1Q18 Conference Call May 16, 2018

Transcription

1 Viana, May 14, 2018 Fertilizantes Heringer (FHER3) announces today its results for 1Q18. 1Q18 Conference Call May 16, 2018 Portuguese 11:00 AM BR (10:00 AM U.S. ET) Phone: +55 (11) / Code: Heringer Replay for one week: +55 (11) Password: English 11:00 AM BR (10:00 AM U.S. ET) Phone: +1 (516) Code: Heringer Replay for one week: +55 (11) Password: Investor Relations Phone: +55 (19) ri@heringer.com.br 1Q18 HIGHLIGHTS Delivery volume totaled 866 thousand metric tons of fertilizers in 1Q18, 1.2% higher than the 856 thousand metric tons in 1Q17; Net revenue totaled R$1,041.4 million in 1Q18, 3.5% up on the R$1,006.3 million recorded in 1Q17; EBITDA was a negative R$28.1 million in 1Q18, lower than the positive EBITDA of R$44.8 million in 1Q17; Net loss came to R$46.7 million in 1Q18, versus a net income of R$7.0 million in 1Q17; Reimbursement of COFINS - the Federal Government made a deposit in the amount of R$32.7 million in 1Q18. 1

2 GLOBAL FERTILIZER MARKET AND AGRIBUSINESS For a better understanding of the Brazilian market in which the Company is inserted, it is important to learn about the global fertilizer market as well as agribusiness in general, which are innovating and growing industries. FERTILIZER RAW MATERIAL PRODUCING COUNTRIES Source: IFA World Potash Capacities 2017, June 2016 IFA World Processed Phosphates Capacities 2017, July 2017 IFA World Ammonia Capacities 2017, June 2017 The charts above show the world's largest fertilizer raw material producers. China is the largest producer of nitrogen and phosphorus, and the 4th largest chloride producer, behind Canada, Russia and Belarus, respectively. Russia also has a leading position in other commodities, and is the second largest producer of nitrogen, followed by the U.S. and India, and the fourth largest producer of phosphorus. Brazil is not one of the leading producing countries of any of the main nutrients (NPK) above, and depends on the importation of fertilizer raw materials. 2

3 FERTILIZER RAW MATERIAL CONSUMING COUNTRIES Source: IFA Short-Term Prospects for World Agriculture and Fertilizer Demand 2016/ /19 CRU Urea Fertilizer Market Outlook September 2017, CRU Potash Outlook August 2017, CRU Phosphate Fertilizer Market Outlook October CANSIM, Table The four largest fertilizer raw material consumers are China, India, the U.S. and Brazil. China is the world's largest consumer of fertilizer and Brazil has a leading position in global consumption and is the second largest consumer of Potassium Chloride, third largest of Phosphorus and fourth largest of Nitrogen. Source: Nutrien Fact Book 2018/ IFA Brazil is the fourth largest fertilizer market in the world growing above the global average and has the highest CAGR (Annual Compound Growth Rate) among the largest fertilizer consumers, at 6.5%, twice the figures of the two largest consumer markets, China and India. From 2014 to 2015, consumption dropped by 6.2% in the Brazilian fertilizer market. In 2016, consumption grew by 12.9% recovering the 2015 drop and reaching a new record, which was surpassed in 2017 with a consumption of 34.4 million metric tons. In 2018, a new record in Brazilian fertilizer consumption is estimated at around 35 million metric tons. 3

4 Source: ONU - Rosemberg/ IMF World Economic Database Global GDP is expected to grow by 3.9 % over the next two years, and global per capita income and per capita income in other countries is growing, along with the population, which in 2050 will reach 9.5 billion according to UN estimates. This growth points to the need for increased food production to meet a growing global demand. The sustainable use of fertilizers is one way to increase the productivity of agricultural crops to meet the global demand for food, fiber and energy. GLOBAL GRAIN PRODUCTION IMPACTED BY THE DROUGHT IN ARGENTINA The scenario for soybean in 2018 is positive since prices have risen due to the drought in Argentina, which is the third largest soybean producer in the world (in 2017 it harvested approximately 55 million metric tons of soybeans), which reduces supply of this crop in 2018, causing global supply and demand to nearly match in the current crop. The price of soybean in the international market (CBOT) began the first quarter at approximately USD9.5 a bushel, and ended it at approximately USD10.5 a bushel. In the same period, the price of corn also increased in the CBOT, with effects on the Brazilian market, recording values higher than those practiced in the same period of Therefore, the 2018 scenario for soybean and corn, which are crops responsible for the consumption of about 60% of fertilizers in Brazil, is very positive and tends to provide good demand for fertilizers in the second half of SOYBEANS: BEST SCENARIO FOR 2018 Source: Santander Santander Economia 4

