Quarterly Information - ITR Fertilizantes Heringer S.A.

Transcription

1 Quarterly Information - ITR with Independent Auditor s Review Report on Quarterly Information

2 Quarterly Information - ITR Contents Independent auditor s report on quarterly information... 1 Quarterly information Balance sheets... 3 Statements of operations... 5 Statements of comprehensive income (loss)... 6 Statements of changes in equity... 7 Cash flow statements... 8 Statements of value added... 9 Notes to quarterly information Report on Company's performance... 50

3 Edifício Trade Tower Av. José de Souza Campos, 900 1º e 3º andares - Nova Campinas Campinas - SP - Brasil Tel: Fax: ey.com.br A free translation from Portuguese into English of Independent Auditor s Review Report on Quarterly Information (ITR) prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and in accordance with IAS 34 - Interim Financial Reporting, issued by International Accounting Standards Board (IASB) Independent auditor s report on quarterly information The Board of Directors and Shareholders Introduction We have reviewed the accompanying interim financial information of ( Company ), contained in the Quarterly Information Form (ITR) for the quarter ended, which comprises the balance sheet as at and the related statements of operations and of comprehensive income (loss) for the three- and six-month periods then ended, and the statements of changes in equity and of cash flows for the six-month period then ended, including explanatory information. Management is responsible for the preparation of the interim financial information in accordance with Accounting Pronouncement CPC 21 (R1) and IAS 34 - Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), as well as for the presentation of this financial information in accordance with the rules issued by the Brazilian Securities and Exchange Commission (CVM) applicable to the preparation of Quarterly Information (ITR). Our responsibility is to express a conclusion on these interim financial statements based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Review Engagements (NBC TR Review of Interim Financial Information Performed by the Independent Auditor of the Entity, and ISRE Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 1

4 Conclusion on the interim financial information Based on our review, nothing has come to our attention that causes us to believe that the interim financial information included in the quarterly information referred to above was not prepared, in all material respects, in accordance with CPC 21 (R1) and IAS 34 applicable to the preparation of Quarterly Information (ITR), and presented consistently with the rules issued by the Brazilian Securities and Exchange Commission (CVM). Other matters Statements of value added We have also reviewed the Statements of Value Added (SVA) for the six-month period ended June 30, 2016, prepared under the responsibility of Company management, the presentation of which in the interim financial information is required by the rules issued by the Brazilian Securities and Exchange Commission (CVM) applicable to the preparation of Quarterly Information (ITR), and as supplementary information under the IFRS, whereby no SVA presentation is required. This statement has been subject to the same review procedures previously described and, based on our review, nothing has come to our attention that causes us to believe that it was not prepared, in all material respects, consistently with the overall interim financial information. Campinas, August 4, ERNST & YOUNG Auditores Independentes S.S. CRC 2SP015199/O-6 Luís Alexandre Marini Accountant CRC 1SP182975/O-5 2

5 A free translation from Portuguese into English of Quarterly Information (ITR) prepared in Brazilian currency in accordance with accounting practices adopted in Brazil, and in accordance with IAS 34 - Interim Financial Reporting, issued by International Accounting Standards Board (IASB) Balance sheets and December 31, 2015 Note 06/30/ /31/2015 Assets Current assets Cash and cash equivalents 3 125,813 69,550 Trade accounts receivable 4 537, ,757 Inventories 5 735,735 1,008,303 Taxes recoverable 6 121,107 99,775 Income and social contribution taxes recoverable 7.a 51,527 37,259 Derivative financial instruments 8-27,864 Rebates on purchases 7,595 51,683 Other assets 36,209 34,988 1,614,999 1,875,179 Noncurrent assets Trade accounts receivable Taxes recoverable 6 286, ,000 Income and social contribution taxes recoverable 7.a 174, ,647 Other assets 13,339 10,101 Deferred income and social contribution taxes 7.b 218, ,188 Tax credits acquired , ,185 Judicial deposits 14 28,264 28,306 Property, plant and equipment , ,132 Intangible assets 7,098 7,416 1,453,740 1,458,331 Total assets 3,068,739 3,333,510 3

6 Note 06/30/ /31/2015 Liabilities and equity Current liabilities Trade accounts payable , ,354 Forfaiting , ,612 Loans and financing 13 1,195,048 1,594,540 Payroll and social charges 28,421 23,310 Taxes payable 2,471 2,311 Advances from customers 433, ,497 Derivative financial instruments 8 110,794 14,402 Other liabilities 34,173 42,726 2,737,614 3,006,752 Noncurrent liabilities Loans and financing ,917 64,625 Provision for contingencies 14 15,931 16, ,848 80,744 Total liabilities 2,854,462 3,087,496 Equity 15 Capital 585, ,518 Equity adjustment 41,971 42,456 Accumulated losses (413,212) (381,960) Total equity 214, ,014 Total liabilities and equity 3,068,739 3,333,510 See accompanying notes. 4

7 Statements of operations Three- and six-month periods ended and 2015 (In thousands of reais, except for loss per share) Note Quarter ended 06/30/2016 Six-month period ended 06/30/2016 Quarter ended 06/30/2015 Six-month period ended 06/30/2015 Net operating revenue ,776 2,309,282 1,239,423 2,577,225 Cost of sales and services 17 (919,489) (2,108,705) (1,157,288) (2,373,795) Gross profit 75, ,577 82, ,430 Operating income and expenses Selling expenses 17 (71,355) (149,912) (77,944) (163,361) General and administrative expenses 17 (23,641) (45,916) (22,349) (44,198) Other operating expenses, net (3,223) (4,055) 1,020 1,941 (98,219) (199,883) (99,273) (205,618) Income (loss) before financial income and expenses (22,932) 694 (17,138) (2,188) Financial income and expenses Exchange gains (losses), net , ,655 71,900 (367,522) Financial income (expenses), net 19 (163,881) (333,256) (110,847) 95,992 (27,580) (50,601) (38,947) (271,530) Income before income and social contribution taxes (50,512) (49,907) (56,085) (273,718) Income and social contribution taxes 7.c 17,233 18,170 18,792 93,523 Income (loss) for the period (33,279) (31,737) (37,293) (180,195) Weighted average number of common shares (in thousands) 53,857 53,857 53,857 53,857 Basic and diluted earnings (loss) per share 15 (0.6179) (0.5893) (0.6924) (3.3458) See accompanying notes. 5

8 Statements of comprehensive income (loss) Three- and six-month periods ended and 2015 Quarter ended 06/30/2016 Six-month period ended 06/30/2016 Quarter ended 06/30/2015 Six-month period ended 06/30/2015 Income (loss) for the period (33,279) (31,737) (37,293) (180,195) Other comprehensive income (loss) Comprehensive income (loss) for the period (33,279) (31,737) (37,293) (180,195) See accompanying notes. 6

9 Statements of changes in equity Six-month periods ended and 2015 Capital Equity adjustment Accumulated losses Total Balance at January 1, ,746 43,415 (46,951) 445,210 Share issue 145, ,419 Share issue cost (8,647) - - (8,647) Loss for the period - - (180,195) (180,195) Realization of deemed cost, net of deferred income and social contribution taxes - (479) Balances at June 30, ,518 42,936 (226,667) 401,787 Balance at January 1, ,518 42,456 (381,960) 246,014 Income (loss) for the period - - (31,737) (31,737) Realization of deemed cost, net of deferred income and social contribution taxes - (485) Balances at 585,518 41,971 (413,212) 214,277 See accompanying notes. 7

10 Cash flow statements Three- and six-month periods ended and 2015 Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Cash flow from operating activities Income (loss) before income and social contribution taxes (49,907) (273,718) Non-cash income (expenses): Allowance for doubtful accounts 1,649 6,913 Provision for inventory losses 7,288 2,513 Depreciation and amortization 25,897 25,313 Loss (gain) on disposal of property, plant and equipment Provision for adjustment at market value of assets held for sale 8 - Reversal of provision for discount on taxes recoverable (8) - Unearned interest on debentures 8,119 13,714 Provision for vacation pay, 13th month salary and profit sharing 6,749 7,945 Provision for contingencies, net (188) (1,252) Interest and financial charges on noncurrent assets (4) (19) Interest and financial charges on current assets and liabilities - - Unrealized interest and exchange variation on trade accounts receivable, imports in transit, accounts payable and loans and financing (370,196) (80,195) Unrealized swap 124,257 55,893 (245,558) (242,168) Increase (decrease) in asset accounts Trade accounts receivable 7, ,904 Inventories 265,280 (578,097) Taxes recoverable (41,076) (68,525) Other assets (5,535) 4,484 Judicial deposits 948 (4,477) Rebates on purchases 41,026 17,906 Recovery of tax credits, court-ordered debts and sub judice amounts 1,345 - Increase (decrease) in liabilities Trade accounts payable (40,321) (58,961) Import financing taken out 736,253 1,288,507 Payment of principal of import financing (1,189,293) (855,330) Payroll and social charges (1,638) (1,296) Taxes payable 160 (326) Advances from customers 242, ,026 Other accounts payable (6,720) (5,919) Changes in asset and liability accounts (235,454) (195,272) Interest paid on loans and financing (85,354) (52,601) Net cash used in operating activities (320,808) (247,873) Cash flow from investing activities Payment for acquisition of subsidiary - (1,850) Additions to investments (1) (3) Acquisition of property, plant and equipment (13,476) (50,833) Proceeds from sales of property, plant and equipment 14, Additions to intangible assets - (117) Net cash generated by (used in) investing activities 607 (52,323) Cash flow from financing activities Loans and financing taken out 973, ,378 Payment of principal of loans and financing (597,204) (38,826) Capital increase - 136,772 Net cash provided by financing activities 376, ,324 Net decrease in cash and cash equivalents 56,263 (95,872) Cash and cash equivalents at beginning of period 69, ,908 Cash and cash equivalents at end of period 125, ,036 See accompanying notes. 8

11 Statements of value added Three- and six-month periods ended and 2015 Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Revenues Sales of goods, products and services 2,339,383 2,601,337 Other revenues 2,396 6,291 Revenue from construction of own assets 7,040 30,287 Set up, reversal and recovery of doubtful accounts (1,602) (6,650) 2,347,217 2,631,265 Inputs acquired from third parties Cost of goods and products sold and services rendered (2,094,496) (2,345,531) Materials, energy, third-party services and other expenses (187,628) (239,595) Loss/recovery of assets (9,169) (10,313) Other (213) (2,562) (2,291,506) (2,598,001) Gross value added 55,711 33,264 Depreciation and amortization (25,897) (25,296) Net value added produced 29,814 7,968 Value added received in transfer Financial income 582, ,902 Other 898 1, , ,144 Total value added to be distributed 613, ,112 Distribution of value added Personnel Direct compensation 64,624 65,052 Benefits 20,125 20,289 Unemployment Compensation Fund (FGTS) 4,105 4,334 88,854 89,675 Taxes, duties and contributions Federal (23,337) (101,454) State (40,144) (48,921) Municipal (62,772) (149,692) Debt remuneration Interest 604, ,692 Rent 4,273 6,013 Other 10,074 8, , ,324 Equity remuneration Income (loss) for the period (31,737) (180,195) (31,737) (180,195) Total value added distributed 613, ,112 See accompanying notes. 9

