Fertilizantes Heringer SA

BOVESPA:FHER3

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. Thank you for waiting. Welcome to Fertilizantes Heringer's Fourth Quarter of 2021 Earnings Conference Call. Today with us, we have Mr. Dalton Carlos Heringer, CEO of the company; and Ricardo Cavalcanti Alves, CFO and Controller of the company. We would like to inform you that this event is being recorded. [Operator Instructions]

Afterwards we will have a Q&A session for investors and analysts only when further instructions will be given. Before proceeding, we would like to mention that forward-looking statements that might be made during this call in relation to the company's business 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 refer to future events, and therefore, they depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of the company and may cause results to differ materially from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Dalton Carlos Heringer, CEO of the company, who will start the presentation. Mr. Heringer, you may begin.

[Dalton Heringer, executive]

Good morning, everybody, and thank you for participating in the fourth quarter of 2021 results conference call. First, I would like to mention the material fact that was published yesterday by the company in which we clarify the closing of the sale operation that we announced in December. [indiscernible] Fertilizantes Tocantins S.A. This was published and you have all the information available at the company's website and CVM as well. And should you have any doubts, the company will be ready to answer and, of course, during the call as well and afterwards, if you wish. And we will have the necessary clarification should you have any doubt.

So those of you who are following our presentation about the quarter and, of course, the full year of 2021, you have our presentation, and we will be starting by talking about the court-supervised reorganization.

On Slide #4, you have the time line, the status of the judicial recovery processes, the request for the judicial recovery going up to the deferral of our request to close the judicial reorganization, which happened last week, on March 22. There was a decision and of course, still at the first level of the court proceedings. So there could be appeals yet. But we do believe that the decision was given according to the strict compliance with the law.

So the company deserved this request for the closing of the judicial reorganization and it was approved by the Paulínia lower court where we have the process of the judicial recovery. So this is very important because this means that the debt part of the company has been solved in the sense that it was unbearable for the company at a certain point in time before we filed for the judicial recovery. And this confirms the continuity of the -- continuation of the company's businesses.

The quarter was marked by a drop in the volume of Heringer, and this drop was very much because of the very high price increase that we had in the fourth quarter and also due to the fact that in some regions, we had a very dry climate. So because of this dry weather in some of the regions and also because of the other factors that I mentioned, there was a decrease in deliveries on the part of the company. And the company, in spite of the drop in volume, in the fourth quarter, we achieved 8% increase, lower than the market average because of the financial situation of Heringer that in terms of results continues to be the company's top priority. So between having a volume much higher than this 8% and growing with a better margin, the company chose to seek the best possible margins and thereby obtaining the benefit of participating in the result of the year's operation.

If you look at the 8% growth in volume, you can see that the growth in revenue was much higher than that because of this characteristic that has already been mentioned that have been very high cost increases in the exchange rate with the dollar during the year and also the price of raw materials. And we will be seeing this in detail later on.

So on Page #5, those of you who are following our presentation, we can see that we had 38% growth here for volume in the first quarter, then the second 28%, practically 0 in the third quarter and almost 10% drop in the fourth quarter, giving us an average vis-a-vis 2020 of 8%.

On the next slide, you can see the volumes and crops. The company has been maintaining its profile working in operations that work with all the crops. So we have a very strong work in all the other crops as an opportunity to deliver to smaller and medium-sized clients as well as the large ones that produce sugarcane and corn that have very big areas in this process, but always maintaining our characteristic, a desirable characteristic of having a very big diversification of crops. Because of that, we have a lower price-associated risk, for instance, if you only work with one of the crops. So when you have that, it is very difficult to have a barter ratio because all Brazilian crops are going very well with favorable prices for the farmers in terms of profitability. But when you have a very high concentration in one single crop, this may lead to some difficulty in terms of barter ratio and the price of fertilizer becomes more difficult or becomes more expensive. So it is very desirable to have this diversification of crops.

When you look at the full year, because of the diversity of our crops, you can see that we maintain our presence in all these crops and all the crops, repeating what I said before, we have already mentioned that that all the crops had a very good level of profitability. And of course, some of the crops have better profitability characteristics and others have less. But it is very important to have many different crops and the Brazilian agriculture in the last couple of years delivered a growth in fertilizer demand. It was very robust indeed. And this further reinforces what I mentioned in terms of the profitability that has been maintained by agriculture in general.

