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3Q08 Earnings Release


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3Q08 Earnings Release

  1. 1. QUARTERLY MARKET BULLETIN / 3RD QUARTER 2008.Rio de Janeiro, November 14, 2008 - Brasil Ecodiesel Indústria e Comércio de Biocombustíveis e ÓleosVegetais S.A. (“Brasil Ecodiesel” or the “Company”) and (Bovespa: ECOD3), pioneer in the biodieselproduction in Brazil, hereby announces its 3Q08 results and informs its shareholders on the Company’sperformance. The Company’s financial statements herein are presented, in accordance with the BrazilianCorporation Law, on a consolidated basis and in accordance with Brazilian accounting practices. CONTACTS CONFERENCE CALL English José Carlos Aguilera Monday, November 17, 2008 CEO and INVESTOR RELATIONS OFFICER 1:00 p.m. (Brazil) / 10:00 a.m. (EDT-NY) Eduardo de Come Phone: +1 (412) 858-4600 CHIEF FINANCIAL OFFICER Code: Brasil Ecodiesel Marcos Leite Replay: +1 (412) 317- 0088 IR MANAGER Código: 424840#1 Portuguese Monday, November 17, 2008 E-mail: 11:00 a.m. (Brazil) / 08:00 a.m. (EDT-NY) Phone: +55 11 2188-0188. Phone: +55 (21) 2546-5031 Replay: +55 11 2188-0188. Code: Brasil Ecodiesel HIGHLIGHTS: Continuation of the Company’s restructuring Restructuring of 82.65% of bank debt, obtaining 48 months for settlement, with a 12-month grace period and 36 months of amortization. 3 Sales of 29,072 m in 3Q08, 53.7% more than the previous quarter, but still below 3 expectations due to the prevailing financial restrictions, with 14,221 m (49%) in September alone, following completion of the working capital financing operation. Reduction of 34.4% in G&A Expenses. Beginning of direct sales to distributors, representing the opening of a new biodiesel sales channel. Revocation of the ratification of the 4Q08 auction for most of the Company’s lots and granting of an injunction suspending the ANP’s decision, enabling the continuity of deliveries under current contracts. Net Revenue of R$89.3 million, Gross Profit of R$1.4 million and Adjusted EBITDA of R$7.8 million negative in 3Q08.
  2. 2. Management CommentsThe last few months have been particularly challenging for the economy and for companies theworld over. The capital market crisis reached hitherto unimaginable proportions and has requiredmassive government and corporate efforts to minimize the impact of the financial system lossesand the scarcity of funding in the real economy.Amid this highly complex situation, as disclosed in our last Quarterly Market Bulletin, the Companyis undergoing an operational restructuring and reorganization process in order to overcome thedifficulties faced throughout last year. After recording successive losses in its sales, which had asignificant impact on the Company’s financial structure, Brasil Ecodiesel reached a point of suchfinancial restriction and lack of working capital that it was prevented from maintaining productionlevels and filling the orders won in the auctions.On August 14, 2008, despite the severe capital market crisis, we announced the successfulcompletion of negotiations with our creditor banks, which allowed the Company to extend its debtand obtain additional funding to ensure sufficient working capital to continue its operations. Weconsider the conclusion of this restructuring to be the crucial first step in the continuedreorganization of our operations, aiming at recouping profitability. Following a reduced production inJuly and early August, our plants began operating with improved capacity use as of August 15,when funds to purchase inputs were raised. As a result, September’s biodiesel deliveries climbed to14,221 m3 from 14,851 m3 in July and August, giving total sales of 29,072 m3 for the quarter.This upturn in production following the improvement in the financial situation highlights theCompany’s effective production capacity, which has been substantially underutilized due to the lackof working capital for large-scale operations. Therefore, as soon as the Company normalizes itscapacity to finance operations, whether through an improvement in the credit scenario or someother means of capitalization, it will be operating at the limit of its installed capacity. Brasil Ecodieselcurrently has Brazil’s highest biodiesel capacity and plans to maintain the leading position it hasheld since the founding of the industry, when it demonstrated a pioneering and innovative spirit.In addition, after the ANP ruling that distributors can acquire biodiesel directly from the producersprovided volumes exceed the amounts contracted in the auctions, the Company initiated directsales to the fuel distributors. Although such sales represent only a small percentage of the domesticbiodiesel market, they are enormously significant since they indicate the freeing up of the market,i.e. that the auction system will gradually be replaced by direct negotiations.After the financial restructuring the Company moved ahead with its operational and administrativereorganization, beginning with operational restructuring, aiming to identify opportunities ofimproving processes, thereby reducing costs. As a result, we were able to cut G&A expenses by asubstantial 34.4% last quarter, thanks to the reduction in personnel expenses, especially at thecorporate level, and the optimization of administrative expenses, overhead, and third-partyservices.
