Paseo de la Reforma 725 Col. Lomas de Chapultepec, Miguel...

Paseo de la Reforma 725 Col. Lomas de Chapultepec, Miguel Hidalgo, CP. 11000, Distrito Federal, México.


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414 Capital increased the target Price for Proteak’s OPCs placing it in a range between MXP 31.2 y 34.0, 9% higher than last year’s valuation.

In May 2016, the third disbursement of the loan that Proteak signed in 2015 with Financiera Nacional de Desarrollo (FND) took place. The amount disbursed was MXP 40MM and is destined for the Eucalyptus plantations.

During the quarter, the Company carried out the second payment of principal and interests of the two loans that Proteak signed with Financiera Rural (now FND) in 2010 for the establishment and maintenance of Teak plantations.

The first MXP 75MM from the sale of MDF boards under the Brand Tecnotabla were sold. Reaching a participation of 18% in the market in just two months.

414 Capital published its independent valuation of Proteak, placing the value of the Company’s OPC between MXP 31.2 and MXP 34.0 as of May 2016. That is 9% higher than last year’s valuation.

The valuation takes into account both Teak plantations and their inherent horizon of long-term investment as well as the incremental value of the new MDF business line.

The valuation report is currently published on Proteak’s website:

http://proteak.com/index.php/en/investors/financial-information/analyst-coverage

MDF Plant

The start-up of the MDF Plant has been a success. During 2Q16 production tests were developed succesfully by obtaining the volume and quality desired. As part of the process for testing production, MDF boards with different thicknesses ranging from 3mm to 28mm were manufactured, which correspond to all the thicknesses that will be comercialized in Mexico. During the quarter the plant reached a production of more than 50% of its nominal capacity following the ramp-up as planned. In 2016 a production of 90 – 100 thousand m3 is expected. The board production will continue to gradually increase until a production of 280 thousand m3 is reached.

The Melamine press was fully installed as of the second quarter end of 2016 without inconvinience. During 3Q16 production and commercialization of value added boards will start. The Turbin and Resine plant had a delay of one and two months respectively, due to minor techinal adjustments made by the supplier

The key operative personnel for the Plant is ready and mantains a low rotation. As the plant production increases (Ramp – up) the company will continue to recruit the necessary staff.

Commercialization

The first MXP 75MM from the sale of MDF boards under the Brand Tecnotabla were sold. As of quarter end, Tecnotabla had presence in 14 states. The strategy of early commercialization that Proteak developed during 2015 allowed to develop a customer base with a monthly purchase potential of 25,000 m3 and as of June-end the customer base represent a monthly purchase potential of 31,400 m3.

http://proteak.com/index.php/en/investors/financial-information/analyst-coverage


The MDF board has had a good market reception. With only two months of sale, Tecnotabla reached a global market share (Thick and thin MDF boards) in Mexico of 18%. For the thick nude MDF boards, Tecnotabla achieved a market share of 30%.

The company continues strenghtening its marketing strategy which consists in “creating solutions of good wood within everyone’s reach” with “specialized boards of good wood that make projects a reality”. Tecnotabla has the philosophy to stay close to its clients in order to offer a personalized service and custom design. Furthermore, the project has started to focus on value added products to attend the specific need of each project.

As a result from the commercialization strategy of Tecnotabla, during these two months of the sales, our MDF Board brand has entered places that had not been contemplated with a client purchase recurrency higher than 80%.

Tecnotabla, MDF de Buena Madera, uses 100% sustainable and certified wood from its own Eucalyptus plantations.

Forestry

During 2Q16, the preparation of land for the 2015-2016 cycle was concluded. Within the next rainy season, the remaining 150 hectares will be planted (these hectares have been prepared and are ready for planting). The 2016 – 2017 forestry cycle contemplates 1,500 hectares, from which 2/3 are already assured. As of the day of conclusion of the present report, only 500 hectares are missing to reach a 10,000 hectares mark in 2017.

Maintenance of Eucalyptus plantations has been developed according to plan, while meeting adequate quality and productivity conditions.

Commercialization

During the quarter, the harvest of the mature teak plantations that Proteak acquired in Tabasco in 2010 continued. As a natural consequence of the transition of the wood source from Colombia to Mexico, and the commercial strategy of the Company to strengthen the concept of “Mexico Teak” in Asian markets, a reduction in sales volume during the quarter is reflected when compared to the last quarter.

Proteak is in the final phase of commercialization of mature plantations from Colombia. During the quarter, 25 containers with Colombian Teak were exported maintaining prices above the target. As part of Proteak’s strategy to maintain its presence in the market the commercialization of young wood from Costa Rica started.


Forestry

The maintenance of Teak plantations during the 2015-2016 cycle has been concluded and the plantations present adequate conditions of quality and productivity.