12 Notes to quarterly information 1. Operations ( Heringer or Company ), headquartered in the municipality of Viana, Espírito Santo state, is primarily engaged in the manufacturing and sale of fertilizers. The Company currently owns 19 mixing units distributed over the Southeastern, Central-Western, Southern and Northeastern regions of Brazil and two sales offices located in Bahia and Goiás states. It should be stressed that Heringer also has a Sulfuric Acid Unit and a Single Super Phosphate (SSP) plant in Paraná State, in addition to a mixing unit included above. Common shares issued by the Company are traded in the special segment of the São Paulo Stock Exchange (BM&FBOVESPA) named Novo Mercado (New Market), under ticker symbol FHER3. Approval of Interim financial information The presentation of interim financial information was approved by the Company Board of Directors on August 4, 2016 and authorized for disclosure on August 5, Accounting practices 2.1. Basis of preparation The Company s interim financial information for the periods ended and 2015 was prepared in accordance with Accounting Pronouncement CPC 21 - Interim Financial Reporting, issued by the Brazilian Financial Accounting Standards Board - FASB (CPC), and IAS 34 - Interim Financial Reporting. Accordingly, and as described in CVM/SNC/SEP Memorandum Circular No. 03/2011, the Company chose to present summarized notes to interim financial information for the cases of redundancy in relation to what was presented in the financial statements at December 31, For these cases, the complete disclosure of notes to annual financial statements was indicated to avoid misunderstanding of the Company s financial positions and performance during the interim period. Therefore, the interim financial information must be read in conjunction with the financial statements at December 31, The Company s interim financial information only differs from the IFRS because the Brazilian Corporation Law requires that publicly-held companies present the statement of value added (SVA) in their interim financial information whilst, for IFRS purposes, such information is presented as supplementary information. 10

13 2. Accounting practices (Continued) 2.2. Summary of significant accounting practices The accounting practices adopted for preparing the interim financial information are consistent with those disclosed in Note 2.2 to the financial statements at December 31, The Company adopted all the standards, revised standards and interpretations issued by the Brazilian FASB (CPC), the Brazilian Securities and Exchange Commission (CVM), the IASB and other regulators that were effective at. Standards, amendments and interpretations to standards In the period ended, no new standards, amendments and interpretations to standards were issued, in addition to those disclosed in Note 2.3 to the Company s financial statements for the year ended December 31, In addition, no changes in relation to expected and disclosed impacts were observed in those financial statements that could affect the interim financial information of such period. 3. Cash and cash equivalents The Company considers cash equivalents short-term investments readily convertible into a known cash amount and subject to a low risk of change in value. Cash and cash equivalents are held by the Company for the purpose of meeting short-term cash commitments rather than for investment or any other purposes. These refer to investments in Bank Deposit Certificates (CDB) and repurchase agreements (operations subject to a repurchase agreement by the financial institution), redeemable within 90 days from investment date. Average rate 06/30/ /31/2015 Cash and cash equivalents 101,856 35,155 Short-term investments Bank Deposit Certificates (CDBs) (i) 99.8 % of CDI 5,083 3,935 Debentures repurchase agreements (ii) 97.6 % of CDI 18,875 30, ,813 69,550 (i) These are represented by DI (Interbank Deposit) fund shares. These investments were contracted from top-tier financial institutions and are remunerated based on percentages of variation in the Interbank Deposit Certificates (CDI), immediately redeemable. (ii) These refer to operations carried out with prime financial institutions, immediately redeemable and repurchase agreements by the financial institutions themselves. 11

14 4. Trade accounts receivable Trade accounts receivable are initially valuated at fair value, and subsequently measured at amortized cost using the effective interest rate method less allowance for doubtful accounts. The allowance for doubtful accounts is set up when there is objective evidence that the Company will not be able to collect all amounts due by its customers. The evaluation of impairment existence is based on individual analysis of default customers, considering their payment capacity, guarantees provided and assessment of lawyers and specialized collection companies. 06/30/ /31/2015 Domestic trade accounts receivable 583, ,842 Foreign trade accounts receivable 3,337 1,176 Present value adjustment (8,574) (8,641) 578, ,377 Allowance for doubtful accounts (40,913) (39,264) 537, ,113 Current (537,013) (545,757) Noncurrent At and December 31, 2015, present value adjustment was calculated based on all sales with a collection term of more than 30 days, at nominal interest of 1.80% per month (1.80% in December, 2015) through the discounted cash flow method. The reversal of present value adjustment is recorded in P&L for the year under Financial income. The foreign trade accounts receivable balance is denominated in US dollars. At and December 31, 2015, none of the Company s customers represented more than 10% of total revenues or receivable balance. At, trade accounts receivable amounting to R$ 81,488 (R$ 76,189 at December 31, 2015) are past due. The Company did not set up an allowance for doubtful accounts for such amounts, as they refer to a number of independent customers who have no recent history of default, therefore, no losses on these amounts are expected, or for which the Company has security interest. The aging list of these accounts receivable is as follows: 06/30/ /31/2015 Within 3 months 21,292 11,599 From 3 to 6 months 2,859 13,481 Above 6 months 57,337 51,109 81,488 76,189 12

15 4. Trade accounts receivable (Continued) At, the Company has an allowance for doubtful accounts in the amount of R$ 40,913 (R$ 39,264 at December 31, 2015). The aging list of these trade accounts receivable is as follows: 06/30/ /31/2015 Within 6 months 1,609 1,957 Above 6 months 39,304 37,307 40,913 39,264 At the periods ended and 2015, changes in allowance for doubtful accounts were as follows: Period ended 06/30/2016 Period ended 06/30/2015 Opening balance 39,264 25,260 Set up (reversal) of provision (i) 1,649 6,912 Closing balance 40,913 32,172 (i) Recorded under Selling expenses, in P&L for the period. The maximum exposure to credit risk at the reporting date is the book value of each class of the above-mentioned receivables. 5. Inventories Inventories are stated at cost or net realizable value, whichever is lower. Costs incurred in bringing each product to its current location and conditions are accounted for as follows: (i) raw and packaging materials - average acquisition cost, using the weighted moving average; and (ii) cost of finished products and work-in-process - raw materials, labor, other direct costs and related general production overheads, based on normal operating capacity. Imports in progress are recorded at the accumulated cost of each import: 06/30/ /31/2015 Raw and packaging materials 531, ,978 Imports in transit 186, ,564 Advances to suppliers 8,375 5,704 Storeroom 17,040 18,611 Provision for inventory loss (i) (7,288) - Provision for adjustment at market value (ii) - (1,554) 735,735 1,008,303 13

16 5. Inventories (Continued) (i) This refers to a provision for inventory shortage of raw materials and finished products. Such provision is recorded over the year and written off at the end of the year, after inventory counting and consequent loss measurement. (ii) Refers to provision for raw material waste, whose average inventory cost was higher than the replacement cost or realization values. At, certain inventory items representing 10% of the account balance were pledged as collateral in transactions with suppliers (10% at December 31, 2015). 6. Taxes recoverable 06/30/ /31/2015 Contribution Tax on Gross Revenue for Social Security Financing (COFINS) (i) 268, ,252 State VAT - ICMS (ii) 73,781 86,321 Provision for discount on sale of ICMS credits (ii) - (8) Contribution Tax on Gross Revenue for Social Integration Program (PIS) (i) 64,053 60,375 Withholding Income Tax (IRRF) on financial instruments 1, Other , ,775 Current (121,107) (99,775) Noncurrent (iii) 286, ,000 (i) These will be recovered partially through the Company s transactions and partially through reimbursement requests, in the total original amount of R$ 313,268, filed in the Brazilian Internal Revenue Service between August 2009 and June 2016, as well as through the request for offset with other taxes administered by the Brazilian IRS (RFB). (ii) These will be used for acquisition of property, plant and equipment and production inputs, and also in the ordinary course of the Company operations. At June 30, 2015, the Company had approval to transfer credits with São Paulo state authority amounting to R$ 388 with Minas Gerais state authority amounting to R$ 4,507, and awaits approval to transfer credits with São Paulo state authorities amounting to R$ 11,155. (iii) Refers substantially to PIS and COFINS credits, which should be realized between 2017 and Income and social contribution taxes Current tax assets and liabilities for the last and prior years are measured at the estimated amount recoverable from or payable to tax authorities. Tax rates and laws used to calculate the amounts are those in force, or substantially in force, at the balance sheet date in the countries in which the Company operates and produces taxable income. Current income and social contribution taxes relating to items recognized directly in equity are therein recognized. From time to time management reviews the tax position in situations in which interpretation of tax regulation is required, and sets up provisions as appropriate. 14

17 7. Income and social contribution taxes (Continued) There are uncertainties regarding the interpretation of complex tax regulations, and the amount and timing of future taxable profit/loss. Given the long-term nature and complexity of existing contractual agreements, differences between the actual results and the assumptions made, or future changes to such assumptions, could require future adjustments to tax income and expenses already recorded. The Company sets up provisions, based on reliable estimates, for possible consequences from audits by tax authorities of the respective jurisdictions in which it operates. The amount of these provisions is based on various factors, such as past tax audit experience and differing interpretations of tax regulations by the taxable entity and by the relevant tax authority. These different interpretations may arise in a wide variety of issues, depending on the prevailing conditions in the respective domicile of the companies included in the financial statements. Deferred income and social contribution taxes ( deferred tax ) are recognized on temporary differences, at period end, between assets and liabilities recognized in the financial statements and corresponding tax bases used in computing taxable profit, including income and social contribution tax losses, where applicable. Deferred tax liabilities are generally recognized on all taxable temporary differences, and deferred tax assets are recognized on all deductible temporary differences only when the Company is likely to recognize future taxable profit at an amount sufficient for such deductible temporary differences to be used. Deferred tax assets and liabilities are measured at the tax rate expected to be applied in the year in which the asset or liability will be realized or settled, based on the tax rates (and tax law) in force at the balance sheet date. The recoverability of deferred tax assets is reviewed at the end of each reporting period and adjusted by the amount that is expected to be recovered. Deferred tax assets are recognized for all unused tax losses to the extent that taxable profit will likely be available to allow the use of such losses. Significant judgment from management is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profit, together with future tax planning strategies. Current and deferred income and social contribution taxes are recognized as expenses or revenue in P&L for the year, except when these are related to items recorded under other comprehensive income (loss), when applicable. 15

