Fertilizantes Heringer SA

BOVESPA:FHER3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome, everyone, to Fertilizantes Heringer's Fourth Quarter 2018 Earnings Conference Call. Today with us, we have Mr. Dalton Carlos Heringer, CEO; and Ulisses Maestri, Technical and Commercial Director. We would like to inform you that this event is being recorded [Operator Instructions]. There will be a replay facility for this call for one week. This event is being simultaneously webcast through Heringer's IR website at www.heringer.com.br/ir, where the slide presentation is available for download.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of the company's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. 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 turn the conference over to Mr. Dalton Heringer, CEO, who will start the presentation. Mr. Heringer, you may begin.

[Dalton Heringer, executive]

Good morning, everyone. Thank you for being with us today and joining us in our conference call in the fourth quarter 2018 and full year 2018. With me in my presentation, I also have our Commercial Director and Technical Director, Ulisses Maestri.

The year 2018 was a year of major challenges and difficulties. Brazil has been through a presidential election. We had a trucker strike, which had a very strong impact on agribusiness as a whole and also the fertilizer industry. There was high dollar volatility, very significant increase over months, of imported raw materials in Brazil. And Brazil has a very strong characteristic of raw material imports. The bulk of the demand of raw materials are supplied from abroad. And more strongly, in the first half of the year, there was a lot of pressure on selling prices in markets in general.

During the first quarter, there was a very strong anticipation of purchases in the main grain markets, particularly the soybean. And as a result, all these reflex of higher costs, logistic costs, foreign exchange variation and also the high prices of raw material had a very strong influence and impact on the results of the first half of the year -- in the first quarter. And in the second quarter, the company posted results, and the P&L of the company was negative on June 30.

As a result, we have this characteristic for the year, like I said before. And this whole reality put a lot of pressure on the second half of the year in our debt, particularly when it comes to suppliers and banks. And then, in early January, we had a lawsuit against a company of a debt involving a supplier, and the company was forced to file for judicial recovery in order to search for the necessary protection to keep on running its business.

This fact led the company to have a very strong reorganization in its business. It had been operating with a much larger number of plants, and the commercial, administrative and manufacturing structure was much bigger than what we currently use. But these facts were necessary in order to try and pursue legal protection, so we can continue our operations.

If you're following us -- if you're following our presentation, our agenda for the day, we'll be addressing the judicial recovery and reorganization actions that are being performed by the company. We'll also address year 2018 in further detail, and we also mention the financial reflex of the balance sheet last year and also the outlook for the future.

So like I said before, on February 4, 2019, the company issued a material fact announcing to the market the request for judicial recovery -- a file for judicial recovery that was on February 4. Afterwards, the company issued another material fact on February 6. And the court that worked in our filing for judicial recovery in the City of Paulínia accepted our filing for judicial recovery, appointed a bankruptcy trustee, and moved forward the proceedings of the act that provides for the next steps for judicial recovery. And still in February, the company had a meeting. That happened on February 20. And during the meeting, the company confirmed the board's act to decide to file the request that was made on February 4. So this is the material facts related to this file for judicial recovery.

Now on Slide #5, we show a time line and the current status of the proceeding and also future steps. Right now, as we speak, we are within 60 days, and the end of the term will happen in the first 2 weeks of April. And the company will, therefore, be presenting a plan -- a recovery plan for years to come. And this is part of the recovery plan, we have the obligations by the company in terms of given evidence of its future payment capacity. And also within this judicial recovery act, we also try to submit this plan for approval during the creditors meeting. And once the plan is approved, it will be ratified by the Court of Paulínia.

Like I said, year 2019 -- in year 2019, the company was operating 19 mixing units. We had a national footprint in early 2019. And over the year -- year 2018, we had a reduction in the number of units. We discontinued operations in 3 units, the unit of Patos de Minas, Bebedouro and São João do Manhuaçu. These where 3 outsourced units. And the scale of volume that the company was planning to deliver in our operations in 2018 were no longer justifiable. And therefore, we closed the year of 2018 with 16 mixing units.

In the material fact disclosed in February, we made a major reorganization, restructuring, moving from this operation, which, early in the year, was taken place in 16 mixing units, and we are maintaining, keeping the operation since we filed for bankruptcy protection in these 7 mixing units. The total capacity -- installed capacity is approximately 2,900,000 tons. So we have real operations taken place. And as of February, we have these 7 units.