5 BRAZILIAN FERTILIZER MARKET According to ANDA, deliveries in the Brazilian fertilizer market in 1Q18 totaled 6.3 million metric tons, a reduction of 1.3%, mainly due to the reduction in the demand for second-crop corn and sugarcane when compared to 1Q17. Total deliveries of fertilizers in nutrients (NPK) in the first quarter of 2018 reduced by 2.8% reaching 2.75 million metric tons, compared to 2.83 million metric tons in Nitrogen, phosphate and potassium fertilizers decreased by 1.2%, 3.7% and 4.2%, respectively. Mato Grosso State led the deliveries, concentrating the largest volume in the first quarter (22.2%), reaching 1.4 million metric tons, followed by the states of Paraná (13.5%) with 858 thousand metric tons, São Paulo (12.9%) with 818 thousand metric tons, Minas Gerais (12.6%) with 801 thousand metric tons and Goiás (12.2%) with 770 thousand metric tons. Domestic fertilizer production in the first quarter of 2018 reached 1.86 million metric tons, against 1.94 million metric tons in the same period of 2017, corresponding to a reduction of 4.0%. In the analyzed period, nitrogen fertilizer production decreased by 3.1% and phosphate fertilizer production by 2.6%, whereas potassium fertilizer production increased by 6.8% in relation to Imports of fertilizers reached 4.74 million metric tons in 1Q18, a significant reduction of 14.1% in relation to the same period in Nitrogen fertilizers dropped by 20.7%, phosphates by 23.9% and potassium fertilizers grew by 2% in the period analyzed in relation to Through the Paranaguá port, the main fertilizer entry, imports reached 2.08 million metric tons, a decrease of 7.2% in relation to 2017, when 2.24 million metric tons were unloaded and represented 43.9% of total imports across all ports. BRAZILIAN FERTILIZER MARKET DELIVERIES Source: Anda 5

6 BRAZILIAN FERTILIZER MARKET DOMESTIC PRODUCTION Source: Anda BRAZILIAN FERTILIZER MARKET IMPORTS Source: Anda DELIVERIES BY CROP HERINGER Despite the 1.3% drop in deliveries, the volume delivered by Heringer increased by 1.2%, from 856 thousand metric tons in 1Q17 to 866 thousand metric tons in 1Q18. As a result, the Company resumed growth, reaching a market share of 13.6% in the period against 13.2% in 1Q17. In 1Q18, the Company's deliveries for soybean crop dropped by -11.8% in relation to 1Q17 (historically, deliveries for soybean crop in the Brazilian market in this period are incipient). In addition to soybeans, corn (-0.7% in relation to 1Q17) and sugarcane (-3.2% in relation to 1Q17) also dropped. Coffee and other crops recorded an increase in deliveries of 3.3% and 5.7%, respectively, in 1Q18, compared to the same period in

7 Heringer has a more diversified delivery profile in relation to the Brazilian market, thus minimizing the volatility associated with the local weather and other specific conditions regarding prices, pests and diseases. DELIVERIES BY CROP SPECIALTY PRODUCTS In 1Q18, delivered volume of specialty products totaled 385 thousand metric tons, 7.7% down from 1Q17, which was 417 thousand metric tons. The CAGR (Composite Annual Growth Rate) for the delivery of special products by the Company was 10.5% in the period from 2007 to The share of specialty products in the Company's total deliveries totaled 44% in 1Q18, 49% down from 1Q17. In spite of the decline in the share of specialty product sales in 1Q18, for 2018 the Company expects to achieve a higher share than the 46% recorded in Heringer continues intensifying its efforts to publicize its specialty product portfolio by participating in the main Brazilian agribusiness fairs and implementing, together with its clients, several demonstration fields, thus proving the superior quality of its specialty products compared with the conventional products available in the market. The Company has also been stepping up the delivery of lectures together with specialized advisors in different Brazilian regions, presenting the agricultural potential of these products to a large number of clients. Heringer has been intensifying the training of both its internal sales team and the sales teams of its distributors in all regions. Heringer continues to invest in R&D to develop new technologies and products that can be added to its three specialty product lines: Solo (specially FH Humics, FH Micro total and FH Nitro Mais ), Ferti and Foliar. 7