18 7. Income and social contribution taxes (Continued) a) Breakdown of income and social contribution taxes recoverable 06/30/ /31/2015 Income tax recoverable 201, ,374 Social contribution tax recoverable 23,856 19, , ,906 Current (51,527) (37,259) Noncurrent 174, ,647 These will be recovered partially through the Company s transactions and partially through reimbursement requests, in the total amount of R$ 129,656, restated by reference to the SELIC benchmark rate, filed in the Brazilian Internal Revenue Service between August 2009 and June 2016, as well as through the request for offset with other taxes administered by the Brazilian IRS (RFB). b) Breakdown of deferred income and social contribution taxes At and December 31, 2015, the deferred asset and liability balances were as follows: 06/30/ /31/2015 Assets: Income and social contribution tax losses 191, ,823 Temporary differences: Provision for sales commissions 4,031 3,911 Amortized goodwill of merged investor company Provision for contingencies 5,417 5,480 Allowance for doubtful accounts 4,961 5,559 Present value adjustment 5,275 4,042 Provision for inventory loss and market value adjustment 2, Provision for losses on realization of assets held for sale Unrealized loss on derivative financial instruments 37,670 4,897 Other temporary differences 1,865 1, , ,095 Liabilities: Unrealized gain on derivative financial instruments - (9,474) Present value adjustment (4,810) (3,999) Property, plant and equipment deemed cost (i) (26,614) (26,949) Other (3,966) (3,485) (35,390) (43,907) Net 218, ,188 (i) Refers to deferred taxes on deemed cost of property, plant and equipment, arising from their recognition at fair value upon first-time adoption of CPC

19 7. Income and social contribution taxes (Continued) b) Breakdown of deferred income and social contribution taxes (Continued) Based on a technical study, the Company expects to fully recover tax credits in the following years: Year , , , , , , , , , , ,829 Considering that basis of income and social contribution taxes on net profit comprises not only profit to be generated, but also non-taxable income, nondeductible expenses, tax incentives and other variables, there is no immediate correlation between net profit of the Company and income and social contribution taxes, net. Accordingly, the expected use of tax credits must not be taken as the sole indication of the Company s future results. c) Reconciliation of income and social contribution tax expense (income) Quarter ended 06/30/2016 Six-month period ended 06/30/2016 Quarter ended 06/30/2015 Six-month period ended 06/30/2015 Income before income and social contribution taxes (50,513) (49,907) (56,084) (273,718) Tax nominal rate 34% 34% 34% 34% Income and social contribution taxes at statutory rate 17,174 16,968 19,069 93,064 Effects from permanent exclusions on calculation of taxes: Tax benefits and grants 271 1, ,659 Goodwill on acquisition of merged company Other (212) (398) (1,080) (1,200) 17,233 18,170 18,791 93,523 Income and social contribution taxes on P&L for the periods: Current 12,348 (18,071) - - Deferred 4,855 36,241 18,791 93,523 17,233 18,170 18,791 93,523 Effective tax rate 34% 34% 34% 34% 17

20 7. Income and social contribution taxes (Continued) d) Changes in deferred tax assets and liabilities Assets Liabilities Net Balance at January 1, ,766 (54,593) 3,173 Deferred taxes on realization of deemed cost to property, plant and equipment stemming from the depreciation of these assets Tax effect on changes in temporary differences 9,983 10,473 20,456 Tax effect on the income and social contribution tax losses for the period 72,735-72,735 Balance at June 30, ,484 (43,788) 96,696 Balance at January 1, ,095 (43,907) 182,188 Deferred taxes on realization of deemed cost to property, plant and equipment stemming from the depreciation of these assets Tax effect on changes in temporary differences 35,699 8,182 43,881 Tax effect on the income and social contribution tax losses for the period (7,965) - (7,965) Balance at 253,829 (35,390) 218, Derivative financial instruments A summary of derivative financial instruments, represented by swap contracts and Non-Deliverable Forwards (NDF), is as follows: Notional value Fair value Instrument curve Gains (losses) incurred in the period 06/30/ /31/ /30/ /31/ /30/ /31/ /30/ /06/2015 Net position 712,836 1,417,731 (110,795) 13,463 (90,961) 14,174 (294,923) 124,973 Gains and losses on transactions involving derivatives are recognized monthly in P&L for the period, based on the fair value of these instruments (Note 22). 18

21 8. Derivative financial instruments (Continued) a) Description of contracts At, the Company had derivative agreements with the purpose of reducing the effects of exchange gains/losses on its liabilities denominated in foreign currency. The Company held swap contracts in the total nominal amount of R$378,600 (R$10,499 at December 31, 2015). Under these swap contracts, the Company has the right to receive exchange variation of U.S. dollars less interest of 0.50% p.a. and is liable for the payment of 100% of the CDI rate. The Company held Non-Deliverable Forward (NDF) contracts in the total nominal amount of R$ 334,236 (R$1,061,979 at December 31, 2015) at a R$ 3.76 to U$ 1.00 forward exchange rate. b) Maturity of contracts (NDF) At, referred to derivative contracts mature as follows: US dollars (US$) Within 1 month 59,875 From 1 to 2 months 52,121 From 3 to 4 months 110,085 From 5 to 6 months - 222,081 NDF contracts are valued at present value, at the market rate at the reporting date, of the future cash flow calculated through the application of contractual rates up to the expiry date, based on the US dollar projections verified in the futures contracts registered with the São Paulo Commodities, Futures and Sock Exchange (BM&FBOVESPA). 9. Transactions with related parties is controlled by Heringer Participações Ltda., which holds 51.48% of Company shares; OCP International Coöperatieve U.A. (OCP) holds 10% of shares; PCS Sales (Canada) INC. (PCS) holds 9.5% of shares and the remaining 29.02% of shares are held by various investors, and no single investor holds more than 5% of shares. 19

22 9. Transactions with related parties (Continued) a) Transactions and balances The transactions realized between the Company and its related parties and subsidiaries consist of commercial transactions, including the lease of a property and other operations, and can be summarized as follows: 06/30/ /31/2015 Assets Accounts receivable (i) Dalton Dias Heringer Inventories PCS 16,657 - OCP 67, ,665 JFC V-Jorf Fert.Company 45,707 54,220 Canpotex Limited 91, , , ,819 Other accounts receivable (ii) PCS 1,660 1,660 OCP 726 7,762 JFC V-Jorf Fert.Company 574 2,350 Canpotex Limited 4,890 39,911 7,850 51, , ,540 (i) These arise from the sales of the Company's products in the ordinary course of business. (ii) These arise from performance bonus according to the supply agreement between the parties. 06/30/ /31/2015 Liabilities Accounts payable (i) PCS - 73,153 OCP 69, ,510 JFC V-Jorf Fert.Company 59,454 24,261 Canpotex Limited 227, , , ,171 Intercompany loans Dalton Dias Heringer 27,630 - Dalton Carlos Heringer 5,513 - Juliana Heringer Rezende 4,737 - Eny de Miranda Heringer 5,526-43, , ,171 (i) These arise from purchases of inputs made in the ordinary course of business. 20

23 9. Transactions with related parties (Continued) a) Transactions and balances (Continued) Quarter ended 06/30/2016 Six-month period ended 06/30/2016 Quarter ended 06/30/2015 Six-month period ended 06/30/2015 P&L Sales revenue Dalton Dias Heringer (i) Paulo de Araújo Rodrigues Cost of products sold Dalton Dias Heringer (152) (268) (634) (943) PCS (ii) - (11,103) - - OCP (ii) (20,336) (45,069) (96,191) (176,141) JFC V-Jorf Fert.Company (28,509) (30,467) - - Canpotex Limited (44,843) (61,104) - - Paulo Araújo Rodrigues (93,841) (148,011) (96,825) (177,084) Other operating income Dalton Dias Heringer JFC V-Jorf Fert.Company (iii) PCS (iii) OCP (iii) (443) (215) 2,962 4, ,967 4,087 Purchases Dalton Dias Heringer JFC V-Jorf Fert.Company 71,655 76, Canpotex Limited 115, , PCS - 27, OCP 55, , , , , , , ,732 (i) These arise from sale at market value of by-products originated from the production process. (ii) Raw material used in the period. (iii) Performance bonus. Sales and purchases involving related parties are carried out at usual market prices and conditions. The outstanding balances at period end do not have guarantees and are settled in cash. No guarantees were provided or received in relation to any accounts receivable or payable involving related parties. In the first quarter of 2015, the Company and its current OCP and PCS shareholders entered into agreements for the purchase of phosphate and potassium fertilizers, respectively, effective for 10 years (renewable for additional 5 years). The agreement entered into with OCP provides for a minimum volume of three hundred and twenty thousand tons a year. 21

24 9. Transactions with related parties (Continued) b) Related-party compensation For the periods ended and 2015, total related-party compensation was as follows: Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Payroll and related charges 1,720 1,948 Management fees 1,337 1,143 Severance payments - - Private pension plan Other ,283 3, Property, plant and equipment Property, plant and equipment are stated at cost, net of accumulated depreciation and/or accumulated losses from impairment, where applicable. This cost includes the cost to replace part of property, plant and equipment items and borrowing costs on long-term construction projects, when the recognition criteria are met. Depreciation is calculated by the straight-line method, according to the rates below: Land is not depreciated. Depreciation rate - % p.a. Nominal Weighted average Buildings and constructions From 1.5 to 25 3 Machinery, equipment and industrial facilities From 4 to Other From 10 to An item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition of an asset (measured as the difference between the net sale price and the carrying amount of the asset) is recognized in the statement of operations when the asset is derecognized. The net book value and useful life of assets and depreciation methods are reviewed at year-end, and adjusted prospectively, when applicable. Certain property, plant and equipment items, amounting to R$ 245,610 at (R$ 232,705 at December 31, 2015), were pledged as collateral in transactions with suppliers and for financing transactions. 22