  3. 3. The Company is currently studying alternatives for its agricultural development strategy, which wasnegatively impacted by inclement weather, poor mamona yield and tighter credit in 2008, forcing usto reduce the pace of our raw material diversification strategy.In 4Q08, the Company has contracts to supply up to 70,000 m3 of biodiesel, at adequate pricesgiven the cost structure and the recent decline in vegetable oil prices. However, on September 22,just one week before supply was due to begin, we were surprised by the ANP’s decision to cancelthe result of the auctions for a portion of the biodiesel volume won by Brasil Ecodiesel. Consideringthat this decision was taken without any notice and without our being given the right of defense, wefiled for a preliminary injunction to suspend the regulatory agency’s decision. However, we wereonly granted the injunction reversing the decision and granting us the opportunity to fulfill thecontracts on October 1, when deliveries should have already begun. As a result, the first weeks ofdeliveries were jeopardized by bureaucratic process.In 4Q08, vegetable oil prices are continuing to move down and are currently at mid-2006 levels.Soybean oil prices, which stood at 70.4 cents/lb in early March 2008, are currently around33 cents/lb on the Chicago Exchange. However, the price of oil sold on the domestic market islinked to the CBOT price and therefore to the U.S. dollar, so this reduction has been partially offsetby the dollar appreciation. Independently of this, the crisis has thrown up strong indications that thegreater part of the previous rise in vegetable oil prices was speculative in nature, with no relation toreal supply and demand, debunking the view of critics who claimed that biofuels were causing anincrease in food prices.In addition, the Company believes that the best way to develop an industry is to allow its players tofreely seek the best way of creating efficiency and generating returns for shareholders. We alsobelieve that this should take place in an environment regulated by specific rules and legislation, butwhich guarantees free competition. It is our firm contention that a free market, i.e. with direct salesbetween biodiesel distributors and producers, would be healthier for the industry and for theCompany, as opposed to an auction system in which any competitive advantage in terms oflogistics, scale, services, or any other area for that matter, is simply eliminated. The freeing up ofthe market, plus the potential introduction of superior biodiesel blends as soon as 2009, as recentlysignaled by members of the government, will provide the sector with additional momentum.Brasil Ecodiesel hopes to recoup its results in the coming periods and continue developing its rawmaterial diversification strategy, thereby reducing exposure to the commodity market. We remainfocused on the same objective since the beginning of our operations, which is to establishourselves as an important player in the Brazilian biodiesel market, through a growth strategy basedon the diversification of raw material sources, taking advantage of expansion opportunities in thedomestic market and gaining a relevant share of the international market. And we will continue tomaintain this focus, even if we are forced to change some of our operational tactics in light of thecurrent market conditions, which are very different from those prevailing when we developed ourinitial strategic plan.