SUMMARY OF RESULTS AND KEY INDICATORS

I. Income Statement Analysis

Sales

The quarter sales reached a total of MXP 113MM, 3 times higher than those registered during 2Q15. They mainly reflect the sale of the first MDF boards under the Brand Tecnotabla for MXP 75MM.

Teak sales decreased 31% compared to 2Q15, as a result of the transition from Colombian wood to Mexican wood and the commercial strategy of the Company to strengthen the concept of “Mexico Teak”. During the last four years the Company has developed and strengthened its presence in Asian markets. Nowadays Proteak is recognized as one of the main suppliers of high quality certified Teak thanks to the strict standards that the company has followed during plantation, maintenance, harvest and logistics.

The MDF board commercialized under the Brand Tecnotabla has had an excellent acceptance in the market. The Eucalyptus / Panel sales of the quarter reached MXP 94MM. These reflect the sale of imported third party boards for MXP 19MM and the sale of Tecnotabla for MXP 75MM.

In '000 MXP 2Q'16 2Q'15 Q vs Q YTD 2016 YTD 2015 YoY

Teak Sales 19,375 28,126 (31%) 47,076 48,878 (4% )

Eucalyptus / Panel Sales 93,528 9,778 857% 121,291 18,610 552%

Income from Revaluations 36,228 45,556 (20%) 81,847 90,994 (10% )

Other Income / Expenses, Net (1) 26,898 1,745 1442% 28,392 3,936 621%

Teak Sales Cost 17,804 22,939 (22%) 43,001 40,796 5%

Eucalyptus Sales Cost 116,851 7,833 1392% 148,858 16,370 809%

Gross Margin 41,682 52,688 (21%) 87,097 102,370 (15% )

Teak Gross Margin Without Revaluation 1,571 5,187 (70%) 4,075 8,082 (50% )

Eucalyptus / Panel Gross Margin Without Revaluation (23,322) 1,945 (1299%) (27,567) 2,240 (1330% )

Operating Income 5,137 29,883 (83%) 24,147 55,050 (56% )

Debt 1,620,116 1,072,072 51% 1,620,116 1,072,072 51%

Total Liabilities / Total Assets 0.4 0.3 24% 0.4 0.3 24%

Debt / Equity 0.5 0.3 46% 0.5 0.3 46%

Debt / Total Assets 0.3 0.2 18% 0.3 0.2 18%

Debt / Current Assets 2.0 1.1 82% 2.0 1.1 82%

N/C Not Comparable

(1) Other Net Income considers subsidies, asset sales and other expenses.


Net Quarterly Sales totaled MXP 176MM, 111% higher than the ones registered the same quarter last year, mainly driven by the start of commercialization of MDF boards under the Brand Tecnotabla.

Income from the Biological Asset Revaluation totaled MXP 36MM, staying in line with the provision and the growths registered in 2015. Throughout the year, the company makes income provisions from the Biological Asset Revaluation. Nevertheless, it is during the last quarter of the year when a physical inventory takes place and the final value of the year’s revaluation is registered along with the corresponding adjustments.

Sales Costs, General Expenses and Net Income

During the quarter a Gross Loss of 19% for the sale of goods was reported. This is an expected consequence of the start of commercialization of Tecnotabla MDF boards and the sale of imported third party MDF that is kept in inventory.

The operations start-up of the MDF Plant generates fixed operation costs such as personnel, depreciation, etc., which with the production level of the quarter were not fully covered. This is normal during the start-up phase and as the plant ramp-up increases, the unitary fixed cost will decrease, until an operation break-even is reached. During the quarter the Plant operated in break-even at a marginal contribution level.

The sale of imported third-party MDF boards inventory that Proteak had as a market penetration strategy, combined with the exchange rate effect, represent 30% of the loss in Eucalyptus / Panel results. The inventory is expected to be finished during 3Q16.

General Expenses of the quarter totaled MXP 36MM reflecting sales expenses, mainly from freights of the MDF board sales, and are in line with the operation level of the Company.

The Operating Profit of the quarter is MXP 5MM, 82% lower than the one registered in the 2Q15, mainly due to the MDF commercialization with negative margin because of fixed costs as well as the decrease in Teak sales due to the transition from Colombian wood to Mexican wood. The results are in line with the expectations of the Company because of the star-up operations of the Plant.

II. Balance Sheet Analysis

Assets

As of June 2016, total assets of the Company amounted MXP 5,574MM, 6% higher than the 2015 year-end, mainly driven by the Investment in the MDF plant, the revaluation of Biological Assets and the exchange rate effect on Teak Assets.

Among Current Assets, Clients stand out with a total of MXP 127MM, showing an increase of MXP 11MM compared to December 2015 mainly due to a higher level of sales of MDF boards.

Inventory increased MXP 27MM compared to year-end 2015, as a consequence of the integration of MDF boards and the net inventory (harvest minus consumption) of Eucalyptus wood in order to supply the MDF plant.