25 10. Property, plant and equipment (Continued) Land Buildings and constructions Machinery and equipment and manufacturing facilities Other Construction in progress Advances to suppliers Total At January 1, , , ,801 11,565 79,755 16, ,057 Acquisitions ,232 39,604 12,941 58,294 Write-offs - (273) (567) (301) (64) - (1,205) Depreciation and amortization - (4,006) (19,040) (1,836) - - (24,882) Transfers - 3,817 18, ,424 (24,378) - At June 30, , , ,266 15, ,719 5, ,264 At January 1, , , ,540 13,863 65, ,132 Acquisitions ,762 3,294 29,918 Write-offs (i) - (1,877) (9,563) (343) - (3,079) (14,862) Depreciation and amortization - (4,929) (18,781) (1,869) - - (25,579) Transfers - 23,690 11, (34,939) - - At 66, , ,738 12,220 56, ,609 Balance at December 31, 2015 Cost 66, , ,474 31,883 65, ,406 Depreciation and amortization - (49,320) (173,934) (18,020) - - (241,274) Net book value 66, , ,540 13,863 65, ,132 Balance at Cost 66, , ,804 31,326 56, ,210 Depreciation and amortization - (53,429) (183,066) (19,106) - - (255,601) Net book value 66, , ,738 12,220 56, ,609 Write-offs (i) - (1,877) (9,563) (343) - (3,079) (14,862) - Cost - (2,697) (19,212) (1,125) - (3,079) (26,113) - Depreciation and amortization , ,251 At, construction in progress substantially refers to: (i) expansion of the warehouse in Rosário do Catete unit Sergipe (SE) state; (ii) acquisition of trucks with ICMS credits in the Minas Gerais (MG) state units; (iii) completion of construction of the Candeias Bahia (BA) state unit; and (iv) refurbishment of the Paranaguá units, Paraná state. In order to conclude these construction in progress, the Company formalized commitments with building contractors and other suppliers totaling R$ 2,268 (R$ 4,850 at December 31, 2015). These commitments will be paid with the Company s own resources and future cash generation, as well as with funds obtained from financial institutions. 23

26 11. Trade accounts payable Trade accounts payable are liabilities for goods acquired or services received from suppliers in the ordinary course of business, classified under current liabilities if their payment falls due within one year. Otherwise, trade accounts payable are stated as noncurrent liabilities. They are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. 06/30/ /31/2015 Domestic trade accounts payable 179,314 90,822 Foreign trade accounts payable 496, , , ,354 The Company purchases most of its raw materials from foreign suppliers. These securities are denominated in US dollars. Present value adjustment amounting to R$ 14,147 (R$ 11,762 at December 31, 2015) was calculated based on all purchases from domestic and foreign suppliers with maturities of more than 30 days, at variable interest rates agreed upon for each transaction, using the discounted cash flow method. 12. Forfaiting The Company entered into agreements with banks to structure Forfaiting transactions with its main suppliers. In these transactions, suppliers transfer the right to receive securities to banks, which then become their creditors. This type of transaction does not significantly change prices and other conditions established with Company suppliers. However, when financial institutions act as an intermediate between the Company and certain suppliers in acquiring raw materials, the payment term of referred to purchases is substantially extended, which contributes to a better operating cash flow for the Company. Considering the characteristics of such transactions and aware of CVM Memorandum Circular No. 01/2016, of February 18, 2016, the Company decided to present amounts related to these transactions under a specific account. Their terms and conditions are as follows: Interest rate Term 06/30/ /31/2015 Forfaiting US$80,153 thousand (US$74,168 thousand at December 31, 2015) VC % p.a. 203 days

27 13. Loans and financing Loans are financial liabilities which are initially recognized at fair value, in the receipt of funds, net of transaction costs. Subsequently, loans taken out are presented at amortized cost, i.e., plus charges, interest and transaction costs not amortized, proportional to the period incurred, using the effective interest rate method. Loans and financing are classified as current liabilities unless the Company has an unconditional right to defer settlement of such liability for at least 12 months after the balance sheet date. Foreign currency Contractual interest rate Effective interest rate 06/30/ /31/2015 Import financing (i) Fixed US$197,772 (US$343,215 at December 31, 2015) VC % p.a. VC % p.a. 634,807 1,340,188 Fixed working capital US$35,683 (US$11,883 at December 31, 2015) VC % p.a. VC % p.a. 114,535 46,401 Domestic currency Working capital (ii) % of DI p.a % of DI p.a. 340, ,867 FINAME 5.39 % p.a. 5.39% p.a. 6,959 7,946 Rural credit transactions (iii) 8.06 % p.a % p.a. 26,668 21,402 Other VC+Libor+3.0% p.a. VC+Libor+3.0% p.a. 13,263 12,773 BNDES 98.87% of DI p.a % of DI p.a. 28,650 25,360 Intercompany loans 15.0% p.a %.p.a 43,406 - Debentures (iv) DI % p.a. DI % p.a. 87,669 88,228 1,295,965 1,659,165 Current (1,195,048) (1,594,540) Noncurrent 100,917 64,625 25

28 13. Loans and financing (Continued) Additional information on the types of loans and financing taken out by the Company is as follows: i) Import financing Financing involving agreements with various financial institutions to fund raw material imports. Payments are due up to 360 days from the date of the bill of lading of raw materials abroad or from the date of disbursement of the transaction. At, 25.9% (16.2% at December 31, 2015) of the amount financed are guaranteed by the Company s receivables; however, there are no guarantees for the remaining balance. ii) Working capital This refers to loan transactions with financial institutions, given that, at, 84% of the balance mature in 2016 and 16% mature until At, 22.1% (22.2% at December 31, 2015) of the working capital amount are guaranteed by the Company s receivables through FIDC transactions, however, there are no guarantees for the remaining balance. iii) Rural credit transactions The Company has agreements with financial institutions related to rural credit transactions for preferential customers (cash sales financed by financial institutions directly to purchaser guaranteed by the Company). The balances are classified as liabilities because the Company guarantees these transactions. At, the total rural credit transactions in the amount of R$ 26,668 was covered by credit insurance, which covers for any losses. iv) Debentures Series Number Issue Nominal value Index Current Noncurrent Total FHER /6/ DI % p.a. 87,669-87,669 87,669-87,669 December 31, 2015 Series Number Issue Nominal value Index Current Noncurrent Total FHER /6/ DI % p.a. 88,228-88,228 88,228-88,228 26

29 13. Loans and financing (Continued) iv) Debentures (Continued) On May 10, 2013, 26,000 non-privileged single-series unsecured nonconvertible junior debenture, with par value of R$ 10,000 each were issued, as approved at the Special General Meeting held on April 29, 2013 and at the Board of Directors meeting held on April 29 and May 7, 2013, making up the 2nd issue of Company debentures, with restrict distribution efforts. The 2 nd issue totaled R$ 260,000. These debentures are remunerated at Interbank Deposit (DI) rate plus 3.25% p.a., determined on a pro rata day basis from the issue to the maturity date. Interest matures on a semiannual basis from November The principal is payable in three equal annual installments, two of which were paid on November 10, 2014 and 2015, whlist the remaining one matures on November 10, Issue costs totaled R$ 4,604 and were accounted for as a reduction to the principal. At June 30, 2016, funding costs to be amortized totaled R$ 1,072, and will be amortized to P&L according to the debenture maturity schedule by the amortized cost under the effective interest rate method. These debentures are subject to certain covenants which, among other matters, require that the Company comply with certain financial indices measured on an annual basis. At December 31, 2015, the Company did not meet the required financial index threshold, no additional accounting record or reclassification was necessary. The guarantee is the chattel mortgage of real properties corresponding to 50% of the total issue value. At the General Debenture Holders Meeting held on March 31, 2016, debenture holders approved the non-declaration of the early maturity of the Issue, due to Company s noncompliance with the above-mentioned Financial Indices related to the year ended December 31, 2015 and Company s payment to debenture holders of a waiver fee of 1.50% of the Balance of the Nominal Unit Value plus Remuneration, totaling R$1,385 thousand. 27

30 13. Loans and financing (Continued) v) Analysis of loans and financing maturities Loans and financing mature as follows: 06/30/ /31/ ,005 1,594, ,406 37, ,364 26, onwards 28,190-1,295,965 1,659,165 vi) Fair value of loans and financing At, the fair value of debentures amounted to R$ 88,723. The fair value of other loans and financing at and December 31, 2015 approximates their book value. 14. Provision for contingencies The Company is involved in legal and administrative proceedings arising from the ordinary course of its business. The provisions for losses, if any, arising from these lawsuits are estimated and adjusted by management, supported by the opinion of its legal advisors. At and December 31, 2015, the provision for contingencies comprised the following: 06/30/ /31/2015 Nature of contingencies: Tax and administrative 2,023 3,771 2,023 3,771 Labor and social security 13,481 11,955 (-) Judicial deposits (3,697) (3,015) 9,784 8,940 Civil and environmental (-) Judicial deposits (385) (171) Total Provision for contingencies 15,931 16,119 (-) Judicial deposits (4,082) (3,185) 11,849 12,934 28

31 14. Provision for contingencies (Continued) i) Changes in provision for contingencies For the periods ended and 2015, changes in the provision for contingencies are as follows: 06/30/ /30/2016 Opening balance 9,517 10,769 Addition, net 3,496 (1,672) Monetary restatement 2, Closing balance 15,931 9,517 ii) Judicial deposits linked or not to proceedings for which a provision was recorded 06/30/ /31/2015 Tax and administrative 10,856 11,395 Civil and environmental 6,069 5,540 Social security 5,851 6,634 Labor 5,488 4,737 28,264 28,306 iii) Contingent liabilities The Company is a party to tax, social security, labor, administrative, civil and environmental proceedings, involving risks of loss classified by management and its legal advisors as possible, for which no provision has been recorded. Breakdown of contingent liabilities is as follows: 06/30/ /31/2015 Tax and administrative 222, ,215 Labor and social security 62,624 29,005 Civil and environmental 119,266 99, , ,713 The amounts presented are monetarily restated based on the Brazil s Central Bank benchmark rate (SELIC) or, when applicable, correspond to the updated amounts calculated by the Company s legal advisors. Tax and administrative proceedings substantially refer to disputes involving PIS, COFINS and ICMS, mainly resulting from tax assessment notices and differing interpretations between the tax authorities and the Company. The main disputes are currently at the administrative level. Labor and social security lawsuits arise from the ordinary course of the Company s business and refer to claims by former employees, as well as to disputes regarding the calculation and payment of social security charges. 29

32 14. Provision for contingencies (Continued) iv) Acquisition of tax credits used for offsetting against taxes due In February 2003, the Company acquired tax credits arising from a federal tax overpayment. A credit assignment agreement was formalized and filed with the Registry of Titles and Documents, and the substitution of the plaintiff was also requested from, and approved by, the Federal Court. The decision regarding the substitution of the plaintiff was also final and unappealable. At, the Company has R$ 162,844 in tax credits acquired recognized under noncurrent assets. Grounded on the Request for Payment issued by the Federal Justice on June 20, 2016, in relation to the amount not subjected to dispute and based on the opinion of Company legal advisors, management expects to receive the amount of R$130,482 in December, 2017 and the balance of credits over a period of five years, as monetarily restated by reference to IPCA-E plus corresponding interest charges. v) Civil Class Action brought against Paranaguá unit, Paraná State In February 2009, the Federal and State Public Prosecution Offices of Paraná filed a Civil Class Action which claimed irregularities in the licensing process and alleged environmental damages caused by the SSP (Simple Superphosphate) plant in Paranaguá, Paraná state, which is currently in the phase of finding of facts awaiting an answer from the court-appointed experts regarding the parties inquiries on the experts reports. Supported by the opinion of its legal advisors, who classified as remote the likelihood of an unfavorable outcome for the Company of the request of the Public Prosecution Offices to demolish the buildings and vacate the area and as possible the likelihood of loss for the Company in the other items of the lawsuit, the Company did not set up any provision for losses on the assets of Paranaguá unit or for the civil actions mentioned above. At June 30, 2016, the restated amount of this action whose likelihood of loss is assessed as possible amounted to R$15,813 (R$14,983 at December 31, 2015). 15. Equity a) Capital The Company's capital is fully comprised of common no-par-value shares. Additional costs directly attributable to the issue of new shares or options, when applicable, are stated in equity as a deduction of the amount obtained, net of taxes. 30