The other units now are under a hibernating period. They have been discontinued. There was a restructuring -- a very strong restructuring of personnel. And in addition to those who were working in the units that are hibernating today, we also had a reduction in our corporate headcount at large. The purpose was trying to adapt the company to the new scale of the company and the reality of our expenses. So we took into account those real expense into a new operation level, which we start as of February.

Thanking for being with us. And now, I'm going to turn it over to Ulisses. Ulisses is going to tell you more about deliveries and also the company's performance over year 2018.

[Ulisses Maestri, executive]

Thank you, Dalton. Considering what Dalton stated, naturally, there was a drop in volumes and deliveries that were very significant in Q4. This is naturally owing to financial difficulties at the levels that we had been financing before, so there was a reduction of 68% vis-à-vis the fourth quarter of the prior year.

This has an impact on our crops naturally in those units in which we have a bigger share. If you look on the fourth quarter, there was a slighter drop in coffee, for instance, where we have hegemony. But anyway, there was a very significant reduction. And this is also reflected in the full year. So we had a drop in the fourth quarter, which was very strong. And for the full year, naturally, it happened as well. So we had a drop in volume in the fourth quarter of 168,000 tons, 70.9% lower than the fourth quarter, which was 577,000 tons. In 2018, the volume delivery was 42% (sic) [ 34.6% ] lower vis-à-vis 2017, when 1.2 million tons approximately. I repeat, this was driven by financing challenges and to finance at the levels that we had been doing before.

Now what about special products. There was a reduction -- also very significant reduction, if you think about nominal terms. However, we also maintain our percentage. So we have historical percentages, 45%, 46%. This is what has been happening over time. The thing is that, with special products or specialty products -- and now this is a current focus because our own technology, our unique technology, these 7 remaining units in these 5 states are up and ready to keep on working with special products, which had been showing a very significant margin difference from 2016 to 2018.

There was an increase for non-differential compared to conventional products, which was very significant in 2016, a difference in margin between conventional and special products of 5.4%. And in 2018, despite all difficulties, we expanded this margin difference to 10.4%. So this is our current focus. If we consider all the restructuring that Dalton mentioned, we keep on focusing on our research and development, and we keep on focusing on our special products. And on the field, agronomical response has been very significant. So we understand this is one of the drivers, so we can maintain and recover our position.

So basically, this is it. And we can talk more afterwards.

[Dalton Heringer, executive]

Thank you, Ulisses. Let us resume and talk now about the financial picture -- the financial scenario vis-à-vis the fourth quarter and full year 2018. The year, like we said before, had several factors. We had a very strong impact on our P&L.

In the second half of the year, the financial capacity to maintain volumes at historical levels was decisive for the drop in sales, revenues and volumes. We had a drop of 23% of our revenue over the year from BRL 4.8 billion to BRL 3.7 billion as net revenue. As a result, in the fourth quarter, it became even more significant because the first half of the year didn't pose any significant reductions in our net revenue. So the bulk of this drop that occurred over the year of 23%, like I said before, was generated in the second half of the year and even more strongly in Q4.

So the fourth quarter posted this drop of nearly 61% from BRL 1,487,000,000 to BRL 576 million. The factors and drivers that I mentioned before, for instance, the truckers strike and this high prices of raw materials, a lot of volatility of foreign exchange during the election time made the cost of raw materials fluctuate a lot over the year and particularly more strongly affecting our results in the second half of the year, and the P&L of the company -- or correcting myself, the P&L of the company became negative with the results of the second quarter.

So cost of goods sold as a percentage of the revenue was very high. Gross margin in this time frame was way lower than historical levels. And as a result, gross product -- profit over 2017, which was BRL 460 million was BRL 185 million in 2018, way below the historical levels. Please note that year 2017 already posted low margins. The company prior 2017 and 2018 had already posted levels between 1 percentage point above or below, so between 12% and 14% gross margin, some years slightly higher, other years lower. But this level of a little bit less than 10% posted in 2017 and only 5% in 2018 was a reality very far away from the company's historical levels.

In terms of freight and commission, this is pari passu with the drop in volumes. So expenses in freight and commission as a ratio of net revenue showed very similar percentages in 2017, 4.9%, and in 2018, 4.8%. As you can see, it was possible to have an adjustment vis-à-vis the drop in volume in 2018 and making the same adjustments to these expenses, both for the quarter and the full year, while the same was not possible in SG&A expenses. There was a reduction in our personnel or headcount, which went down according to the drop in revenues, but personnel expenses, if you consider termination and the cost of layoffs at the end of the day, overall speaking, SG&A expenses did not follow the drop posted in volumes.