Real Estate, Plant and Equipment registered an increase of 9% compared to year-end 2015, reflecting the end of the construction of the industrial building for the MDF plant.

Biological Assets (Current and Non-Current) increased 10% compared to December 2015, reflecting the Investment on new plantations and the Biological Assets revaluation, which is composed by a mix of different effects that can be broadly classified as: (i) new acquisitions, (ii) growth, and (iii) exchange rate.

The value of Proteak’s plantations is mainly modified by four factors: (i) capitalized forestry expenses, (ii) exchange rate, (iii) revaluations representing the growth of biological assets, and (iv) outflows from the wood’s cost of sales.

So far this year, the following has been registered: (i) MXP 65MM in capitalized forestry expenses, destined for both, maintenance of existing plantations and planting of new ones, with the purpose of improving their expected return by maintaining growths that overcome those originally expected; (ii) MXP 7MM from revaluation of the USD; (iii) MXP 81MM in revaluation derived from the previously discussed growth; and (iv) MXP 19MM, which represent the wood’s cost of sales. During the quarter, harvested wood amounted to 106 thousand m3 (thinnings and harvest).

Long Term Assets kept for Sale are mainly non-strategic plots that will be sold in the medium term. These assets are located in Costa Rica and their value as of this quarter is MXP 73MM; the decrease of 29% compared to year-end 2015 figures stems mainly from the sale of a part of the assets.

Liabilities and Equity

Current Liabilities increased 13% compared to 2015, staying in line with the normal development of the business.

Deferred Tax Liabilities show the provisions that were generated by the annual calculation of 2016 taxes.

Other Liabilities with Cost reflect mainly the disbursements of the credit with AKA- Commerzbank for the acquisition of machinery for the MDF plant. They also include the third disbursement for MXP 40MM of the credit line signed with FND in April 2015.

During the quarter, the second amortizations of principal and interests of the first two credit lines signed with Financiera Rural (now FND) 5 years ago were done for a total of MXP 12MM.

Total Equity of the Company as of the semester totals MXP 3,248, MXP 114MM higher than the 2015 year-end figure, reflecting the conversion effect as a result of the US Dollar appreciation and the results of the exercise. Proteak’s solvency continues strong with an Equity to Liabilities ratio of 1.4 to 1.

III. Cash Flow Analysis

During the second quarter of 2016, the cash flow position recorded a net decrease of MXP 31MM. Investment activities and new plantations were funded.

The difference between Operating cash flow and Investment Activities were funded mainly with the disbursement of FND credit line (MXP 40MM) and VAT recovery (MXP 20MM).


The period’s cash flow is in line with the Company’s investment plan. As of quarter end the cash flow position totalized MXP 140MM.

Environmental development.

During the verification period of the Fresh Breeze Afforestation Project, the first emission was estimated at a total of 245,652 tons of CO2. The carbon credits are expected in July 2016. The annual monitoring reports for the International Finance Corporation (IFC) and the Finnish Fund for Development (FINNFUND) were presented in order to demonstrate compliance with the agreed environmental and social commitments. Lastly, the annual FSC audit for Forestry Management in Costa Rica’s Teak plantations was positively concluded.

Social Development.

An 70% progress was reported on the construction work for the classroom and bathrooms for the community preeschool in Lic. Antonio Zamora. The inaugural event is expected in August 2016. The school has 15 students.

In June 2016, the OPC reached a maximum Price of MXP 20.10. During the quarter, the market continued recognizing the fundamental value of Proteak; the Price of its OPC (CPO for its name in Spanish) remained stable, with an average of MXP 19.30 vs a MXP 16.96 during 2Q15.


Independent Analyst

As part of the independent analyst program, follow-up of Proteak’s OPC is performed by:

Ernesto Gustavo O´Farrill Santoscoy [email protected] Tel: (55) 5531 0042 Bahía de Todos los Santos #26 Col. Verónica Anzures Delegación Miguel Hidalgo C.P. 11590, México, D.F.

Investor Relations Agency

Alejandro Ramírez Arcia [email protected] Tel: +52 (55) 5256 – 5705


The following table presents a summarized quarterly Income Statement in MXP ‘000, and a comparison with the same period of 2015. Regarding Gross Profit, Operating Profit and Net Income, the table shows the percentage of net sales plus revaluation income they represent.

