Strategy and Competitive Advantages

Heringer intends to consolidate its leadership position in the market through: (1) the consistent and sustained expansion of its operations, primarily in the retail segment, (2) the continued development of new products that meet its clients’ needs and (3) vertical integration of its activities, allowing the company to strengthen its competitive advantages and maximize shareholder value. The key components of its strategy are to:

Consolidate its leadership position: Heringer believes that its management model, the strength of its brand name, its focus on high-quality products, a flexible commercial strategy capable of meeting the different needs of various agribusiness segments, and a low cost structure gives the company strong competitive advantages to consolidate its leadership position and to benefit from the growth potential in the Brazilian fertilizer market. In addition, the company is seeking new expansion opportunities, based on its successful history of penetrating new markets, such as in the Northeast, North and South of Brazil.

Create vertical integration along the phosphate production chain: To improve its strategic positioning in the fertilizer industry, the company opened in November, 2008 its first unit to produce sulphuric acid and SSP, an intermediate fertilizer essential for grain crops. Heringer believes that this initiative provide the company with: (1) considerable synergies, as the company will be able to produce both Intermediate Fertilizers and NPK formulas at the same production facility; (2) decrease its dependence on third- parties for raw materials and, as a result, increase its operating margins; and (3) improve its distribution logistics in states located in the central-western portion of Brazil.

Continue to focus on its retail operations to improve results: One of the pillars of Heringer’s strategy for the coming years is to increase its existing client base, which is currently with more than 48 thousand active customers. As the company expands its customer base, Heringer believes that will be able to minimize business risks and enhance its future profitability.

Increase the production and supply of Special Fertilizers, which have higher margins: In response to a trend in the agricultural industry towards a more balanced use of fertilizers, Heringer plans to significantly increase its portfolio of Special Fertilizers by investing in the development of new formulas, new products and a specialized technical team. Special Fertilizers have gross margins that generally exceed those of Basic Fertilizers and NPK Formulas. Special Fertilizers create value for its customers because they increase crop productivity when properly applied. The Company plans to gradually increase its sales of these products as a percentage of its total sales volume, which went from 12% in 2005 to 35% in 2014.

Maintain its high level of brand recognition: Heringer is recognized by its clients for: (1) its highquality products; (2) its ability to serve diverse agricultural regions in Brazil; (3) its just-in-time deliveries; and (4) its differentiated pre- and post-sales supports.

People management: Heringer’s management model seeks to embody the interaction between top management, teams, strategic, operational and administrative support activities, and working process management.

One of the people management cornerstones is team qualification management, through which the company has been mapping requirements and competencies, aiming to identify capacity building and training needs in order to effect improvements.

To ensure the management of this information, Heringer has adopted an IT tool which enables the company to visualize and manage the needs, training, development and evaluation of its employees.
Right from the start, the focus has been on valuing and encouraging the professional growth of those employees who show an interest in developing together with the company. With this in mind, priority is given to internal recruitment whenever possible.

Heringer’s model also favors information flow through the use of an integrated system and collaborative tools in order to disseminate information that is strategic to its operations, thereby streamlining processes and decision-making and permitting a large degree of autonomy for its employees.

In addition, the company has implemented and structured a quality management system, ensuring that people must have a deep knowledge of the processes with which they are involved, dominate working techniques, pursue improvements, identify their contribution to final results and understand the impact they have.

As a result of this process, Fertilizantes Heringer currently has five units with ISO 9001:2008 certification.

Historically, Heringer has achieved sales volume growth that exceeds the market average in the Brazilian fertilizer industry. The company believes that they will continue to have impressive growth rates in the coming years as a result of its competitive advantages and its highly successful strategy. Heringer believes that its principal strengths are the following:

Significant growth potential in a competitive industry: During the 18-year period, Heringer had sales growth that was approximately 3 times greater than the overall growth rate in the Brazilian fertilizer industry during this period, with an annual compound growth rate of approximately 14.8% in terms of sales volume. As a result, its market share in a competitive market that includes national and multinational companies increased from 3.7% in 1995 to 17.1% in 2014. The company believes that they are well positioned to benefit from the expected growth in the fertilizer industry in the coming years as a result of: (1) its primary focus on the Brazilian fertilizer market; (2) the ability to increase its market share in areas where Heringer currently operates, and its successful history of entering new markets; and (3) its track record of efficiently serving clients across a variety of agribusiness segments.

