Fertilizantes Heringer SA
BOVESPA:FHER3
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Fertilizantes Heringer SA
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Good morning. Thank you for standing by. Welcome to Fertilizantes Heringer Third Quarter '22 Earnings Conference Call. Today with us, we have Mr. Julio Varela Gubitosi, CFO and IRO; and Alfredo Fardin, procurement and logistics, commercial and Technical Officer of the company. We would like to inform you that this event is being recorded.
[Operator Instructions] Before proceeding, let us mention that any statements that may be made during this conference call related to the company's business outlook, operating and financial projections and goals are based on beliefs and assumptions of the company's management and on information currently available to the company.
Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, 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 performance of the company and lead to results that differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to Mr. Alfredo Fardin, who will start the presentation. Mr. Fardin, you may begin.
Thank you, Rodrigo. Good morning, everyone. I'll cover deliveries for the quarterly and the company and also deliveries at 9 months. Following on Slide #4, we can notice the company delivered 433 tonnes in the third quarter vis-a-vis 449,000. In the third quarter of '21, 3.6% lower in the delivery volume. When you look at the market, despite having no statistics for the full quarter, we already have the numbers disclosed for July and August. We can see this drop in volume at the company have been much lighter than the market drop.
In July and August, the market had 23% was smaller than year-over-year results. When you look at a breakdown by crop, we can see the main reduction happen in other crops. In other words, it's a very large number of crops and mostly those crops oriented to the domestic market with high prices of fertilizer, there is a further drop in IT index. Therefore, we have the strongest drop in the company's delivery volumes. Checking the first 9 months, we also had a drop this time a little bit more important. The company delivered 976,000 tons of fertilizers vis-a-vis $1,063,000 year-over-year, a drop of 8.2%. Also, as we analyze vis-a-vis the market, we have statistics only year-to-date up to August, but the market has a drop of 10.2% and from January to August, whereas the company had a drop of 8.2%.
Also in the first 9 months, we maintained this drop, particularly in other crops. We're speaking of leafy greens or beans and with a high cost of fertilizers this year, these are crops that usually have a further drop in terms of use of technology. Now on Slide #6, we will show the presentation of mix of products delivered by the company, breakdown of conventional and specialty products. We also saw a significant drop in the sale of specialty products. When we come back to the previous slides, I mentioned a drop in volume for other crops. It's also linked to this performance down here. By and large, farmers with a high price of fertilizers is only natural that because there is a drop in the use of fertilizers, there is also a drop in demand and the first step is to go down on technology. That's why the number of specialty products were lower compared to the same period of the previous year. Moving on, now Julio Varela is going to cover the financial highlights.
Thank you, Fardin. On this first slide of the financial highlights, slide 8, he will share the results of the third quarter and year-to-date 9 months of 2022. Net revenue in the third quarter totaled BRL 1.80 billion, improving about 37% when compared to the same period of the previous year, which was BRL 1.31 billion. Year-to-date, net revenue amounted to BRL 4.12 billion, which is about 57% higher than the same period last year, which totaled BRL 2.62 billion. Obviously, this is the result of higher selling prices due to the increase in raw materials in the domestic market. Gross profit in third quarter '22 was BRL 15.8 million, a gross margin of 0.9% and significantly lower than the same quarter of 2021, which totaled BRL 38.8 million, a gross margin of 23.5%.
At 9 months year-to-date, gross profit was BRL 29.1 million, a gross margin of 5.3%, about 61% less when compared to the same period last year, which was BRL 564 million, a gross margin of 21.5%. Reduction, both in gross profit and margin, gross margin. These are due to an increase in the cost of inputs and raw materials. EBITDA in the third quarter of '22 was negative at BRL 45.9 million, a negative margin of 2.5%. Year-to-date, EBITDA was positive at 63.3% with a positive margin of 1.5%, lower by 86% when compared to the same period of 2021, which totaled BRL 467.1 million as EBITDA with a positive margin of 17.8%. Once again, negative margins follow the trend seen in gross profit and gross margin.
The net result was also affected by FX variation on realized FX variation in the period. In the third quarter of '22, it was negative by BRL 110.8 million year-to-date negative by BRL 77 million. On the next slide, slide #9, here we break down the earnings of the third quarter and also the first 9 months of 2022. In the third quarter, there is a loss of BRL 56.2 million, referring to the unrealized FX variation on the court-supervised reorganization debts. These debts are denominated in foreign currency, and this stems from the depreciation of 3.2% of the Brazilian currency in the period. FX variation, unrealized FX variation on foreign currency debt of the court supervised reorganization showed a strong appreciation of the real in the first quarter of '22 by more than 15% and eventually supported the depreciation of the currency in the second and third quarters of '22 ending the 9 months with a gain of approximately BRL 16 million.
On the next slide, slide 10. Here we show the cash flow for 9 months of 2022. We can see that by the end of year-to-date 2022, the company closed with cash and cash equivalents of BRL 29.1 million. The main items that make up the reconciliation of the negative result before income tax and social contribution, which totaled BRL 15.3 million and also noncash expenses amounting to BRL 91.5 million, mainly comprised of interest and unrealized FX variation in the period. Another item is the increase in asset accounts amounting to BRL 137.2 million, basically concentrated in accounts receivable from clients. There was also an increase in liability accounts amounting to BRL 39.5 million, mainly comprised of suppliers. Another item is net investment totaling BRL 54.4 million and the negative net cash flow from financing activities in the amount of BRL 186.7 million. With that, I give the floor back to Alfredo Fardin.