8 Heringer provides its clients with a complete vegetable nutrition line. Specialty products are fertilizers that are mostly produced exclusively by Heringer and whose agronomic characteristics are superior to market standards. They currently meet the nutritional needs of all crops. INTERNATIONAL RAW MATERIAL PRICES The prices of phosphate and potassium fertilizers and of urea increased in 1Q18 in relation to the previous quarter, as shown below: 8

9 BRAZILIAN FERTILIZER MARKET AND SEASONALITY In 2018, the Company expects the seasonality observed in Brazil s fertilizer market to be similar to recent years, with approximately 40% of the year s total volume delivered in the first half and nearly 60% in the second half. The 2018 outlook is positive, especially in the second half due to the higher concentration of fertilizer demand from more diversified crops and the improvement in grain prices compared to Heringer estimates that in 2018, the Brazilian fertilizer market will reach a record volume of approximately 35.0 million metric tons, nearly 2% up on The reasons for such fertilizer consumption growth estimate for 2018 are mainly focused on the significant improvement in grain prices (cotton, soybeans and corn). Source: Anda / 2018E Heringer Estimate GRAIN PRODUCTION AND PLANTED AREA According to CONAB's 7 th estimate, the 2017/2018 Brazilian grain crop is expected to reach million metric tons, and although this estimate is 3.4% lower than the last harvest, Brazil is expected to harvest the second-largest crop recorded so far, and the expectation for this 2017/2018 harvest has been revised upwards over the months. The planted area may reach 61.4 million hectares, with yield of 3.74 t/ha, which may correspond to the second-best yield in history. 9

10 Grain: corn, soybean, rice, beans, sorghum, castor bean, cotton, sunflower, barley, rye, canola, oat, peanut, wheat and triticale Total Brazil (all crops) Source: CONAB - 7 th estimate April 2018 FINANCIAL RESULTS 1Q18 INCOME STATEMENTS Delivery volume totaled 866 thousand metric tons of fertilizers in 1Q18, 1.2% higher than the 856 thousand metric tons in 1Q17. First-quarter net revenue came to R$1,041.4 million, 3.5% more than the R$1,006.3 million in 1Q17. We highlight that the average fertilizer price in 1Q18 stood at R$1,203 per metric ton against R$1,176 per metric ton in 1T17, increasing by 2.3%. Gross profit amounted to R$67.4 million in 1Q18, 46.3% down on the R$125.5 million recorded in 1Q17, while the gross margin in 1Q18 stood at 6.5%, lower than the 1Q17 figure of 12.5%. Freight and commissions increased to R$51.6 million in 1Q18, corresponding to 5.0% of net revenue, against R$48.7 million in 1Q17, corresponding to 4.8% of net revenue This figure is mainly concentrated in freight, which increased by approximately 10% per metric ton in relation to the first quarter of Commissions fell by 11.8% in 1Q18 compared to 1Q17, reaching R$10.4 million against R$ 11.9 million in the same period of the previous year. S&A expenses (excluding freight and commissions) totaled R$55.2 million in 1Q18, representing 5.3% of net revenue), an increase of 20.8% compared to R$45.7 million in 1Q17, or 4.5% of net revenue. These expenses are mainly related to the increase in the Foliar team as of 3Q17, a higher provision for doubtful accounts, the increase in expenses from fuels and commercial vehicle fleet leasing, nonexistent in 1Q17, among others. EBITDA was a negative R$28.1 million in 1Q18, lower than the positive EBITDA of R$44.8 million in 1Q17, representing a negative margin of 2.7% of net revenue, while the margin in 1Q17 was a positive 4.5%. Net financial expenses totaled R$34.0 million in 1Q18, higher than the R$21.9 million in 1Q17. This line comprises net interest, discounts granted and expenses related to adjustment to present value, among 10

11 others, totaling a negative R$23.3 million, a negative exchange variation of R$4.6 million and net income from hedge operations amounting to R$6.1 million. Net loss came to R$46.7 million in 1Q18, below the net income of R$7.0 million recorded in 1Q17. Heringer manages its financial risks using hedges in order to mitigate the impact of foreign exchange risk on its dollar-denominated liabilities arising from raw material imports. On March 31, 2018, Heringer s total hedge position formed through NDFs came to US$145.1 million, with a weighted average rate of R$3.30. As of March 31, 2018, the Company had no covenants. Despite the continuation of the temporary stoppage of the SSP and sulfuric acid units, their maintenance is at adequate levels. Regarding the public civil lawsuit of Paranaguá - PR, the evidentiary stage has been concluded and the case is pending a decision by the judge of first instance. 11