  4. 4. Comments on the Consolidated PerformanceSales totaled 29,072 m3 in 3Q08, 53.7% up on the previous quarter. Despite the difficulties in Julyand August, we substantially increased the volume of deliveries at higher prices, generating a99.3% increase in B100 revenue over 2Q08. Porto Rosário do Biodiesel Floriano Crateús Iraquara Itaquí Total Nacional Sul 3Q07 9,055.80 10,349.50 19,300.10 7,069.30 3,746.90 3,787.20 53,309.10 Sales of B100 2Q08 1,084.41 299.36 5,842.40 470.21 6,945.50 4,276.45 18,918.32 (m3) 3Q08 3,594.90 3,515.95 5,298.31 0.00 8,719.07 7,943.87 29,072.10 3Q07 17,665.54 20,578.90 38,024.23 13,921.91 7,366.14 7,445.67 105,002.40 Revenues of B100 2Q08 3,289.24 1,105.59 15,714.05 982.08 14,583.47 12,111.03 47,785.46 (R$ths) 3Q08 13,376.79 13,004.20 16,548.73 0.00 27,433.64 24,850.08 95,213.42As a result, 3Q08 net revenue totaled R$89.3 million and gross profit stood at R$1.4 million, most ofwhich from operations in September, showing that the new operating conditions enable theCompany to generate positive results – results that would be even better if billed volume was morein line with that obtained at the auctions. 1Q08 2Q08 3Q08 Total Net Revenue 167,264 45,790 89,262 302,316 COGS (180,313) (58,992) (87,856) (327,161) Gross Profit (13,049) (13,202) 1,406 (24,845) Net Loss (14,934) (82,536) (28,901) (126,371)Our net result was chiefly impacted by the financial result, due to the Companys debt level, inaddition to lower-than-expected sales volume, which was insufficient to cover operating expensesdespite the positive contribution margin. In order to give a more accurate view of the specific periodresult, the following table shows our Adjusted EBITDA. 1Q08 2Q08 3Q08 Total Net Loss (14,934) (82,536) (28,901) (126,371) Depreciation and Amortization 4,649 4,490 4,699 13,838 Financial Result 9,922 12,831 16,347 39,099 Provision 35,778 - 35,778 Adjusted EBITDA (363) (29,438) (7,855) (37,656) *EBITDA in 2Q08 adjusted for the Petrobras fine provisions and market value of inventories, which do not generate a cash effect.
  5. 5. Gross Revenue Gross revenue totaled R$104.3 million, 91.3% of which (R$95.2 million) from the sale of29,072 m3 of biodiesel. In addition, given market conditions, and aiming to give liquidity to its highlevel of inventories and strengthen its cash position, the Company sold a portion of its castor stocks,generating revenue of R$7.0 million (6.7% of the total). The remainder of our gross revenue camefrom the sale of byproducts, especially glycerin and fatty acids. Gross Revenue (R$ ‘000) 250.000 200.000 150.000 Glycerin and By-products Castor 100.000 Biodiesel B100 50.000 - 1Q08 2Q08 3Q08 Deductions Deductions totaled R$15.0 million, or 14.4% of gross revenue, R$7.3 million of which inICMS tax, R$5.8 million in Cofins tax and R$1.3 million in PIS tax. In fact, deductions would havebeen even higher, but for the use of R$4.4 million in ICMS tax credits. In addition, since July 1, 2008, payments by Petrobras have no longer been subject to awithholding rate of 5.85% related to PIS, COFINS and income and social contribution taxes.Although this change has no effect on the Company’s result, it has a significant impact on its cashposition. Net Revenue Net revenue totaled R$89.3 million, 94.9% up on the previous quarter, thanks to the upturn insales volume and prices. Cost of Goods Sold COGS totaled R$87.9 million. Vegetable oil is still the main production cost item and,together with methanol, accounts for 94% of the cost of biodiesel sold.
