U.S. Markets closed

Edited Transcript of FHER3.SA earnings conference call or presentation 13-Nov-19 3:00pm GMT

Q3 2019 Fertilizantes Heringer SA Earnings Call

Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Fertilizantes Heringer SA earnings conference call or presentation Wednesday, November 13, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dalton Carlos Heringer

Fertilizantes Heringer S.A. - Deputy Chairman, CEO, Chief Administrative Officer & Member of Executive Board

* Ricardo Garcia

Fertilizantes Heringer S.A. - Head of Finance & Controller

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and thank you for waiting. Welcome to Fertilizantes Heringer's conference call to discuss the results of the third quarter of 2019. Today with us, we have Mr. Dalton Carlos Heringer, CEO; and Mr. Ricardo Garcia, Head of Finance and Controller. We would like to inform you that this event is being recorded. (Operator Instructions) The replay of this event will be available for 1 week as soon as it ends. And this event is also being broadcast simultaneously on the Internet via webcast at the Investor Relations website of Heringer, heringer.com.br/investorrelations, where you can also find the respective presentation.

Before proceeding, we would like to clarify that forward-looking statements that might be made during this call in relation to the company's business perspectives, operating and financial projections and targets are beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantees 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 affect the future performance of the company and may lead to results that differ materially from those expressed in such forward-looking statements.

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

--------------------------------------------------------------------------------

Dalton Carlos Heringer, Fertilizantes Heringer S.A. - Deputy Chairman, CEO, Chief Administrative Officer & Member of Executive Board [2]

--------------------------------------------------------------------------------

Good afternoon, everybody, and thank you for participating in our call about the results of the third quarter of 2019. If you're following our presentation, the agenda is as follows. We have 3 topics. The first one will be the judicial recovery of the company. The second point will be the company and some financial highlights, and the third is the reality and the outlook for the company.

I would like to start by the judicial recovery. During this quarter, there have been some stages of the judicial reorganization, and one of them was that there was a change in the proposal for the reorganization plan presented on October 18. And on October 23, the first invitation to creditors happened. But on October 23, it was not possible to install this meeting. Because of that, there was a second invitation that was necessary and should be complied with. On November 7, we had the second installation of the meeting. So it was installed on the 7th of November. However, it was not possible to vote the plan on this date as a proposal for modification was presented a few days before, so the meeting was suspended, and it was rescheduled to December 3. So the steps of the reorganization were these as I have just described. And once the meeting is established, we will already have the need for approval of the plan on December 3.

And the news regarding the plan are basically these. This is the information that we are bringing to investors. So those of you who are following our presentation on Slide #6, we will be talking about the units and the distribution of the units vis-à-vis the operations. The news in this quarter is the following. One of the units that were hibernated has already resumed production in the south of Minas Gerais in the Três Corações area or Três Corações municipality. So Heringer now has 8 active units: Viana in Espírito Santo; in Minas Gerais, 3 units, Manhuaçú, Três Corações now and Iguatama; in São Paulo, we are operating with Paulínia and Iguatama -- no, Paulínia and Ourinhos; in Goiás in Catalão; and in Bahia in Candeias.

We also have hibernated units that you can see here on the presentation on Page #6. We are talking about 7 units that are not in operation at the moment, and they are hibernating. In relation to our operations in the quarter, the third quarter of 2019 was one in which we delivered 246,000 tons to many different crops, and the comparison on a year-on-year basis shows a very important drop. And of course, the volumes with which the company is operating right now are much lower within the reality that we are living today in our judicial recovery period. But if we analyze the performance of these sales and the results from these sales, we already see that they are more positive and with better volumes. Ricardo will be talking about the financials, but this is the first quarter with a positive EBITDA after quite a few quarters without that. So all the plans for expenses cut, et cetera, that we have carried out in order to adapt to the financial capacity of the company and the working capital reality of the company, all the measures taken have already -- are already bearing fruit. So in this quarter, we already have positive EBITDA after many consecutive quarters. The company has been operating in a smaller region than before. And even in this smaller region, we are maintaining a profile of distribution to many different crops.