Now on the next slide, we talk about the mix of delivered products, conventional and special products. And this is a very important characteristic that has been developed by the company over time, which is to seek products that better serve agriculture generating increasing yields. And very often, these products are more costly. And in spite of that, given that the characteristic of the product leads to a better productivity, a better yield for the farmers, so in spite of paying more for the product, the farmers have a higher profitability than if they just resorted to conventional fertilizers. And the Brazilian agriculture increasingly every year has been increasing their yield. So these products of our special line have been very well accepted.

And what you see on the slide, Slide #8, for those of you who are following the presentation, you can see that we had an increase of 46% in 2020 of specialty products as the portfolio mix reaching 51%. This has been a very important evolution. This was our target, that is to say, getting to close to 50%. That was our target for the year in the normal process of the business regarding the special products of the company. And we believe that gradually, we could even go upwards in the development of special products. Many farmers still think about the price of fertilizers as the main factor for their decision-making process in terms of their purchases. And whereas it should be how much will this fertilizer bring of additional yield, and some farmers already see this, and they focus on that, that is to say how much this fertilizer will bring in terms of benefit. So very often when they have this frame of mind, they do not buy conventional products. They choose to buy a special product, although it is more expensive. But overall, it is really worth it.

Now going to Slide #9, those of you who are following our presentation. The company today -- the company operates 11 of the 14 units that we have. So 3 of our units are hibernating yet. And I think I should mention that when we filed for judicial recovery, we hibernated many of our units. And from the initial filing of the judicial recovery up to now, many of these units were activated or reactivated over time. And right now, the snapshot of December 2021, we still have 3 units hibernating. In the presentation, we say that the Rio Grande unit is undergoing maintenance and being prepared in order to resume activities at the end of the first half or maybe at the beginning of the third quarter. This characteristic of resuming operations in Rio Grande is here in the presentation, and we still have a reality to be defined for Paranaguá and Porto Alegre. This will depend on future decisions, but the currently active units of the company have an installed capacity of over 4 million tonnes and storage today also ready to have over 600,000 tonnes being stored.

As I said before, Brazilian -- or Brazil had a very high increase in consumption in the last couple of years driven by the world demand for agricultural products. And the pandemic differently from other sectors has not had a negative impact on the food sector. The food sector continued to grow all over the world. And Brazil was able to tap into this reality of growing demand, also increasing production, mainly for export, in a very efficient manner. So in order to really achieve a growth in food exports and also generating more agricultural products overall, this has to do with an increase in the consumption of fertilizers. So this relationship between agriculture production and fertilizer consumption is very strong, not only here in Brazil, but plants everywhere they need these nutrients and the fertilizers really cater to that and they meet this demand.

So having a higher agricultural production has to do with having a better nutrition, which means higher volumes of fertilizers. In the last couple of years, we saw a very strong demand in the fertilizer consumption, and imports were relevant as well during this period. But more specifically, last year, we also saw a growth in the domestic production of fertilizers that had been dropping consistently in the last few years. So last year, after a long time, we saw that -- during many years, we saw a drop in domestic production. And last year, the situation changed. We have a slight increase in our domestic production, reaching almost 7 million vis-a-vis 6.5 million in the previous year, tonnes. But given the fact that the growth in the market has been very strong, it was really supported by imports. As you can see here, we see 19% growth in the year reaching about 40 million tonnes overall, which is historical. That is to say, we have never seen such a strong demand before.

But on the other hand, the market was buying much more fertilizers in one single year. 2020, for instance, had been the highest ever for the fertilizer industry for one given year. And the growth that we had from 2020 to 2021 was very big, 13%, as you can see on the slide. So we saw a market that was lower than 40 million tonnes and the previous record was 2019, going up to almost 46 million tonnes during the period. In the case of Heringer, you can see the chart on the right, we see an even stronger evolution, of course, driven by our judicial recovery characteristic that brought a possibility to return to our operations.

We were able to manage our inventories. We managed all our sales and our purchases, the commercial characteristic of the sale of our product and also having an increase during the period of less than 800,000, which was the lowest ever in 2019, reaching about 1.5 million. We practically doubled the volume in a couple of years. So this reality was possible because of the characteristic of the interest on the part of farmers in the products of the company, together with the possibility of supply that improved increasingly with the opening of unit -- reopening of units and the adequate inventories that we were able to have, going from 800,000 in 2019 to practically 1.5 million.

I would like to thank you very much for your attention and give the floor to Ricardo, who is our Head of Finance, and he will talk about our figures.