There was a drop in the year. However, this drop in SG&A expenses was lower than the drop in volume. So BRL 215 million in total SG&A expenses in year 2017 and BRL 200 million in year 2018. So there was a drop of 7%. However, it was not proportional to the drop in volumes pretty much due to what I said before. In other words, we had layoffs, and, therefore, there was a reduction in the headcount trying to bring these changes. However, termination or layoff expenses at the end of the day made the drop in SG&A expense not proportional to the volume reduction for the full year.

As a result, for the first time in the history of the company, we had a negative EBITDA. So in year 2018, if we consider all the circumstances we mentioned before, year 2018 had many nonrecurring events if you consider this very long track record, and we had a negative EBITDA year. And please note that year 2017 already posted a very low EBITDA, so we have some impacts from 2017 on 2018.

So years prior to 2017, the company was performing with over BRL 200 million EBITDA per year, and 2017 already posted a drop, by half, of the minimum EBITDA or operational EBITDA in previous years. So from BRL 200 million, in terms of level, 2017 showed a lower number, BRL 92 million, just to round up the numbers, of 50%, and 2018 showed the first reality of a negative EBITDA in the company.

In terms of net financial expense, the company's indebtedness was putting a lot of pressure on our operation, hindering the operation levels for the second half of the year. This very high indebtedness level in the balance sheet of the company added to a high volatility of foreign exchange in 2018 and added to the higher risk perception of the company made financial expenses for the year had a significant increase from BRL 230 million in 2017 to the current level in 2018 of BRL 332 million.

The net income -- and on other next slide, we're going to give you more detail, if you're following our presentation, on Slide 12. There is an influence of an accounting event in which deferred taxes, income tax and social contribution, we had reversal of these taxes from previous periods. So for accounting purposes, in year 2017, we posted BRL 125 million as negative net profit. Year 2018, approximately BRL 780 million as negative net profit.

On Slide 12, as I was saying, if you focus on equivalent basis to analyze the net profit or net income, we moved away from operating result in the same base. So in 2017, we had BRL 192 million as operating loss, and year 2018, BRL 528 million as operating loss. So these figures show a reversal of deferred tax. And this is due to the challenge of projecting future performance of these taxes. And the numbers adequately reflect this accounting reversal. And like we said before, there was a loss in 2017 amounting to BRL 105 million with deferred income tax and social contribution.

And once these amounts were reversed, both in the current year and in previous years, the net profit was taken to BRL 780 million. Please note that although these taxes are not accounting -- are not reflected for accounting purposes, there are no tax impacts. In the future, should the company start generating tax income again, from the tax viewpoint, it will be possible to benefit from these credits once we have a real tax profit in the future. It is reflected for accounting purposes, but we don't have this future tax impact yet.

So year 2017 -- and, by the way, if you're following our presentation, we're now on Slide 13. There was an important judicial decision that was really having a very strong impact on the company's income. So we had a decision made in May 2018 at the lower court. And once we have a renewal of the operating license or the revenue, the SSP unit in Paranaguá could have the adequate permit or license to start operating again.

So this unit has been -- had a slowdown and stopped for a while, but maintenance level is adequate. The licensing process had a judicial decision, and it requires a new EIA/RIMA, Environmental Study and Report with a public hearing. And the company is working with all bureaucracies, so we can have another Environmental Study and Report and the public hearings, so that possibly, over 2019, we can have this plan approved. This environmental plan approved by the environmental agency of the State of Parana, and so we can have the operating license validated for 2019 and beyond.

Now let us talk about the cash flow. Year 2018 showed a reality of cash flow in which we started the period with BRL 67 million cash, and the result for the year and also the difficulty to maintain lines with banks and suppliers made the cash by year-end to a level of up approximately BRL 20 million. So there was a big drop in cash. So in early 2018 to the end of 2018, we had BRL 47 million approximately.

So we have this broken down, not in this presentation, but also in the company's earnings release report, which is already public and also the financial statements. So the main accounts that are driving cash from early to the end of the year are not investment accounts. They are payments related to suppliers and banks and also operations, loans, with new purchases and new financing.

So there was also a significant flow in cash reduction or cash increase coming from lower inventories in this time frame. I am not going to discuss in detail right now. The take-home message is that it was a tough year to maintain cash positive every month or every quarter considering the P&L of the company in each and every quarter and also the uncertainties related to year 2018 with very high foreign exchange volatility and the reflex of the second quarter making the P&L of the company turn negative and now the challenge of keeping credit at historical levels. So all these factors led to this drop in cash that we saw over the year.