33 15. Equity (Continued) a) Capital (Continued) Pursuant to the Company's Articles of Incorporation, the Board of Directors is authorized to increase the Company's capital up to the limit of R$ 800,000. At, subscribed capital amounting to R$585,518 comprises 53,857,284 shares. 06/30/ /31/2015 Capital 585, ,165 Share issue costs - (8,647) 585, ,518 b) Equity adjustment Equity adjustment consists of deemed cost of land and buildings that was recorded on the date of transition to CPCs and IFRS. c) Profit allocation and income reserves tax incentives At, the amount that would be allocated to income reserves - tax incentives, totaling R$ 10,942, was used for offsetting accumulated losses. These tax incentives have been used for absorbing losses accumulated since December 31, By, the annual amounts of tax incentives that were utilized to offset the accumulated losses and that, as previously mentioned, must be returned to income reserve when there are available profits, are as follows: 2008 to Total PSDI (i) 134,389 25,099 19,575 9, ,730 Desenvolve (Program for Industrial Development and Economic Integration) (ii) ,171 1,171 Other incentives received 5, , ,846 25,099 19,575 10, ,462 State VAT (ICMS) incentive: (i) The tax benefit arises from the approval granted to the Company in September 2003 to participate in the Sergipe Industrial Development Program (PSDI) - Government of Sergipe State, which benefits from a tax benefit corresponding to the reduction of 92% in the ICMS calculated in the plant located in the city of Rosário do Catete (Sergipe State). The program matures on September 26, (ii) This tax incentive was granted to the Company in November 2014 for taking part in the Program for Industrial Development and Economic Integration (Desenvolve) - Bahia State Government, which enjoys a tax benefit corresponding to a 90% decrease in the State VAT (ICMS) amount computed in the manufacturing unit located in Candeias - Bahia state. The program matures on October 31,

34 15. Equity (Continued) c) Profit distribution and income reserves tax incentives (Continued) A 75% reduction in income tax payable, determined based on profit from tax-incentive activities (lucro da exploração) for a 10-year period as from grant date, under article 1 of Provisional Executive Order No. 2199/14 of August 24, From 2007, the Company enjoys the tax benefit obtained from Brazil s Supervisory Office for Development of the Northeast (SUDENE). This benefit was originally granted in March 2006 to the unit located in Rosário do Catete (Sergipe state) and shall be valid until As from 2012, the benefit was also extended to the unit in Camaçari (Bahia state) and shall be valid until In 2014, the benefit obtained from the Superintendence for the Development of the Amazon (SUDAM) was granted to the two units located in Rondonópolis (Mato Grosso state) and shall be valid until The benefits are directly recorded in P&L for the year and subsequently transferred from Retained earnings to Income reserve - tax incentive. These reserves can only be used to increase capital or offset losses. If there is an offset of losses, the amount absorbed must be subsequently returned to the reserve account as profits are available, in order to avoid possible tax contingencies, because this reserve cannot be distributed to shareholders. 16. Earnings (loss) per share Shares and P&L used to calculate basic and diluted earnings (loss) per share for the quarters ended and 2015 (in thousands, except earnings (loss) per share) are as follows: Quarter ended 06/30/2016 Quarter ended 06/30/2015 Profit (loss) attributable to the Company s shareholders (33,279) (37,293) Weighted average number of outstanding common shares 53,857 53,857 Basic and diluted earnings (loss) per common share (0.6179) (0.6924) 32

35 16. Earnings per share (Continued) Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Profit (loss) attributable to the Company s shareholders (31,737) (180,195) Weighted average number of outstanding common shares 53,857 53,857 Basic and diluted earnings (loss) per common share (0.5893) (3.3458) For the periods ended and 2015, the Company carried out no transactions involving potentially dilutive common shares that would generate differences between basic and diluted earnings (loss) per share. 17. Net operating revenue This revenue comprises the fair value of the consideration received or receivable by the sale of goods and services in the ordinary course of the Company s business. Revenue is stated net of taxes, returns, rebates and discounts granted. Sale revenue is recognized in P&L when all risks and rewards of product are transferred to the buyer, i.e., for cases of Free on Board (FOB) sales, revenue is recognized when the buyer withdraw the goods in the Company s units; for cases of Cost, Insurance and Freight (CIF) sale, revenue is only recognized after the delivery of goods in the local established by the customer. Reconciliation of gross sales to net revenue is as follows: Quarter ended 06/30/2016 Quarter ended 06/30/2015 Gross sales revenue 1,013,758 1,263,837 (-) Deductions from gross sales revenue: Rebates and unconditional discounts, cancelled sales and returns (4,337) (10,695) Sales taxes (19,328) (19,289) Tax incentives ICMS (PSDI and DESENVOLVE) 4,683 5, ,776 1,239,423 33

36 17. Net operating revenue (Continued) Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Gross sales revenue 2,349,859 2,619,115 (-) Deductions from gross sales revenue: Rebates and unconditional discounts, cancelled sales and returns (10,476) (17,778) Sales taxes (40,939) (36,227) Tax incentives ICMS (PSDI) 10,838 12,115 2,309,282 2,577, Cost and expenses by nature Rebates arising from purchases of raw materials, granted by suppliers, are recognized as discount of costs under Cost of sales, in P&L for the year, as the Company acquires the right to receive, through compliance with the purchase volumes and other pre-established parameters. The expenses related to freight of purchases of raw and ancillary materials are appropriated to Cost of sales when these are sold. Freight expenses related to the delivery of goods and expenses with sales commission are recorded as Selling expenses, as incurred. Other costs are calculated on an accrual basis. The Company chose to present the statement of operations by function and states below the details by nature: Quarter ended 06/30/2016 Quarter ended 06/30/2015 Raw and production materials 867,777 1,099,625 Transportation expenses 35,688 43,886 Personnel expenses (Note 21) 48,727 51,153 Commercial expenses 17,272 14,923 Depreciation and amortization 12,715 12,733 Profit sharing (Note 21) 2,540 2,682 Advertising expenses Operating lease agreements 1,238 1,552 Other expenses 28,350 30,524 1,014,485 1,257,581 Classified as: Cost of sales and services 919,489 1,157,288 Selling expenses 71,355 77,944 General and administrative expenses 23,641 22,349 1,014,485 1,257,581 34

37 18. Cost and expenses by nature (Continued) Six-month period ended 06/30/2015 Six-month period ended 06/30/2015 Raw and production materials 2,004,268 2,260,790 Transportation expenses 76,896 89,780 Personnel expenses (Note 21) 98,366 99,647 Commercial expenses 35,687 36,785 Depreciation and amortization 25,897 25,296 Profit sharing (Note 21) 5,012 5,257 Advertising expenses Operating lease agreements 2,580 3,117 Other expenses 55,518 59,854 2,304,533 2,581,354 Classified as: Cost of sales and services 2,108,705 2,373,795 Selling expenses 149, ,361 General and administrative expenses 45,916 44,198 2,304,533 2,581, Exchange gains (losses), net Transactions in foreign currency are translated into Company functional currency, using the exchange rates prevailing at the date of transaction or evaluation, when the items are remeasured. Exchange gains and losses resulting from these transactions and the translation at the exchange rates prevailing at year-end, referring to monetary assets and liabilities in foreign currency, are recognized in P&L for the year. Quarter ended 06/30/2016 Quarter ended 06/30/2015 Exchange gains 172, ,237 Exchange losses (36,606) (56,337) 136,301 71,900 Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Exchange gains 505, ,988 Exchange losses (223,114) (592,510) 282,655 (367,522) 35

38 20. Financial income and expenses Quarter ended 06/30/2016 Quarter ended 06/30/2015 Financial expenses Losses on derivative financial instruments (137,686) (46,518) Interest on financial liabilities and discounts granted (34,416) (24,958) Expenses with present value adjustments (15,704) (8,203) Taxes and rates on financial transactions (10,287) (9,751) Monetary losses 45 (102) (198,048) (89,532) Financial income Monetary gains 6,136 4,584 Income from present value adjustments 25,088 12,832 Gains on derivative financial instruments - (47,887) Short-term investment yields 372 3,484 Interest on financial assets and discounts granted 2,571 5,672 34,167 (21,315) Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Financial expenses Losses on derivative financial instruments (Note 8) (303,844) (66,422) Interest on financial liabilities and discounts granted (58,167) (46,221) Expenses with present value adjustments (28,055) (23,032) Taxes and rates on financial transactions (19,971) (29,128) Monetary losses (16) (118) (410,053) (164,921) Financial income Monetary gains 11,632 9,312 Income from present value adjustments 49,613 34,761 Gains with derivative financial instruments (Note 8) 8, ,395 Short-term investment yields 1,045 11,082 Interest on financial assets and discounts granted 5,586 14,363 76, ,913 36

39 21. Expenses with employees Expenses with employees are as follows: Quarter ended 06/30/2016 Quarter ended 06/30/2015 Wages and salaries 28,992 30,225 Social security expenses 7,584 8,142 Benefits set forth by law 3,985 4,213 Additional benefits (i) 8,166 8,573 48,727 51,153 Profit sharing 2,540 2,682 51,267 53,835 Six-month period ended 06/30/2016 Six-month period ended 06/30/2015 Wages and salaries 59,435 59,633 Social security expenses 15,039 15,913 Benefits set forth by law 8,047 8,021 Additional benefits (i) 15,845 16,080 98,366 99,647 Profit sharing 5,012 5, , ,904 (i) Health insurance plan, life insurance, private pension plan, death and meal benefit. 22. Fair value of financial instruments The Company carries out transactions involving various financial instruments, particularly cash and cash equivalents, trade accounts receivable, trade accounts payable, loans and financing, including Vendor and rural credit transactions. Additionally, the Company carries out transactions involving derivative financial instruments, particularly NDFs and Swaps. 37