On Slide 13, here, we can see the latest forecast by Conab for the next grain harvest, once again, a record harvest forecast. In other words, despite the reduction in demand by fertilizers or reduction in the use of technology. Considering the high levels we had in soil and that we still have in sale, particularly P205. Sorry, correcting myself going back one slide, I apologize. So, sticking off prices of fertilizers, there's still a significant drop in P205 and potassium map and potassium chloride prices in Q3. For nitrogen, we can see a recovery in prices, the price of urea $607 by the end of the second quarter, searching for an increase in price, $700 approximately by the end of Q3. However, we keep on noticing this move of a drop in prices of the main raw materials, particularly demand-wise, lower demand in Brazil that is not enough in this period to maintain prices at current levels.
Now on slide 13. Here, we show the harvest forecast for harvest year 2022 and 2023, Conab numbers, once again, record harvest levels. In other words, the drop in demand for fertilizers should not impact the new harvest year considering the good levels of phosphorus and potassium in Brazilian soil. What brings good news, confirming if this record harvest is linked to the level of technology and particularly with good climate that has been shown to date in terms of planting time. We expect to see next year a return a resumption of regular levels in fertilizer demand. In other words, there is such a high production as we foresee. Once again, we need to increase the demand for fertilizers for next year. Thank you, everyone. Rodrigo, over to you.
We'll begin now the Q&A section for investors and analysts only. On the right-hand side of the field, you have a few to type your questions. Please hold while we take questions.
I have a question about delisting proposal. As we said before in the previous quarter a possible listing proposal is a matter related to the offer of Heringer holding company and not Heringer per se, which is only a facilitator so to speak, in the preparation of the process. So as we speak, we have no comments to share on this matter.
There is a question about why COGS move from 78% to 95%.
A high COGS number stems from the drop. The drop in raw material prices, like we showed on a slide on prices. Fertilizer prices are going down for 6 months now. And the company cannot deliver fertilizers at the price in which it was purchased in which the product was purchased, and therefore, it somehow corrodes margins.
Question from Paulo Roberto. He wants to know why the company's net debt over EBITDA ratio went down between the second and third quarter.
Actually, this reduction in financing was offset by an increase in accounts from suppliers, accounts payable. The company managed from the European controlling company delivery of products with a payment term and cash generation was used to lower the company's indebtedness level.
We kindly ask you to hold while we take questions. Thank you.
I have a question about any possible impact on the company coming from fierce competition on U.S. agricultural products when it comes to grain and legumes.
I think it's important to say that as we mentioned in the beginning of today's call, Heringer has a big diversity of crops, coffee 28%, sugarcane 18%, 25% in other crops that are not soybean and corn. So any change in the international market for soybean and corn would not affect -- would not have a material impact on the company.
There is a question about the purchase pride of COGS vis-a-vis average spot, 110% as you pay in commodities.
Actually, a distribution company in Brazil has supply in the international markets. So Brazil has no availability of supply of raw material. Basically, 85% of what we buy to deliver comes from the international market. And prices are considered as a procurement time, by and large, we buy 60 days before the selling date. So procurement, shipping the product, AeroGulf, Russia, Canada, in order to come to Brazil. It is the distribution time.
So with this move of drop in prices of the main raw materials, there is a moment in which prices are higher and then we buy when prices already went down. That's why we actually see an increase in COGS. That's the main reason why this year, prices have been going down from the moment they had a peak in April and on a monthly basis, there is a drop in prices for the main raw materials. So this is the scenario. The more prices go down at the current levels, they tend to be normal once demand proves to be higher, prices will come to a new balance again, and the scenario is expected to be normal again.
We kindly ask you to hold while we take questions. Thank you. There is a question from Eric Myson. He wants to know if procurement happens with Agroking brand because Agroking is also a majority player in [indiscernible] Brazil.
Actually, [indiscernible] signed an agreement. A raw material supply contract with Uralchem. Actually, with a trading arm of Uralchem Switzerland. In this contract, this operation was performed under market conditions when it comes to the applicable legislation. Obviously, without hurting the company's minority shareholders. Please note, Uralchem is just one supplier of Asia and it has no conditions to supply all products that Asia needs in order to cater to its customers' needs. Uralchem in particular, does not supply or produce super triples, super simple, not even ammonia sulfide there are many products that [indiscernible] cannot buy from Uralchem. More specifically, those purchases that were made with Uralchem were all under market conditions, bringing a lot of benefit to [indiscernible] when it comes to financing since it allows the company to pay financing that were a heavy burden on the company's results.
There is a question from Newton. He wants to know the company will use FX hedge products to be protected in terms of mix and sale in order to preserve margins.
Actually, FX variation that we've seen in the income statement comes from indebtedness that is denominated in foreign currency. That indebtedness level has no cash impact in the short term. The first maturity is December 2023. So, in order not to make any extra burden in the company's result. Net debt is not part of the coverage of FX via hedge instruments. In terms of margins there is no material impact of FX on worse margins. Margins got worse owing to the drop in fertilizer prices in the international market, and this is not related to dollar prices.
There is a question from Desio. You wanted to know the result related to the fraud mention and recently communicated.
In this case, the company clarifies that any information that can be made public are those found in the material fact already disclosed the market? And also those found in the quarterly results already announced by the company. No additional comments to make on fraud or investigations. Investigations are ongoing. And in a timely manner once the investigation is concluded, the company will make it public.
There are a couple of questions. They are related to other questions that were previously answered. And as for other questions, we will answer them all via e-mail. There are no further questions. So this concludes Fertilizantes Heringer earnings conference call. Thank you. Have a good day.