[Ricardo Cavalcanti;CFO and Controller, executive]

Thank you, Dalton. It is a great pleasure to present the results of the company to investors and other stakeholders. 2021 was a year in which our volumes were according the seasonality that we expected for this period, on Page 12. Nevertheless, because of the increases in raw material prices, we had a higher ticket. Our sales price was higher. So you can see that the increase in revenues is higher than the increase in volume, as you can see on the slide. You can see that our revenues with a higher ticket of our product. Our sales grew much more in terms of revenues than in terms of volume because of the price increases. So you can see that we maintained our profitability. We monitored our margins. BRL 870 million EBITDA, BRL 999 million in the gross margin, BRL 4.3 billion here in revenues, and the volume, as we said before, a little bit less than 1.5 million.

In the quarter, as we can see, this is a very strong quarter, together with the third because of the seasonality of our industry and the profitability in the last quarter. We had higher prices and therefore, we had the highest in the year.

On Page 13, we see our income statement for the fourth quarter of 2021. If we compare to the fourth quarter of 2020, you can see a drop in volume as has already been explained by Dalton. Our net revenue because of the higher prices, it more than doubled. Margin maintenance, which is the major concern of the company brought us a gross profit of BRL 435.28 million. And after the expenses having to do with the business, this brought us an EBITDA of BRL 403 million for the quarter. The net financial result for the quarter, and I will be going into detail in the next pages. And our net result for the quarter was BRL 428.600 million. In this quarter, in December, we recognized about BRL 100 million of income tax and social contribution deferred in relation to previously verified losses in the company because of business plans. In terms of the credit regarding this negative profit -- negative tax base, we recognized the deferred income tax that we have in our books of about BRL 100 million in December with BRL 428.622 million of net result.

For the full year, January to December, we had a volume of almost 1.5 million tonnes, 8.1% growth year-on-year increase. The net revenue of BRL 4.3 billion, our gross margin being maintained higher than 20%. And after the fixed and variable expenses, the EBITDA of BRL 170 million (sic) [ BRL 870 million ], EBITDA margin 20.3% this year. Net financial result, an expense of BRL 156 million and the net result, BRL 667 million. And in this amount, we have the BRL 100 million of deferred income tax and social contribution that have already been recognized in the quarter -- in the last quarter.

For those of you who are following our presentation, let's turn now to Page 15. We have a very brief reconciliation of our financial results. On the upper part of the slide, you can see the quarter -- the fourth quarter and the financial expenses, BRL 25 million in the quarter, a slight exchange rate variation that brought about a small loss and the appropriate expenses, current loans or debt included in the judicial recovery plan. Exchange rate variation because of the depreciation of the real and the contract -- the long-term contract of the debt that is included in the recovery plan. So this variation is not realized. This is just a correct restatement of the balances, okay? And on the lower part of the slide, we have the same conciliation for the full year of 2021 financial expenses, a BRL 156 million in the year. The exchange rate variation unrealized, just for the restatement of the long-term contract, BRL 55 million and the additional BRL 100 million are the interests from long-term debt and also loan and other financial expenses.

Income tax, social contribution and depreciation reconciliated for the EBITDA, for the net income. BRL 667 million in net result for the period -- for the year, for the full year of 2021. The cash flow of the company is made up of a result before income tax and social contribution of BRL 686 million. This is the last column on the right, if you're following the presentation, Slide 16. We have the noncash expenses to reconciliate this income for the cash impact. So the reconciliated income goes from BRL 456 million to BRL 884 million.

Working capital, a little bit over BRL 1 billion because of assets and mainly inventories and the inventory volumes are according to the normal businesses or business as usual. And as we said before, the cost of imports of raw materials had a very big increase. This is why we had BRL 1 billion in inventories with some movement in the lower liabilities. We have the cash flow for investing activities, BRL 78 million, generating a free cash flow of BRL 238.723 million on the right column around the middle of this slide, Page 16.

This need for free cash flow was covered by working capital operations, short-term banking operations in order to balance our cash vis-a-vis this need and funding the year increased. So we increased BRL 229 million in our short-term debt. So this is very easy to support, so to say. And the EBITDA is also sufficient in the relation with the EBITDA. Dalton?

[Dalton Heringer, executive]

Thank you very much, Ricardo, for the explanation about our figures and our cash flow. So during this period, we had a very favorable situation because the company was looking to tap into opportunities in the market for both volume and margins. And our figures are evidence of our incessant focus on that and the adequate customer service that we always seek to provide. So these figures translate very well this reality.