So this is the impact on the company. Now resuming our presentation, let us move to Slide 15 now. On this slide, we show some of our most important raw materials: phosphorus, potassium and nitrogen, and we already mentioned some increases over this period. For some products, we had constant hikes pegged to the dollar and also in addition to the high prices of dollars in Brazil. And therefore, there was a negative impact on sales margins -- anticipated sales by all players in the fertilizer market.

So there was a favorable barter ratio for agriculture in early 2018. Farmers anticipated their purchase, and the industry and Heringer were also participating in these sales. And later on, there were those impacts. I already mentioned a couple of them, and I'm just highlighting again the truckers strike generating an impact on logistics and the big dollar volatility. And now on Slide 15, we show a little bit of the reflex of the high prices of raw materials that are pegged to the dollar.

What about our stock? We had big moves over 2018. Early in the year, we reached a level below BRL 3 or BRL 2.50, BRL 2.70, and we had times over BRL 8 or BRL sometimes in the purchase and sale of our stock last year. And we closed the year at a lower level, around BRL 4.5 per share. Right now, I would say our stock is very much pressured by uncertainties that are still present in our judicial recovery process. However, the company is performing all the legal proceedings required. So that over 2019, we can have the plan approved and then help to bring uncertainties to an end and possibly start having a higher price level, depending on the market conditions, depending on the approval of the plan and also lower uncertainties vis-à-vis the company.

I would like to give the floor back to Ulisses.

[Ulisses Maestri, executive]

Thank you. When we speak of uncertainties, on the other hand, if you think about Brazilian harvest, what we see when you think about winter crop is a moment of happiness. Either you're going to have a record winter crop, and, therefore, the slide that you see now. According to the last CONAB survey, we had 33 million tons. And yesterday, Agroconsult estimated 240 million tons, naturally, owing to a winter crop that will be really strong.

Everything was great in the winter crop. So we expect to have 240 million tons already exceeding the latest CONAB survey. So we do have expectations for fertilizers all in the same pace. ANDA doesn't give you monthly data, you only have data every 4 months, the National Fertilizer Agency (sic) [Association]. So Heringer foresees that the market of 2018 was 35.5 million tons, something around those numbers. And the growth for next year is 3%. So we would have a fertilizer market around 36 million tons, naturally, following the harvest year 2018, 2019, that is actually really strong.

Our expectation is that the market or seasonality be maintained 63%, 37% in the second half of the year. We don't expect to see a lot of change. Naturally, it can be influenced by a winter crop down the road because we can have some advances, and we can also have the same now in the first quarter vis-à-vis soybean. The scenario is not going to change that much. 37-63 is what we foresee in the fertilizer market. And I repeat, this is our estimate of the market for 2019.

[Dalton Heringer, executive]

Thank you, Ulisses. Now I'd like to start the question-and-answer session, if there are questions. Thank you very much for being with us up to now.

[Operator]

[Operator Instructions] There are no questions. We would like to give the floor back to the company for the closing remarks.

[Dalton Heringer, executive]

Once again, thank you for being with us for joining us today at this conference call about full year 2018. It was a tough year bringing significant changes to the company. However, last year, the company celebrated 50 years of operation in the fertilizer market in Brazil. Ulisses put it so well. This market will keep on bringing opportunities in terms of growth.

And via the judicial recovery in 2019, the company is pursuing legal protection. And the goal is to continue with our operations. So we are very hopeful that this reality for 2019 will bring, as we've been planning, the continuation of our business. We still have a lot of challenges in the judicial proceeding in our operations, but our team is very focused, very committed, so we can be successful in our future negotiations.

I would say that, on a quarterly basis, we'll be sharing information, and I hope there will be positive information to give evidence of this potential recovery, which we consider to be doable. Our history, our always positive share, very active in the fertilizer market happens through the support in the continuity of the business, so we can really deliver a better 2019 and with a healthier structure in the company's balance sheet, the company's operations, so we can keep on supplying good products to our clients, products that benefit agriculture and support Brazilian agriculture to perform very importantly in our country to meet the whole national demand for foods and also exports for more than 100 countries in the world. Thank you very much. Thank you for following our conference call today, and see you next time.

[Operator]

Thank you. This concludes Fertilizantes Heringer's conference call. You may disconnect your lines now. Have a good day.