 plants that are hibernating, Rio Grande, Porto Alegre in Rio Grande do Sul and then Parana, we have Paranagua. And we are analyzing our strategy, means analyzing and tapping into the best moment to reopen them. So we are analyzing all the possibilities and even the possibility of opening new plants. I do not have a deadline. I do not have a date for that. We are not sure, but we are analyzing. Let's say, strategically, this is really -- it does make sense. So we might reopen another plant.
[Wa Zi], thank you very much for your question about the outlook for 2022 and about the judicial recovery and the exit from the judicial recovery. The market has its own fluctuation so to say, depending on the supply and demand situation. We know that the suppliers are global. So we have our outlook based on certain assumptions, and we know that local consumption, Fertilizantes Heringer works basically in the domestic market. And we know that the outlook for consumption for local consumption is very good for 2022.
And this has been increasing consistently in the last few years. So we know that the prices will vary. They will vary according to the supply and demand situation globally, and the whole world depends on these global suppliers. But we understand we should be prepared to supply and to cater to our domestic market to maintain your margin, preservation of the company, as Ulisses said. So our outlook for 2022 is checking what might occur. Margins and costs will be analyzed, such as was the case in 2021, but we have to be prepared to maintain our margins, such as we have been doing in a very satisfactory fashion in 2021.
Regarding the judicial recovery, there is a legal period of 2 years from -- the judicial recovery plan is available to all of you on our Investor Relations page on our website, and we are sure that we will be on time.
The last question is by [Mercebeke]. The transfer of the adjustment of the supply prices or raw material. Well, it is happening. And you can see the results that we are delivering and presenting to you today. Once again, we have been working to preserve our margins, as we said before. I'm not saying that this is something very easy.
We have been making our best endeavors in order to deliver good results, and this is our purpose. Soybean represents over 15% of our deliveries, our total deliveries. In our case, it impacts less than the other crops. I'm not saying this is easy. You ask whether it is easy, it's not easy, but we have been able to do this, that is to say, to transfer to our prices the cost of the raw materials.
If there are no more questions, I would like to turn the floor back to Mr. Maestri for his closing remarks.
Just to finalize our meeting, I would like to thank you all very much for participating in this meeting. I thank you very much for your presence and for your patience as well. And thank you very much. We wish you a good afternoon.
Thank you very much. Fertilizantes Heringer conference call has come to an end. You may disconnect your lines. Thank you very much, and have a good day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]