So on Page #7 in our presentation, you can see sales for coffee crop, very important. But corn and sugarcane, also an important participation, and other crops, also a big highlight. 77,000 tons of the 246,000 delivered during this quarter went to... [The interpreter apologizes because she's not receiving any sound now. The sound was completely cut, please stand by while they resume this transmission].

(technical difficulty)

[On the main line of our conference, we are now going back, and we are going to resume our conference. And I hope you stay with us. Thank you very much, and we apologize for this inconvenience. So let's resume the presentation.]

Now looking at the 9 months, we have a delivery of 450,000 tons, maintaining basically the same distribution profile with many different crops and showing a recovery, a major recovery in volumes during this quarter. And I would like to remind you that for the full half year -- first half year of the company, we were only able to deliver 200,000 tons. So you can see that in 1 quarter, we were able to do more than the first half year, and you can see the recovery in the volumes delivered.

So I thank you very much for your participation, and I will be giving the floor to Ricardo Garcia who will be talking about our financials.

--------------------------------------------------------------------------------

Ricardo Garcia, Fertilizantes Heringer S.A. - Head of Finance & Controller [3]

--------------------------------------------------------------------------------

Thank you, Dalton. So adding to what Dalton said regarding the volumes, there was a direct impact on the figures of our net revenue. And of course, this is impacted and the net revenue that in 2018, we're talking about the third quarter specifically, it was BRL 1,185,000,000. Now we go to BRL 367 million in the third quarter of '19. There is a reduction of 70%. And when we look at the year-to-date figure, we see a major reduction, 82%, and this has a direct impact on our gross profit. But when we look at that percentage-wise from the third -- on a year-on-year basis, we see an improvement in gross profit, 6 percentage points, which is very good for the business. [And we apologize, but the sound that we are receiving is not good].

When we talk about January to -- in this quarter, we had a positive EBITDA, BRL 8.6 million, which is discrete, but very representative, and we saw a devaluation of the real at the same time, and that happened in June from BRL 3.83 going to BRL 4.16 in September. The impact of the exchange rate still generates a high financial expense, and our net income is still negative because of that, but no cash effect and -- because of the debt that we have in our judicial recovery.

So our results are here. And in the third quarter of '19, you can see a major part of the impact, as Dalton said before, and it represents practically the same impact vis-à-vis the year-to-date as the volumes in the first half were very low when compared to the third quarter, and this is applied for -- this is valid for 2019 and 2018.

And when we look at the distribution and production, talking about Paranaguá in our profit and loss statement, we had the first-degree decision, and that was the basis for a new licensing process. This is underway. It was posted under our provision at the time, BRL 1,457,000, and Heringer continues in this process of environmental licensing. And it has already sent the EIA/RIMA documents to the environmental agency, and we are waiting for the public hearing in order to solve this point.

[We apologize because we have, once again, lost communication with the speakers. Please stand by.]

(technical difficulty)

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

Mr. Garcia, you may proceed, please.

--------------------------------------------------------------------------------

Ricardo Garcia, Fertilizantes Heringer S.A. - Head of Finance & Controller [5]

--------------------------------------------------------------------------------

We apologize, once again, for the disconnection that we had. I believe that we finished talking about the distribution and production of the Paranaguá unit. So as I was saying about our cash flow loss before income tax and social contribution, BRL 136 million affected by the noncash expenses mainly because of the exchange variation unrealized, and we had a net increase of BRL 126 million decrease in asset because of the increase in inventories and account -- trade account receivables. We saw a decrease also of BRL 48.7 million, mainly because of the reduction in trade account receivables. We had no net investment. The amount was very low, not significant. All that gave us BRL 153 million in free cash flow.

Now I would like to give the floor back to Dalton. Thank you very much. Have a good afternoon.