2Q16 % Jun'16 % 2Q15 % Jun'15 %Δ 2Q'16 vs

2Q'15

Δ Jun'16

vs Jun'15

Teak Sales 19,375 11% 47,076 17% 28,126 34% 48,878 31% (31% ) (4% )

Eucalyptus / Panel Sales 93,528 53% 121,291 43% 9,778 12% 18,610 12% (23% ) 552%

Revaluations 36,228 21% 81,847 29% 45,556 55% 90,994 57% (56% ) (10%)

Other Income/Expenses, Net 27,205 15% 28,743 10% 0 0% 1,053 1% (5% ) N/A

Teak Cost of Sales 17,804 10% 43,001 15% 22,939 27% 40,796 26% (59% ) 5%

Eucalyptus / Panel Cost of Sales 116,851 66% 148,858 53% 7,833 9% 16,370 10% (22% ) 809%

GROSS PROFIT (LOSS) 41,682 24% 87,097 31% 52,688 63% 102,370 64% (52%) (15%)

General Expenses 36,237 21% 62,599 22% 24,550 29% 50,203 31% 48% 25%

Other Income/Expenses (307) (0% ) (351) (0% ) 1,745 2% 2,883 2% (118%) (112%)

OPERATING PROFIT (LOSS) 5,137 3% 24,147 9% 29,883 36% 55,050 35% (83%) (56%)

Financial Products / Expenses (4,216) (2% ) (13,357) (5% ) 9,378 11% 660 0% (145%) N/A

Other Financial Products / Expenses (66) (0% ) (130) (0% ) (5,037) (6%) (9,825) (6%) 99% 99%

Conversion Effect (13,877) (8% ) (3,326) (1% ) (18,842) (23%) (2,347) (1%) 26% (42%)

Financing Results (18,159) (10%) (16,813) (6%) 14,501 17% 11,512 7% (225%) (246%)

Profit Before Income Taxes (13,022) (7%) 7,334 3% 44,384 53% 66,562 42% (129%) (89%)

Income Taxes (2,604) (1% ) 1,467 1% 19,968 24% 19,968.00 13% (113%) (93%)0 0%0

0% 0% 0% 0% 0%

Net Income (10,418) (6%) 5,867 2% 24,416 29% 46,594 29% (143%) (87%)

Conversion Effect - 0% - 0% - 0% 0 0% N/A N/A0 0 0 0 0 0 - 0 0 0

Comprehensive Income (10,418) (6%) 5,867 2% 24,416 29% 46,594 29% (143%) (87%)

Income Statement


The following table presents the consolidated Balance Sheet as of the second quarter 2016 in MXP ‘000, and its comparison with 2015 year-end figures.

2Q'16 Dec'15 (1)

Δ 2Q'16 vs

Dec'15 %

Cash & Equivalents 140,535 168,180 (27,645) (16% )

Accounts Receivable (Clients) 126,998 116,433 10,565 9%

Other Accounts Receivable 181,613 236,719 (55,106) (23% )

Inventory 156,671 129,279 27,392 21%

Current Biological Assets (Mature) 127,493 151,130 (23,637) (16% )

Assets Available for Sale 73,144 102,729 (29,585) (29% )

Other Assets 8,957 10,763 (1,806) (17% )

CURRENT ASSETS 815,411 915,233 (99,822) (11%)

Plant and Equipment 2,920,070 2,684,337 235,733 9%

Non-Current Biological Assets 1,732,447 1,536,074 196,373 13%

Deferred Income Tax 32,187 33,859 (1,672) (5% )

Other 49,622 37,312 12,310 33%

Prepaid Expenses 25,261 28,388 (3,127) (11% )

NON-CURRENT ASSETS 4,759,587 4,319,970 439,617 10%

ASSETS 5,574,998 5,235,203 339,795 6%

Accounts Payable 58,049 109,962 (51,913) (47% )

Payable Taxes 1,233.79 6,992 (5,758) (82% )

Other Current Liabilities 285,290 272,118 13,172 5%

Current Debt 181,308 76,367 104,941 137%

CURRENT LIABILITIES 525,881 465,439 60,442 13%

Long Term Debt 1,438,808 1,281,416 157,392 12%

Deferred Taxes 348,951 350,005 (1,054) (0% )

Other 13,262.89 3,784.00 9,479 250%

LONG TERM LIABILITIES 1,801,022 1,635,205 165,817 10%

LIABILITIES 2,326,903 2,100,644 226,259 11%

Capital Stock 2,372,941 2,366,218 6,723 0%

Accumulated Earnings (Losses) 116,315 107,542 8,773 8%

Conversion Effect 494,521 393,572 100,949 26%

Revaluation Surplus 119,544 119,544 (0) (0% )

Other Comprehensive Income 144,775 147,683 (2,908) (2% )

TOTAL EQUITY 3,248,095 3,134,559 113,536 4%

TOTAL LIABILITIES + EQUITY 5,574,997 5,235,203 339,794 6%

(1) 2015 Audited Financial Statements

Balance Sheet


June 28th, 2016. Mexico City. Today, Proteak Uno, S.A.B de C.V. (BMV: TEAK) published its 2Q16 results. This information is presented according to Financial Reporting Standards (NIF) in nominal terms.

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