  6. 6. COGS of B100 2.3% 1.7% 2% Vegetable Oil 11.6% Methanol + Chemicals Labor General Costs 82.4% Depreciation As a percentage of net revenue, COGS fell from 128.8% in 2Q08 to 98.4% in 3Q08,generating gross profit of R$1.4 million. Operating Expenses General and Administrative Expenses These comprise general administration expenses, including employee salaries and benefits,expenses from outsourced services, travel, telecommunications, leases, provisions forcontingencies, and other items. In 3Q08, as part of the Companys reorganization initiatives and costcontrol, G&A expenses fell substantially, thanks to the reduction in personnel expenses and effortsto cut administrative expenses. The latter were chiefly impacted by the lower amount spent ontravel, outsourced services and telecommunications and by the reduction in provisions for laborcontingencies, given that many claims were settled in the Company’s favor. All in all, G&A expensestotaled R$9.0 million, 34.4% down on in the previous quarter. General and Administrative Expenses (R$ ‘000) 16.000 14.000 12.000 10.000 8,712 8.000 5,884 4,726 6.000 4.000 2.000 4,625 5,003 4,277 - 1Q08 2Q08 3Q08 Personnel Expenses Administrative Expenses
  7. 7. Tax expenses Tax expenses came to R$0.6 million, most of which from IOF (financial operations tax),41.7% down on the 2Q08. Other operational revenue Other operational revenue totaled R$0.7 million in the 3Q08. This refers to the contractassigning the right to use our industrial capacity, which is booked under non-current liabilities to bewritten down proportionately during the contract’s 15-year validity period. Financial Result The Company posted a net financial expense of R$16.3 million, mainly due to the payment ofcharges on loans, especially short-term loans to finance working capital. Financial expenses totaledR$16.8 million and financial revenue came to R$0.5 million. The impact of the exchange variation ona financing contract in U.S. dollars accounted for R$2.9 million of our financial expense. The Company did not possess derivatives during the period nor does it make use of financialinstruments for speculative purposes. Non-operating Result This line recorded an expense of R$5.0 million, reflecting the cost of idle capacity in ourindustrial plants, which were operating at well below normal capacity, and whose fixed costs inproportion to idle capacity were recognized as non-operating expenses. Results The Company reported a 3Q08 net loss of R$28.9 million, mostly due to the high periodfinancial expenses and the low contribution margin from operations, which was positive but stillbelow the expected scale. Debt The Company closed the 2Q08 with net debt of R$267.6 million, mainly short-term andcontracted to finance working capital. Short-term debt pressure led the Company to negotiate a debtrestructuring agreement with creditor banks in order to extend maturities. With the financialrestructuring completed on August 14 and already considering the inflow of new funds obtained inthe negotiation, net debt on September 30 stood at R$281.1 million, but with a long-term profile, withthe majority maturing as of September 2009, i.e. a 12-month grace period and 36 months ofamortization. Debt (R$ ‘000) 2Q08 3Q08 Short term 243,137 95,351 (+) Long term 29,119 193,788 (=) Total debt 272,256 289,139 (-) Cash and cash equivalents 4,622 8,021 (=) Net debt 267,634 281,118
  8. 8. Pre-restructuring (06/30/2008) Post-restructuring (09/30/2008)300.000 120.000 243,137 95,351250.000 100.000200.000 80.000 62,186 59,151 60.000150.000 33,050 39,348 40.000100.000 20.000 50.000 14,599 53 14,520 - 0 12 2009 2010 2011 2012 2013 12 MONTHS 2009 2010 MONTHS
  9. 9. Attachment I – Income Statements Statements of Operations (In thousand Brazilian reais R$) 3Q07 2Q08 3Q08 9M07 9M08Gross Sales 129.050 53.318 104.272 258.682 362.069 Taxes and returns (29.356) (7.528) (15.010) (57.325) (59.753)Net Sales 99.964 45.790 89.262 201.357 302.316 Cost of Goods Sales (99.300) (58.992) (87.856) (200.951) (327.161)Gross Profit 394 (13.202) 1.406 406 (24.845)Operating Expenses General and Administrative (10.931) (13.715) (9.004) (27.298) (33.228) Taxes (2.267) (1.091) (637) (3.604) (3.305) Other Operational 16.164 (35.371) 683 16.159 (14.655) 2.966 (50.177) (8.958) (14.743) (51.188)Loss/Profit from Operations before financial results 3.360 (63.379) (7.552) (14.337) (76.033)Financial Results Financial Revenue 2.018 448 525 7.692 1.350 Financial Expenses (4.336) (13.279) (16.872) (6.864) (40.449) (2.318) (12.831) (16.347) 828 (39.099)Loss/Profit from operations 1.042 (76.210) (23.899) (13.509) (115.132) Non-operating income, net 51 (6.327) (5.003) 203 (11.241)Loss before income and social contribution taxes 1.093 (82.537) (28.902) (13.306) (126.373) INCOME AND SOCIAL CONTRIBUTION TAXES 1 - - (3) -Loss Before Minority Interest 1.092 (82.537) (28.902) (13.309) (126.373) Minority Interest - 1 1 - 2Loss for the year 1.092 (82.536) (28.901) (13.309) (126.371)