Geographically balanced sales and diversified customer base: Heringer has a highly diversified customer base, approximately 46 thousand active customers in 2014, distributed across various agribusiness segments, including farmers, agricultural companies, retailers, distribution companies and cooperatives located in different agricultural regions throughout the country.

Strong logistical capacity and extensive distribution network: To fully benefit from improved logistics capacity in its plants, Heringer imports raw materials into seven ports, including: Porto de Barra dos Coqueiros in the State of Sergipe, Aratu in the State of Bahia, Vitória in the State of Espírito Santo, Santos in the State of São Paulo, Paranaguá in the State of Paraná, Rio Grande and Porto Alegre, both in the State of Rio Grande do Sul. Its units are located near Brazil’s main ports and principal railroads and highways, which allows for intermodal supply lines.

Leading market position and recognized brand name: The company believes that they are among the three largest sellers and distributors of fertilizers in Brazil, accounting for approximately 17.1% of the total volume of fertilizers sold in Brazil in 2014, according to ANDA data. In southeastern Brazil, where the largest and most competitive fertilizer markets are located. The brand name Fertilizantes Heringer is widely recognized in the Brazilian market for offering products meeting rigorous standards, offering just-in-time delivery, serving various regions and agricultural centers in Brazil, and providing customers with differentiated pre- and post-sales support. The company has a rigorous quality control system for the production of its products, including lab analyses of raw materials and finished products and constant monitoring of its production processes. These standards have contributed significantly to the success of its brand name, loyalty of its existing customer base and its ability to attract new customers. Furthermore, its strong market position allows Heringer to benefit from growth opportunities due to, among other factors, the credibility and reputation of its brand name, the scale of its operations and its close relationship with customers and suppliers.

Diversified portfolio of products and services: Heringer offers to its customers approximately 3 thousand types of fertilizer products, from Basic and Intermediate Fertilizers to NPK mixtures and Specialty Products. The company is innovator in the development of Specialty Products, which are highly specialized mixtures tailored to the different needs of various agribusiness segments. Heringer’s two research centers operate with the most advanced technology available, which allows the company to rapidly develop and produce new formulas at competitive costs. The company believes their ability to rapidly and efficiently develop new formulas makes them highly competitive, allowing them to satisfy its existing clients and capture new ones.

Stable supply of raw materials at competitive costs: As a result of the scale of its operations and its consistent growth, the company is an important client of its domestic and international raw material suppliers and has established solid and reliable relationships with them. In addition, Heringer benefits from Brazil (1) being the world’s fourth largest and fastest growing market for fertilizers and (2) having peak consumption that is concentrated in the latter half of the year, as opposed to countries that consume significant amounts of fertilizer and are located in the northern hemisphere, where demand is concentrated in the first half of the year. In addition, Heringer is the largest purchaser of fertilizer urea from Petrobras and the largest customer of potassium chloride from Vale Fertilizantes. In the phosphate production chain, the company is the second largest costumer of Vale Fertilizantes. The company maintains close and long-term relationships with most of its major suppliers, which gives them access to competitive prices and favorable payment terms.

Solid financial performance: From 1995 to 2014, the Company had a history of solid financial performance. Furthermore, the percentage of its revenues derived from Specialty Products, which have gross margins superior to NPK Formulas, has increased significantly.

Experienced management team and rigorous corporate governance standards: Heringer has been in the fertilizer business for 46 years and its key executives have led its business with a proven track record of performance. Its corporate culture is results-oriented and based on a management model that prioritizes prompt assistance to clients and operational efficiency to achieve growth combined with profitability of its business.

The Company’s management team is highly skilled, with vast technical, operational and market knowledge. Moreover, its organizational structure and its highly experienced and motivated management team allow for efficient decision making in its operations, enabling Heringer to achieve aggressive growth goals and to provide benefits for its shareholders.