12 WORKING CAPITAL MANAGEMENT Heringer s working capital reflects the seasonality of its business. Therefore, comparisons with the same quarters in the previous year provide a clearer understanding of its business model. Heringer maintains a working capital policy designed to maintain operations with a cash position that is appropriate for its needs. It also maintains a strict credit policy in order to keep accounts receivable periods as low as possible through short-term Sales, diversification of clients, and effective credit analysis, thereby reducing the risk of default and losses. Therefore, accounts receivable days stood at 37 days in 1Q18, lower than the 42 days in 1Q17. The reduction in accounts receivables days in 1Q18 was due to the maintenance of the Company s strict credit policy. Inventory days stood at 32 days in 1Q18, below the 45 days in 1Q17. Through synergies between the commercial, supply and logistics areas, Heringer seeks to maintain an adequate level of inventories, to meet its clients needs in a timely manner and with quality. Accounts payable days, including import financing operations (FINIMP), closed 1Q18 at 155 days, versus 146 days in 1Q17. Heringer finances its working capital by drawing on credit lines from banks and local and international suppliers, in order to manage its cash flow effectively. The higher prices of fertilizer raw materials over the last two years impose greater challenges for the management of its working capital in

13 CASH FLOW Heringer s cash and cash equivalents closed 1Q18 at R$80.4 million. The main items leading to this difference were: a) Loss before income and social contribution taxes of R$73.7 million; b) Non-cash revenue of R$51.4 million, basically comprising unrealized exchange variation and interest, amortization and depreciation; c) Net decrease of R$248.5 million in asset accounts, basically in inventory reduction; d) Net decrease of R$252.1 million in liability accounts, whose amounts are basically concentrated in the liquidation of suppliers and import financing; e) Net investments of R$4.1 million; f) Positive net cash flow from financing activities of R$43.5 million. TAXES RECOVERABLE Fertilizantes Heringer S.A. had COFINS federal tax credits recorded in under the non-cumulative system related to the third quarter of 2008 and was granted a favorable decision, and the Federal Revenue Service of Brazil expressly and irrevocably recognized the Company s right to the partial refund of the requested amount, and at the end of the first quarter the Federal Government deposited the amount of R$32.7 million. 13

14 HERINGER OWNERSHIP BREAKDOWN Heringer is currently the only fertilizer company listed on B3 (BM&FBOVESPA), which makes it an attractive investment opportunity. Heringer s shares have been listed in the Novo Mercado, B3 s highest corporate governance trading segment, since April 2007 under the ticker FHER3. Some of Heringer s solid fundamentals are: significant growth potential in a competitive market, geographically evenly distributed sales, diversified client base, focus on retail sales, effective logistics and distribution structure, highly recognized brand, broad portfolio of specialty products and solid management. Due to delivery seasonality, the Company s business model should be analyzed on an annual basis. In the first quarter of 2018, Concórdia S.A. Corretora de Valores Mobiliários Câmbio e Commodities ( Concórdia ), informed that through the funds under its management it reached a position/exposure higher than 5% of the total number of common shares that represent the Company s capital stock, declaring that it does not aim to change the Company s control or its administrative structure and that the funds are not part of any agreement or contract that regulates the exercise of voting rights or the acquisition and sale of securities issued by the Company. 14

15 APPENDIX I BALANCE SHEET 15

16 APPENDIX II 1Q18 INCOME STATEMENT 16

17 EBITDA (earnings before interest, tax, depreciation and amortization) is presented as additional information, given our belief that it is an important indicator of our operating performance, as well as useful for comparing our performance with that of other companies in the sector. However, no single figure should be considered a substitute for net income calculated in accordance with Brazilian Corporate Law (BR GAAP) or even as a measure of Heringer s profitability. Moreover, our calculations may not be comparable with similar measures adopted by other companies in the sector. We make forward-looking statements about future events that are subject to risks and uncertainties. These forward-looking statements are based on the beliefs and assumptions of Heringer s management and on information currently available. Forward-looking statements include information about our current plans, beliefs or expectations, as well as those of Heringer's Board of Directors and Executive Officers. The reservations related to forward-looking statements and information also include information on possible or presumed operating results, as well as any statements preceded, followed or including words, such as «believe», «may», «will», «expect», «intend», «plan», «estimate» or similar expressions. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they refer to future events and, therefore, depend on circumstances that may or may not occur. Future results and value creation for shareholders may differ materially from those expressed or suggested by said forward-looking statements. Many factors that may determine these results and figures are beyond Heringer s control or ability to predict. 17