  10. 10. Attachment II – Balance Sheet BALANCE SHEETS OF 09/30/08 AND 06/30/08 CONSOLIDATED In thousands of Brazilian reaisAssets 09/30/08 06/30/08 LIABILITIES AND SHAREHOLDERS EQUITY 09/30/08 06/30/08CURRENT ASSETS CURRENT LIABILITIESCash and Cash Equivalents 8.020 4.622 Loans and financing 74.878 225.619Temporary cash investments 1 300 Local suppliers 15.614 15.352Trade accounts receivables 62.622 31.219 Mutual Agreement with shareholder 20.473 17.518Inventories 123.080 152.039 Advances of customers 15.054 14.475Advances to suppliers 8.300 7.257 Accrued payroll, vacation and related taxes 8.174 6.666Recoverable Taxes 11.250 15.383 Taxes payable 5.539 6.698Other receivables 411 504 Assignment of Use Rights 2.728 2.728Prepaid expenses 384 606 Other payables 323 18Total Current Assests 214.068 211.930 Total current liabilities 142.783 289.074NON-CURRENT ASSETS NON-CURRENT LIABILITIESLong-term assets Long-term liabilities: Long-term cash investments 2 9.969 Loans and Financing 193.788 29.119 Recoverable taxes 22.206 22.329 Tax incentives 3.524 - Judicial deposits 184 490 Contingency provision 1.354 2.246 Secure deposits 97 97 Assignment of use rights 35.919 36.601 Other receivables 180 180 Total non-current liabilities 234.585 67.966Investiments: Property, plant and equipment 252.349 253.605 MINORITY INTEREST 8 10 Intangible assets 1.272 1.273 Defferred charges 70.405 69.465 SHAREHOLDERS’ EQUITYTotal non-current assets 346.695 357.408 Capital 388.957 388.957 Capital reserve 15 15 Accumulated deficit (205.585) (176.684) Total shareholders’ equity 183.387 212.288 TOTAL LIABILITIES AND SHAREHOLDERSTOTAL ASSETS 560.763 569.338 EQUITY 560.763 569.338
  11. 11. INVESTOR RELATIONS CONTACTSCEO and IRO: José Carlos AguileraIR Manager: Marcos LeiteE-mail: (00XX21) 2546-5031About Brasil Ecodiesel: Brasil Ecodiesel was founded in 2003, and its stock is listed on the NovoMercado trading segment of the São Paulo Stock Exchange (Bovespa). It is the pioneer in theproduction of biodiesel in Brazil, having produced 52.6% of the total volume in 2007. It operates withan innovative business model for the sourcing of raw materials, seeking to guarantee supplies atcompetitive and stable prices, and to diversify raw material sources by establishing new agriculturalproduction chains in Brazil.It is investing in Brazils favorable natural conditions in order to become an important global producerof a renewable fuel which substantially reduces emissions of pollutant gases. Brasil Ecodieselcurrently maintains six operational units with an installed annual biodiesel production capacity of 3640,000 m .This release contains forward-looking statements subject to risks and uncertainties. Such forward-looking statements are basedon the management’s beliefs and assumptions and information currently available to the Company. Forward-looking statementsinclude information on our intentions, beliefs or current expectations, as well as on those of the Company’s Board of Directors andBoard of Executive Officers. The reservations as to forward-looking statements and information also include information onpossible or presumed operating results, as well as any statements preceded, followed or including words such as “believe”, “may”,“will”, “continue”, “expect”, “intend”, “plan”, “estimate” or similar expressions. Forward-looking statements are not guarantees ofperformance; they involve risks, uncertainties and assumptions because they refer to future events and, therefore, depend oncircumstances that may or may not occur. Future results and value to shareholders may differ materially from those expressed orsuggested by said forward-looking statements. Many of the factors which will determine these results and figures are beyondBrasil Ecodiesel’s ability to control or predict.