40 22. Fair value of financial instruments (Continued) The breakdown of financial instruments by category is as follows: Assets measured at fair value through profit or loss Loans and receivables Total Assets as per balance sheet Cash and cash equivalents - 125, ,813 Trade accounts receivable - 537, , , ,353 Liabilities measured at fair value through profit or Other financial loss liabilities Total Liabilities as per balance sheet Loans and financing - 1,295,965 1,295,965 Trade accounts payable - 676, ,264 Forfaiting - 257, ,275 Derivative financial instruments 110, , ,795 2,229,504 2,340,299 Assets measured at fair value through profit or loss December 31, 2015 Loans and receivables Total Assets as per balance sheet Cash and cash equivalents - 69,550 69,550 Trade accounts receivable - 546, ,113 Derivative financial instruments 27,864-27,864 27, , ,527 December 31, 2015 Liabilities measured at fair value through profit or Other financial loss liabilities Total Liabilities as per balance sheet Loans and financing - 1,659,165 1,659,165 Trade accounts payable - 849, ,354 Forfaiting - 289, ,612 Derivative financial instruments 14,402-14,402 14,402 2,798,131 2,812,533 38

41 22. Fair value of financial instruments (Continued) Following is a comparison between the book and fair values of the Company s financial instruments, stated in the financial statements: Book value Fair value Financial assets Cash and cash equivalents 125, ,813 Trade accounts receivable 537, ,540 Financial liabilities Loans and financing 1,295,965 1,295,965 Trade accounts payable 676, ,264 Forfaiting 257, ,275 Derivative financial instruments 110, ,795 December 31, 2015 Book value Fair value Financial assets Cash and cash equivalents 69,550 69,550 Trade accounts receivable 546, ,113 Derivative financial instruments 27,864 27,864 Financial liabilities Loans and financing 1,659,165 1,659,661 Trade accounts payable 849, ,354 Forfaiting 289, ,612 Derivative financial instruments 14,402 14,402 The fair value of financial assets and liabilities is included in the amount for which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or settlement. The following methods and assumptions were used for the fair value measurement: Cash and cash equivalents, trade accounts receivable and trade accounts payable approximate their related book value mostly because of the short-term maturity of these instruments. The fair value of loans and financing is estimated by means of the discounted future cash flows, using rates currently available for debts or similar and remaining terms. For further details see Note 13. The fair value of derivative financial instruments is obtained through valuation technologies with observable market data. For further details see Note 8. 39

42 22. Fair value of financial instruments (Continued) Fair value hierarchy Assets measured at fair value Level I Level II Level III Derivative financial instruments December 31, 2015 Level I Level II Level III Derivative financial instruments - 27,864 - At, there were no assets measured at fair value. At December 31, 2015, the Company had no other assets measured at fair value. Liabilities measured at fair value Level I Level II Level III Derivative financial instruments - 110,795 - December 31, 2015 Level I Level II Level III Derivative financial instruments - 14,402 - At and December 31, 2015, there were no other liabilities measured at fair value. 23. Financial risk management objectives and policies a) Financial risk management policy The Company s activities expose it to various financial risks: market risk (including currency risk, interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse impacts on its financial performance. The Company uses derivative financial instruments to hedge against currency risk exposure. The Company monitors and evaluates its derivative positions on a daily basis and adjusts its strategy in response to market conditions. The Company also periodically reviews the credit limits and creditworthiness of its customers. In view of the policies established for derivative financial instruments, management considers the occurrence of non-measurable risk situations to be unlikely. 40

43 23. Financial risk management objectives and policies (Continued) a) Financial risk management policy (Continued) The Company s risk management policy was established by the Board of Directors and provides for the existence of a Hedge Policy Committee which is responsible for managing the risk of hedging transactions, supported by external advisors from a specialized company. This Committee is a permanent technical and advisory body that aims at assisting the Board of Directors in its responsibilities related to the periodic analyses of protection measures against exchange variations and interest rates, by analyzing the effects of such variations on income and expenses. The Hedge Policy Committee also analyzes the effectiveness of the hedge measures adopted every month and provides recommendations regarding future hedge variations. In accordance with the risk management policy, the Company manages some of the risks by using derivative instruments, and speculative negotiations and short sales are prohibited. Derivative financial instruments are solely used for the purposes of protecting cash flow. b) Market risk Interest rate risk This risk derives from the possibility of the Company incurring losses due to fluctuations in interest rates that increase financial expenses related to loans and financing taken out in the market. Since it has no significant interest-earning assets, the Company s income and operating cash flows are substantially independent of changes in market interest rates. The Company s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Company to a cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to the fair value risk associated to the interest rate. 41

44 23. Financial risk management objectives and policies (Continued) b) Market risk (Continued) Foreign exchange rate risk The Company operates internationally and is exposed to the currency risk arising from exposure to certain currencies, basically in relation to the US dollar. This risk arises from the possibility that the Company may incur losses due to fluctuations in exchange rates, which may increase the amounts of transactions denominated in foreign currencies. At and December 31, 2015, a summary of assets and liabilities denominated in foreign currency, financial instruments that mitigate currency risks and the net exposure to exchange rate risk is as follows: Period for the expected financial impact 06/30/ /31/2015 Import in transit (Note 5) US$58,132 (US$41,119 at 12/31/2015) Within 35 days (186,594) (160,564) Foreign trade accounts payable (Note 11) US$154,823 (US$194,256 at 12/31/2015) Within 190 days 496, ,532 Forfaiting (Note 12) US$80,153 (US$ 74,168 at 12/31/2015) Within 298 days 257, ,612 Loans and financing (Note 12) Import financing US$197,772 (US$343,215 at 12/31/2015) Within 239 days 634,807 1,340,188 Working capital US$35,683 (US$11,883 at 12/31/2015) Within 217 days 114,535 46,401 Other payables (receivables), net US$(168) (US$8,399 at 12/31/2015) Within 270 days (541) (30,778) 1,316,433 2,243,391 Financial instruments that mitigate currency risks (Note 8) US$222,081 (US$363,074 at 12/31/2015) Within 124 days (712,836) (1,417,731) Net exposure 603, ,660 Because of the importance of raw material imports to the Company's operations, the volatility of the exchange rate represents a significant risk to its operations. If the effects of a devaluation of the Brazilian real are not passed on to sales prices, or if the effects of an appreciation of the Brazilian real are passed on to sales prices, significant reductions in gross profit margins could occur and, consequently, pose a significant risk to the Company s operations. In a scenario of raw materials with stable prices in US dollars in the foreign market, the Company's inventories permit a natural hedge for its liabilities denominated in foreign currency. 42

45 23. Financial risk management objectives and policies (Continued) b) Market risk (Continued) Foreign exchange rate risk (Continued) In order to mitigate exchange rate risks, the Company has been engaging in transactions involving derivative financial instruments, contracted with financial institutions, to reduce its exposure to market and currency risks. These financial instruments are derivatives that represent commitments for the future purchase and sale of currencies or indexes on contractually specified dates. The hedge volume contracted at and December 31, 2015 was a result of the decision of the Company s Board of Directors supported by the Hedge Policy Committee. c) Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments, deposits with banks and financial institutions, as well as credit exposures with customers, including outstanding receivables. The Company limits its exposure to credit risks associated with banks and financial investments by investing with top-tier financial institutions, in accordance with pre-established limits and ratings, and by entering into derivative transactions only with financially sound counterparties. No credit limits were exceeded during the reporting period, and management does not expect any losses from non-performance by the counterparties. The creditworthiness of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings made by Lopes Filho & Associados, Consultores de Investimentos (Riskbank), when applicable, or internal classifications based on historical information about the default rates of counterparties: 06/30/ /31/2015 Current account and short-term bank deposits Low risk for long-term 120,731 65,615 Low risk for medium-term 5,083 3, ,813 69,550 Derivative financial instruments Low risk for long-term - 13,462-13,462 43

46 23. Financial risk management objectives and policies (Continued) d) Liquidity risk This is the risk of the Company not having sufficient net funds to meet its financial commitments, as a result of mismatching of term or volume between expected receivables and payables. In order to manage the cash liquidity in local and foreign currencies, policies for future disbursements and receipts are determined, and these are monitored daily by the Company s Finance Executive Board. In order to meet customer needs for credit sales matched to harvests, the Company utilizes financial instruments to assure liquidity. These instruments are guaranteed by the Company and are recorded in Trade accounts receivable, the book values of which do not differ significantly from their market values. The Company s sales policy is closely associated with the credit risk level it is willing to accept in the ordinary course of its business. Diversification of its receivables portfolio, selectivity of its customers, and monitoring of sales financing maturities by business segment and individual position limits are procedures adopted to minimize any defaults inherent in its accounts receivable. Credit risk arising from customer transactions, due to the dispersion of customers, is managed through the individual evaluation of the Company's customers, considering their history of non-default, prospects of growth for the customer's crop and payment capacity. The analysis below presents the Company's financial liabilities and the derivative financial liabilities settled on a net basis, by maturity ranges, corresponding to the period from the balance sheet date to the maturity date established in the contracts. The amounts disclosed in the table are the contractual undiscounted cash flows. The balances due within 12 months are equal to the book balances, as the impact of the discount to present value is not significant. 44

47 23. Financial risk management objectives and policies (Continued) d) Liquidity risk (Continued) Within 1 year From 1 to 2 years From 2 to 5 years Above 5 years At December 31, 2015 Loans and financing 1,626,639 11,894 28,583 6,255 Trade accounts payable 849,354 Forfaiting 289,612 Derivative financial instruments 14,402 At Loans and financing 1,195,417 58,620 76,791 4,491 Trade accounts payable 676,264 Forfaiting 257,275 Derivative financial instruments 110,795 e) Sensitivity analysis of derivative financial instruments The table below presents the sensitivity analysis of financial instruments, including derivatives. Company management considered the following assumptions for scenario I - Probable: Instruments subject to currency risk - the probable scenario considers an exchange rate of R$ /US$ and a CDI rate of 14.13% p.a., the rates effective at the closing date June 30, 2016, which in management s opinion, will remain stable over the next quarter, and the other scenarios were built based on these rates. Instruments subject to interest rate risk - maintenance of the rate in view of the economic environment and funds offered by financial institutions during the period. These analyses take into consideration unearned gains and losses for the next 12 months or up to the contract maturity dates, shown in brackets, if the US dollar quotation and the CDI rate vary in accordance with the percentages below. Derivative financial instruments Exchange rate derivatives Impact on P&L for the period and equity Scenario II Scenario III Scenario II Scenario III -25% -50% 25% 50% Dollar quotation Hedge - NDF (83,554) (167,118) 83, ,118 Hedge - Swap (94,644) (189,300) 94, ,300 (178,198) (356,418) 178, ,418 45