--------------------------------------------------------------------------------

Dalton Carlos Heringer, Fertilizantes Heringer S.A. - Deputy Chairman, CEO, Chief Administrative Officer & Member of Executive Board [6]

--------------------------------------------------------------------------------

Thank you, Ricardo. Basically, one additional information about the reality of licensing in Paranaguá. We were waiting for the dates of the public hearing to be established, which is necessary for the environmental licensing process, and I have the information today that this date has already been scheduled. So very possibly, this is going to happen on December 10, and this will give continuation to the licensing process that we are carrying out for this unit. So the operation is consistent quarter-on-quarter, and the first quarter of this year was very much impacted by the reality lived by the company in the judicial recovery process. So in the second quarter, we already had the beginning of reorganization of the units, already talking about purchases for the units. And as I saw here, the third quarter has already brought about benefit coming from this recovery process, and the recovery was higher. And because of the growing operation that we see in the third quarter, we were able to deliver positive EBITDA results for the quarter.

So those of you who are following us on Slide #12, the sector has been living a reality, the raw material sector, in terms of price corrections, price restatements. And if you see this 1-year chart, the 1-year chart that you see on Slide #12, you can see a drop in the 3 main nutrition chains: urea, nitrogen, potassium. And in dollar, this has not really had a great impact in the price composition in reais because of the exchange rate. And we also live a reality of a significant change in the dollar value. We have been seeing very strong oscillations in the exchange rate, almost on a daily basis. And right now, in Brazil, we do not see a more stable exchange rate. We have been having very big oscillations.

Regarding the ownership structure, no significant change. We see some changes, some ups and downs in our free float trades, but no significant change today in relation to the ownership structure.

Regarding the outlook for the year, the outlook for the year is good, with price recoveries over the year and very much because of the dollar that has been helping us in terms of pricing in reais, bringing benefits to our farmers. And some crops have negative effect, and these are the crops that are smaller in terms of fertilizer consumption in Brazil. And due to this reason, we have crops such as cereals driving this growth from 35.5 million to 36 million tons during this year. And depending on this last quarter, because the corn prices have been showing an important reaction, we expect to have some deliveries still within December, and these 36 million could even be slightly higher than the volumes.

And I would like to mention as well and concluding our presentation, I would like to mention that during this quarter, the third quarter of 2019, the controlling shareholders of the company, by means of Heringer Participações Ltda., the parent company, announced that a letter of intent, a binding letter of intent was signed with the Group Uralkali and Uralchem, and we published a material fact on September 3, 2019 (sic) [September 23, 2019], and we have already imparted some information about this process. The process is occurring as expected. There is nothing new to announce here regarding this process. And it is -- of course, we are having an audit process going on. And in the material fact, we mentioned that there are points that are preceding conditions. So these conditions are being dealt with. And so we do have a process going on business as usual, the normal process, and the company will keep its obligation to inform about any news that might occur. So should the need arise, we will inform our shareholders immediately.

So this is what we had to impart to you. And once again, we apologize for the technical problems that we had. And now let us open to questions.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

(Operator Instructions) If there are no questions, we would like to give the floor back to Mr. Heringer for his closing remarks.

--------------------------------------------------------------------------------

Dalton Carlos Heringer, Fertilizantes Heringer S.A. - Deputy Chairman, CEO, Chief Administrative Officer & Member of Executive Board [8]

--------------------------------------------------------------------------------

Thank you very much once again. And the Investor Relations team and the company are prepared to answer your questions, should you need to ask them. And as the full team is at your disposal and all the communication channels of the company will continue open. As always, the fourth quarter is a very important quarter for the company. As we said during the presentation, this is a quarter during which we will probably have the creditors' meeting that will make a decision about the judicial recovery plan so that the company may have a debt reality with the conditions that will bring about an important benefit to our operation.

We have a very positive expectation, and the effect of the judicial reorganization to the company is very important. And without that, the company would not be able to continue to be active in generating jobs and performing the social role that it must perform. So thank you very much. Agriculture in Brazil continues to be the foundation of the Brazilian economy, and this is a reality that will not change. And in the next few quarters, we will have this reality maintained because the country is a very big producer and exporter of many agricultural products, and this is what gives us strength and the will to continue to perform in the area of fertilizer distribution in Brazil. Thank you very much, and we wish you a very good day.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Thank you very much. Fertilizantes Heringer conference call has come to an end. Please disconnect your lines, and have a good day.

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