Now let's talk a little bit about our outlook. The future is a big question mark because we have the reality of the Russia and Ukrainian situation. And of course, for the international scenario of many commodities, it does have a big impact and this brings about a higher degree of uncertainty. But the position taken by the Brazilian government has been quite reasonable taking into account the characteristic of Brazil of having a very large population; and secondly, very strong food export. So this characteristic of production is very important to be maintained. Or in other words, I mean that the federal government has been acting very prudently trying to keep a neutral position as is a historical stand taken by Brazilian diplomacy and seeking to achieve the normal production of agricultural goods, be it for the domestic consumption or for exports.

So you can see on Slide #18, a very strong increase. We have mentioned quite a few times already during this presentation, the increase in prices of raw materials. And this was because of the growth in demand. This was very clear in our domestic demand. And you can see here on this slide, a very important increase. But there were also, on the other hand, increases in production on the part of farmers or producers, but the demand characteristic was even higher. Because of the supply-demand situation, the prices of these raw materials were driven up. So you can see here on this slide, the price increases over the year.

Brazilian production has been increasing, and even in spite of the dry weather and other factors, we can see an increase. We see the large survey made by CONAB about the '21/'22 harvest. You can see that in spite of the weather problems lived by some regions in Brazil, they had an increase of 4% vis-a-vis the previous harvest year. We should have a total grain production in the '21/'22 of 226 million tonnes coming from a previous year of 255 million tonnes. So the drought brought some pressure on this increase and bringing it a little bit down. But because the planted area and the consumption of fertilizers, if it were not for the weather problem that we had in some regions, we could reach even higher levels than the ones that we see now or higher than the estimates made by CONAB.

I would like to thank you very much for following us. And now I would like to turn the microphone to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Please stand by while we wait for questions.

We have quite a lot of questions. Let's see how many we are able to answer during this call.

[Dalton Heringer, executive]

This is Dalton. With me, I have Ricardo, and we will try to cover all the questions.

[indiscernible] the first question. What about the availability of raw material for the company vis-a-vis the scenario, which is the outlook?

Well, right now, the demand -- the seasonal demand is low. If you make a historical analysis, the month of April to June in the area where we operate, these are months with a low demand. So we have the right degree of comfort, I would say, in order to have a solution for the raw material issue. Of course, the scenario of uncertainty with the reality of the situation between Russia and Ukraine, and the actions taken by the U.S. and the European Union regarding embargos has an even higher degree of uncertainty, but we believe that this will be solved taking into account the characteristic of fertilizers. This is an -- of being an essential good to produce food, and you cannot stop producing food. Of course, you have other factors that come into place such as energy and others, but the basic demand for food.

You can see that many countries in the world need Brazilian exports of food. So the current Ministry of Agriculture of Brazil is carrying out dealings so that fertilizers do not become part of one embargo because ultimately, fertilizers are equal to food and food is a basic need. So the demand for food in the world should be a reality to be maintained. So the period of low demand could help us bring all that to a balance, although the Russian production is very important for the supply of some of the raw materials that are needed, but I do not see a very big problem in the short run.

And the other part of the question, could you talk about the transfer of this price increase of the raw materials?

Well, this is already occurring. What happens is that it's very difficult today to establish prices. You don't have an exchange for fertilizers, such as is the case of oil, for instance. And with this uncertainty that we have in the horizon, what is the right -- the price of raw materials brings about a higher difficulty to price our goods, and we are transferring little by little all these price increases of the raw materials.

Now let's talk about the second question from [indiscernible]. There are many questions in one. Expectation of demand and maintenance of margins over 2022. What is your expectation, more similar to 2021 or to 2020?

Well, looking at the fertilizer prices and having this uncertainty looming in the horizon, after 2 years with such big increases in demand, we do expect some degree of drop. I don't believe it's going to be a very steep drop, but we should expect some drop in demand vis-a-vis '21 and '20. I believe it would be more similar to 2021 or even slightly higher than 2021 right now, but this could change in terms of expectation. But right now, this would be the situation.

The second part of the question. Do you intend to reactivate the 3 hibernated units, when, how much could they increase in your production?

What we have so far in terms of decision, as we said during the presentation, would be the reactivation of the Rio Grande plant. This could increase by 220,000 tonnes our overall capacity. And right now, this is what we have. The company has already reverted accumulated losses, will be paid -- the company has reverted the accumulated losses. Will the company pay dividends? What is the expected payout? We expect to continue improving, but the reversal of the losses will take some time. It will take us some time to go back to normal. The period before the judicial recovery generated a negative profitability, a very big one. The losses were very big. But what happened is that by law, the company after offsetting the losses, we will be paying the 25% minimum according to the legal requirements.