48 23. Financial risk management objectives and policies (Continued) e) Sensitivity analysis of derivative financial instruments (Continued) Non-derivative financial instruments Foreign exchange Impact on P&L for the period and equity Scenario II Scenario III Scenario II Scenario III -25% -50% 25% 50% Dollar quotation Foreign suppliers, net of import in transit 77, ,178 (77,584) (155,178) Forfaiting 64, ,638 (64,315) (128,638) Import financing 158, ,404 (158,692) (317,404) Working capital 28,632 57,268 (28,632) (57,268) Other accounts payable (135) (270) , ,218 (329,088) (658,218) Interest - debentures Impact on P&L for the period and equity Scenario II Scenario III Scenario II Scenario III -25% -50% 25% 50% CDI 10.60% 7.07% 17.66% 21.20% 9,291 6,194 15,485 18,581 f) Capital risk management The Company s objectives in managing its capital are to safeguard its ability to continue as a going concern in order to provide returns for its shareholders and benefits for other stakeholders as well as to maintain an optimal target capital structure to reduce the cost of capital. The Company uses capital from third parties, suppliers and import financing to fund a portion of its working capital. It also uses its own and third-party capital to make long-term investments. In order to maintain or adjust its capital structure, the Company may revise the policy for payment of dividends, return capital to shareholders, issue new shares, or sell assets to reduce its indebtedness, for example. 46

49 23. Financial risk management objectives and policies (Continued) f) Capital risk management (Continued) The Company monitors capital based on the indebtedness ratio. As established in letter I of article 18 of the Company s Articles of Incorporation, the indebtedness ratio for borrowings contracted by the Executive Board cannot exceed 25% of the gross operating revenue for the last fiscal year ended. Ratios exceeding this percentage must be approved by the Board of Directors. At, this ratio was 19.9% (27.3% at December 31, 2015).The Company was authorized by the Board of Directors to increase its indebtedness ratio up to 40% of the gross operating revenue of the last fiscal year ended, expiring on December 31, Insurance coverage The Company does not maintain insurance coverage for all its assets, as it understands that the risk of significant losses is remote. However, the Company has insurance policies for the production units of Paranaguá, Paraná state with maximum indemnity limit of R$ 9,000; for the units located in Dourados, Mato Grosso do Sul state, Catalão, Goiás state, Rio Verde, Goiás state, Porto Alegre, Rio Grande do Sul state, Manhuaçú, Minas Gerais state, Três Corações, Minas Gerais state and Uberaba, Minas Gerais state with maximum indemnity limit of R$ 56,961; for the units located in Paulínia, São Paulo state with maximum indemnity limit of R$ 29,500; for FINAME-financed equipment with maximum indemnity of R$ 14,163; and for part of accounts receivable, rural credit, with maximum indemnity limit of R$100,000. In addition, the Company has a civil liability policy for directors, officers and management with a maximum indemnity limit of R$ 20,000. The scope of independent auditor s work does not include the review regarding the sufficiency of the insurance coverage, which was determined by management. 25. Segment reporting Management has determined the operating segments of the Company based on the reports used for strategic decisions, reviewed by the main decision-makers, namely: the Chairman of the Board of Directors, the Company's CEO and member of the Board of Directors and the other members of the Board of Directors. 47

50 25. Segment reporting (Continued) The Executive Board performs its analysis of the Company s businesses from the perspective of the production process, comprised by two segments: (i) Industrial Segment, which comprises the sulfuric acid and Single Superphosphate (SSP) plant located in Paranaguá; and the (ii) Mixing Segment, which comprises the Company's 19 mixing units. Segment reporting reviewed by the major chief decision makers for the periods ended June 30, 2016 and 2015 is as follows: Industrial segment 06/30/ /06/2015 Mixing Industrial Mixing segment Total segment segment Total Gross sales revenue - 2,349,860 2,349,860-2,619,115 2,619,115 Deductions and taxes on sales - (40,578) (40,578) - (41,890) (41,890) Sales revenue, net - 2,309,282 2,309,282-2,577,225 2,577,225 Cost of sales (11,090) (2,097,615) (2,108,705) (11,296) (2,362,499) (2,373,795) Gross profit (loss) (11,090) 211, ,577 (11,296) 214, ,430 Operating expenses (199,883) (205,618) Financial expenses, net (50,601) (271,530) Operating income (loss) (49,907) (273,718) Income and social contribution taxes 18,170 93,523 Net income (loss) for the period (31,737) (180,195) Depreciation and amortization 5,345 20,552 25,897 5,363 19,933 25,296 EBITDA (5,746) (32,336) 26,591 (5,932) 29,041 23,108 As previously mentioned, the Industrial Segment is currently utilized to meet the requirements of the Mixing Segment. Consequently, the sales of the Industrial Segment to the Mixing Segment were measured considering the market price of the products at the time the sales were realized. The revenues from the Mixing Segment reported to the chief decision makers were measured in a manner consistent with that presented in the statement of operations, and the revenues generated by the Industrial Segment were excluded. 48

51 25. Segment reporting (Continued) Assets by business segment are as follows: 06/30/ /31/2015 Industrial segment Mixing segment Total Industrial segment Mixing segment Total Inventories 3, , ,735 3,253 1,005,050 1,008,303 Property, plant and equipment 59, , ,609 64, , ,132 Other assets - 1,770,395 1,770,395-1,752,075 1,752,075 Total assets 62,290 3,006,449 3,068,739 67,722 3,265,788 3,333,510 No information on the liabilities by segment is available. Management analyzes liabilities as a whole, as it understands that, at present, an analysis of the balances of liabilities by segment is not relevant. Since the Federal Prosecution Office and Paraná State Prosecution Office filed a Civil Class Action (see Note 14) claiming irregularities in the licensing process and alleged environmental damages caused by the SSP (Simple Superphosphate) plant in Paranaguá, Paraná state, the P&L of the Industrial Segment was adversely impacted by the suspension of operations at this plant. Currently, because of a preliminary injunction, which is therefore provisional, dated April 28, 2010, the production of the Acidulation, Granulation and Sulfur Conversion unit is suspended, as informed in a material news release to the market. Nevertheless, the Paranaguá Mixing Unit is authorized and operating. The annual production of the Paranaguá unit, Paraná State, is approximately 250 thousand metric tons (unaudited) of Simple Superphosphate (SSP) and 200 thousand metric tons (unaudited) of sulfuric acid, which currently meets approximately 40% of the SSP needs (unaudited), i.e., 6% of the Company s total consumption of fertilizer raw materials (unaudited). For the period ended, the plant depreciation recorded in P&L amounted to R$ 5,345 (R$ 5,363 for the same period in 2015). 49

52 Viana, August 5, 2016 Fertilizantes Heringer (Bovespa: FHER3) announces today its results for the second quarter and first half of 2016 (2Q16 and 1H16). 2Q16 and 1H16 Conference Call August 8, 2016 Portuguese 11:00 BR (10:00 AM U.S. ET) Phone: +55 (11) / Code: Fertilizantes Heringer Replay for one week: +55 (11) Password: English 11:00 BR (10:00 AM U.S. ET) Phone: +1 (516) Code: Fertilizantes Heringer Replay for one week: +55 (11) Password: Investor Relations Phone: +55 (19) Q16 AND 1H16 HIGHLIGHTS Deliveries totaled 838 thousand metric tons in 2Q16, 18.8% down on the 1,032 thousand metric tons recorded in 2Q15, and 1,816 thousand metric tons in 1H16, 15.9% less than the 2,160 thousand metric tons reported on the same period last year; Second-quarter net revenue came to R$994.8 million, 19.7% lower than the 2Q15 figure of R$1,239.4 million, while net revenue in the first half fell by 10.4% over 1H15, from R$2,577.2 million to R$2,309.3 million; EBITDA was negative by R$10.2 million in 2Q16, versus a negative R$4.4 million in 2Q15. In the first half, EBITDA amounted to R$26.6 million, higher than the R$23.1 million posted in 1H15; The net result was negative in all periods: R$33.3 million in the quarter, versus R$37.3 million in 2Q15, and R$31.7 million in the half, a substantial improvement over the R$180.2 million recorded in the first six months of last year, impacted by the period exchange variation; Deliveries of specialty products posted year-on-year record growth in both periods 12.3% in 2Q16, to 435 thousand metric tons, and 15.6% in 1H16 to 913 thousand metric tons. As a result, their share of the Company s portfolio increased from 38% to 52% in the quarter and from 37% to 50% in the half; 50

53 BRAZILIAN FERTILIZER MARKET According to the National Fertilizer Association (ANDA), fertilizer deliveries in Brazil totaled 7.2 million metric tons in 2Q16, 17.8% up on 2Q15. In 1H16, deliveries came to 13.1 million metric tons, a 12.6% improvement over the first six months of last year. The Company expects annual deliveries of 32.2 million metric tons, identical to the 2014 figure. In the first half, deliveries of nitrogen, phosphate and potassium fertilizers climbed by 9.7%, 8.7% and 13.7%, respectively, fueled by demand from the second corn crop and the anticipation of deliveries for the soybean crop, which did not occur in any significant manner in the same period last year. Mato Grosso state continued to account for the bulk of period deliveries, with 2.9 million metric tons, followed by Paraná with 1.8 million metric tons, São Paulo with 1.5 million metric tons, Goiás with 1.4 million metric tons and Minas Gerais with 1.3 million metric tons. Domestic production increased by 2.8% in 2Q16, but fell by 2.2% in 1H16, with nitrogen, phosphate and potassium fertilizers recording respective declines of 1.3%, 4.5% and 4.4%. Fertilizer imports decreased by 4.9% in 2Q16 and edged up by 0.2% in the first half, when imports of nitrogen and potassium fertilizers climbed by 3.02% and 2.99%, respectively, and those of phosphate fertilizers fell by 3.72%. As we have seen, first-half fertilizer deliveries climbed 12.6% year-on-year to 13,182 thousand metric tons, while imports only inched up by 0.2% to 9,741 thousand metric tons and output dropped by 2.2% to 4,275 thousand metric tons. As a result, supply is lagging projected deliveries of around 19 million metric tons in 2H16. BRAZILIAN FERTILIZER MARKET DELIVERIES Source: Anda 51

54 In thousands of metric tons In thousands of metric tons BRAZILIAN FERTILIZER MARKET DOMESTIC PRODUCTION +5.1% -2.2% -2.4% +2.8% 4,157 4,370 4,275 2,210 2,158 2,219 2Q14 2Q15 2Q16 1H14 1H15 1H16 Source: Anda BRAZILIAN FERTILIZER MARKET IMPORTS Source: Anda 52

55 DELIVERIES BY CROP HERINGER In line with the Company s 2016 business plan, which prioritizes a greater share of specialty products than in 2015, with a consequent reduction in deliveries of conventional products, Heringer s delivery volume fell by 18.8% year-on-year in 2Q16, while market deliveries grew by 17.8% in the same period, chiefly due to the increase in anticipated deliveries for the soybean crop, a feature that was absent in 2Q15. The Company s first-half deliveries fell by 15.9% over 1H15, versus a 12.6% upturn for the market as a whole. As a result, the share of specialty products reached 50% of delivered volume in 1H16, versus 37% in the first six months of Given that the Company s fertilizer deliveries by crop are, on average, more diversified than those of the market, with a greater concentration in the second half, we estimate that its 2H16 deliveries will be similar to the 2H15 total. In the case of sugarcane, although crop renewal areas were small in 1H16, fertilizer demand in the second half should be higher than in 2H15 given the substantial improvement in the earnings of the sugar and ethanol industry. As for coffee, growers current profitability levels, as well as the excellent barter ratio, will certainly fuel consumption in the second half. In the case of the second corn crop, part of the volume to be consumed during planting in 1Q17 is expected to be delivered in 4Q16, a situation that did not arise in Historically, the second quarter is the weakest for Company deliveries due to the Brazilian agricultural calendar and the crops it concentrates on. Due to delivery seasonality, the Company s business model should be analyzed on an annual basis. DELIVERIES BY CROP 53

56 SPECIALTY PRODUCTS The share of specialty products in total sales increased from 38% in 2Q15 to 52% in 2Q16, and from 37% in 1H15 to 50% in 1H16. In 2Q16, specialty product deliveries totaled 435 thousand metric tons, 12.3% more than the 387 thousand metric tons delivered in 2Q15. In the first half, volume grew by 15.6% from 790 thousand metric tons, in 1H15, to 913 thousand metric tons. 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 demands of all crops. The growth in the sales of Heringer s specialty products in recent years has been essentially sustained by the significant productivity gains obtained by its clients, with producers improved profitability increasing growers interest in these products. Heringer continues to invest in R&D in order to develop new technologies and products that can be added to its three specialty product lines: Solo, Ferti and Foliar. It has one of the largest such portfolios in the market, most of which developed using proprietary technology. 54

57 AGRICULTURAL COMMODITIES AND BARTER RATIOS (AGRICULTURAL PRODUCTS FOR FERTILIZERS) The barter ratio of agricultural products for fertilizers for the main crops improved substantially in the first half of 2016 due to the reduction in the dollar price of fertilizer raw materials and the increase in agricultural commodity prices on the international market. Agricultural commodity prices in reais in Brazil also remained high throughout the period. International soybean prices (CBOT) began the second quarter at around US$9/bushel and ended at close to US$11/bushel, an increase of approximately 22%. In the same period, CBOT corn prices moved up by 8% (from US$3.70 to US$4.15/bushel). International sugar prices also performed exceptionally well, climbing by around 30%. Source: Agroconsult/sc* = bags INTERNATIONAL RAW MATERIAL PRICES The downturn in fertilizer raw material prices as of 2015 helped reduce the Company s margins in this period. We believe these prices will be less volatile in 2H16, given that their current levels are substantially lower than in 2015, improving the barter ratio of agricultural products for fertilizers. 55

58 BRAZILIAN FERTILIZER MARKET AND SEASONALITY The average seasonality observed in recent years in Brazil s fertilizer market is expected to continue in 2016, with approximately 41% of deliveries in the first half and 59% in the second half. Heringer estimates that the Brazilian fertilizer market will grow by around 6.5% in 2016, reaching 32.2 million metric tons, similar to the record volume of deliveries reported in Source: ANDA / 2016E Heringer Estimate 56

59 GRAIN PRODUCTION AND PLANTED AREA According to Agroconsult, the 2016/2017 Brazilian grain crop should total 221,980 million metric tons, with planted area of 60.3 million hectares and a yield of 3.68 t/ha. Grains: Corn, Soybean, Rice, Beans, Sorghum, Castor Bean, Cotton, Sunflower, Barley, Rye, Canola, Oat, Peanut, Wheat and Triticale Brazil s Total (all crops) Source: IBGE, CONAB E = Agroconsult Estimate * Heringer Estimate FINANCIAL RESULTS 2Q16 and 1H16 Income Statement Deliveries totaled 838 thousand metric tons in 2Q16, 18.8% down on the 1,032 thousand metric tons recorded in 2Q15. Second-quarter net revenue came to R$994.8 million, 19.7% less than the R$1,239.4 million reported in 2Q15. Also in the second quarter, gross profit amounted to R$75.3 million, lower than the R$82.1 million posted in the same period last year, while the gross margin stood at 7.6%, higher than the 2Q15 figure of 6.6%. Freight and commissions totaled R$46.6 million in 2Q16, corresponding to 4.7% of net revenue, versus R$54.8 million in 2Q15, or 4.4% of net revenue. SG&A expenses (excluding freight and commissions) increased by 6.3%, from R$45.5 million (3.7% of net revenue), in 2Q15, to R$48.4 million (4.9% of net revenue) in 2Q16, pushed by the period reduction in net revenue as a result of lower fertilizer raw material prices on the international market and the appreciation of the real. EBITDA was R$10.2 million negative in 2Q16, with a negative margin of 1.0% of net revenue, versus a negative R$4.4 million in 2Q15, with a negative margin of 0.4%. 57

60 The 2Q16 net financial result was a net expense of R$27.6 million, versus a net expense of R$38.9 million in 2Q15, comprising net interest, discounts granted and expenses related to adjustment to present value, among others, totaling a negative R$26.2 million, a positive exchange variation of R$136.3 million and expenses with hedge operations amounting to R$137.7 million. The 2Q16 net result was negative by R$33.3 million, an improvement over the negative R$37.3 million recorded in 2Q15. First-half deliveries came to 1.8 million metric tons, 15.9% down on the 2.1 million metric tons recorded in 1H15. Net revenue totaled R$2,309.3 million in 1H16, 10.4% less than the R$2,577.3 million reported in 1H15, pulled down by the 15.9% period reduction in deliveries. Gross profit amounted to R$200.6 million in 1H16, with a margin of 8.7%, versus R$203.4 million and a margin of 7.9% in 1H15. First-half freight and commissions totaled R$104.1 million, equivalent to 4.5% of net revenue, in comparison with R$114.9 million and 4.5% of net revenue in 1H15. SG&A expenses (excluding freight and commissions) fell by 1.1% from R$92.7 million (3.6% of net revenue), in 1H15, to R$91.7 million (4.0% of net revenue) in 1H16. EBITDA came to R$26.6 million in 1H16, with a margin of 1.2% of net revenue, versus R$23.1 million, with a margin of 0.9%, in 1H15. The net financial expense fell substantially from R$271.5 million (10.5% of net revenue), in 1H15, to R$50.6 million (2.2% of net revenue), comprising net interest, discounts granted and expenses related to adjustment to present value, among others, totaling a negative R$38.3 million, a positive exchange variation of R$282.7 million and expenses with hedge operations amounting to R$294.9 million. Heringer posted a first-half net loss of R$31.7 million, an improvement over the net loss of R$180.2 million reported in 1H15 (impacted by the period exchange variation). 2Q16 % NR 2Q15 % NR % 16/15 6M16 % NR 6M15 % NR % 16/15 Volume 837,836 1,031, % 1,815,657 2,159, % Net Revenue 994, % 1,239, % -19.7% 2,309, % 2,577, % -10.4% Cost of Goods Sold (919,489) -92.4% (1,157,288) -93.4% -20.5% (2,108,705) -91.3% (2,373,795) -92.1% -11.2% Gross Profit 75, % 82, % -8.3% 200, % 203, % -1.4% Freigth and Commission (46,628) -4.7% (54,798) -4.4% -14.9% (104,134) -4.5% (114,883) -4.5% -9.4% SG&A (48,368) -4.9% (45,495) -3.7% 6.3% (91,695) -4.0% (92,677) -3.6% -1.1% EBITDA (10,216) -1.0% (4,406) -0.4% 131.9% 26, % 23, % 15.1% Net Financial Income (Expense) (27,580) -2.8% % -29.2% (50.601) -2.2% ( ) -10.5% -81.4% Net Income (33,279) -3.3% (37,293) -3.0% -10.8% (31,737) -1.4% (180,195) -7.0% -82.4% 58

61 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, Heringer s total hedge position formed through NDF agreements and swaps came to US$222.0 million (NDFs of US$104.1 million, with a weighted average rate of R$3.76, and swaps of US$117.9 million at the exchange variation less 0.50% p.a.) % NR 2015 % NR 2016 % NR 2015 % NR Net Revenue 2,309, % 2,577, % - 0.0% - 0.0% 2,309,282 2,577,225 Cost of Goods Sold (2,097,615) -90.8% (2,362,500) -91.7% (11,090) % (11,296) % (2,108,705) (2,373,795) Gross Profit 211, % 214, % (11,090) % (11,296) % 200, ,430 Freigth and Commission Fertilizer Sales SSP and Sulfuric Acid Production Heringer Total (104,134) -4.5% (114,883) -4.5% - 0.0% - 0.0% (104,134) (114,883) SG&A (91,695) -4.0% (92,677) -3.6% - 0.0% - 0.0% (91,695) (92,677) EBITDA 32, % 29, % (5,746) % (5,932) % 26,591 23,108 Regarding the public civil lawsuit of Paranaguá - PR, the evidentiary stage has been concluded and the process is pending presentation of the closing arguments by the parties. Once this phase is concluded, the lower court will issue a decision. Despite the continuation of the temporary stoppage of the SSP and sulfuric acid units, their maintenance is at adequate levels. 59

62 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 shorter-term sales and effective credit analysis, thereby reducing the risk of default and losses. Accounts receivable days stood at 48 days in 2Q16, slightly up on the 44 days recorded in 2Q15. In the same period, inventory days stood at 30 days, well below the 85 days in 2Q15 and in line with the Company s 2016 business plan. 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 2Q16 at 154 days, less than the 203 days in 2Q15. Heringer finances its working capital by drawing on credit lines from local and international suppliers and from banks, in order to manage its cash flow effectively. 60

63 INDEBTEDNESS The Company s debt denominated in reais, that was R$1,767 million In June 2015, was reduced in R$471 million in June 2016, to R$1,296 million. In dollar, debt stood at USD 404 million as of June 2016, USD 166 million lower when compared to June 2015, when debt was USD 570 million. 2,000 1,800 1,600 1,400 1,200 1, Loans and Financing - R$ million * 1,767 1,659 1,332 1,425 1,296 Dec 2014 Jun 2015 Dec 2015 Mar 2016 Jun 2016 * Does not inlcude forfait Loans and Financing - USD million * Dec 2014 Jun 2015 Dec 2015 Mar 2016 Jun 2016 * Amounts converted by US dollar closing exchange rate / Does not inlcude forfait 61