Could you clarify why this withholding of 35% of the amount of the control sale and which amounts are provisioned?

These are normal characteristics, and they are present in all M&A contracts, all M&A agreements. You have to have a provision for contingencies. So the provisioning is according to an accounting reality. So all the needs for provisioning are in our balance sheet. And as happens in all other companies, there is the risk of future contingencies, and this is not a known figure. So this reality of this withholding, only the future we'll be showing the exact figures for that.

The inventory generated in the fourth quarter. With this large inventory and with the price hikes in the first and the second quarters of '22, do you expect a higher margin?

As we said before, the company has been seeking to transfer. And there is a lot of uncertainty in the price reality right now. So I cannot say that there will be a margin increase. Very possibly, looking as a percentage, it will drop because the price is higher. Even if in absolute terms it does not drop reals per tonne, there is a possibility of having a difficulty in transferring this as a percentage of the gross margin, given the price increase that we still see. So this will be one challenge for all the companies in the sector.

And the last part of the question, it's a very long question. Thank you very much. There are many items to be answered. The current Executive Board will continue?

Well, this will be decided during a meeting that will be held on the 31st, we have already convened. The call for the meeting has been made a few days ago, and this will be one of the items in our agenda for the 31st of March.

[indiscernible] How do you see the market in 2022? The exports from Russia, are they impacting the company already?

Well, this has already been said. In some regions of Brazil, we had a lower productivity than expected because of the weather conditions and the current prices of fertilizers lead us to believe that there will be some adjustment in demand in 2022. It's a little bit too early to say or to quantify this drop. More specifically, we do not see a very big drop to the extent of getting to the level of demand that we had, let's say, one year ago in 2021.

Exports from Russia, are they impacting the company?

Not right now, because in terms of volumes we have a low season now. But in the future, should this reality not go back to normal, there will be an impact. But the whole sector as a whole is expecting a definition. But this sooner will go back to normal, the sooner we will have normal supply in Brazil because Russia has this characteristic of being a very important producer.

Leonardo. What about the scenario from now on prices, freight, receiving and delivering our fertilizer, expectation for the harvest, capacity to deliver and to pay producers, in spite of the price increases that we have been seeing in fertilizers, if you have a barter ratio like the one that we have now?

There is a favorable relation or correlation for the industry. Fertilizers have gone up, but the agriculture prices have gone up as well. And in relation to prices and freight and the producer capacity, it is preserved. As we saw, Brazil has a different characteristic here because our production is higher than last year's and at very favorable prices. We could see some slight drop in consumption, yes. But right now, international freight had important increases in prices as well, and the domestic freight as well because of the diesel prices. So we expect to have additional increases, but everything within the context that has already been explained when we answered previous questions.

Another question from [ Julu Barbek ]. Do you expect a low -- there will be scarcity -- will there be scarcity of imports?

There could be in some regions or some difficulties in terms of the lead time, but this is not really a shortage. It is not a general shortage of fertilizers for Brazil. There could be a drop in consumption, as we said, given the uncertainty that we have already referred to. Eurochem is a very big producer of nitrogen, phosphorus and potassium, but there is no obligation of assuring supply to Heringer. We also buy Eurochem products. We buy their products, but there will be also the acquisition of other sources of the same raw materials as we have always done.

And the last question that we have here is from [ Juan Pereira ], an individual investor. Congratulations for the results. And with the close of the Eurochem deal, what do you believe there will be the OPA?

Thank you very much. This was a very challenging year, but we achieved very good results in spite of that. Our expectation of results for this year is more uncertain. But in spite of that, we believe that the company will be able to perform at the best possible level with all this uncertainty that we have in the world scenario. And the characteristics of OPA are very well described in a material fact that we have already published. And this will be made public immediately to the market in general and specifically to shareholders. The decisions regarding [indiscernible] and the delisting of the company will happen when the decisions are made, and this will be informed immediately to the market.

I would like to thank you very much for all the questions, for all your attention. We are reaching the end of our call. We wanted to present the results of the full year of 2021 and the last quarter, and we have done so. Thank you very much, and we will continue to maintain the market informed at all times. If you have any further doubts, the Investor Relations team of Heringer will be at your disposal to any further clarification that you might have. Thank you very much.

[Operator]

Thank you very much. Fertilizantes Heringer's conference call has come to an end. You may disconnect your lines right now. Have a good day.

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