Ultrapar Participacoes SA

BOVESPA:UGPA3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's First Quarter 2018 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br and MZiQ platform. Please feel free to flip through the slides during the conference call.

Today with us we have Mr. André Pires, Chief Financial and Investor Relations Officer, together with our other executives of Ultrapar. We would like to inform you that this event is being recorded. [Operator Instructions] A replay of this call will be available for 1 week.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ultrapar management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ultrapar and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Pires. Mr. Pires, you may now begin the conference.

[André de Oliveira Dias, executive]

Thank you very much. Hello, everyone. As always, it's a pleasure to be here with you to discuss Ultrapar's First Quarter 2018 Results as well as to give you some perspectives on the next few quarters. Here with me are the officers from our businesses as well as the Investor Relations team to help answering your questions.

Before starting, I'd like to draw your attention to Slide #2, where we highlight the criteria adopted in the preparation of the published information and that is used in this presentation. All information shown in this quarter adopts the new criteria established by the IFRS 9 and 15 standards. This includes quarterly information for 2017, which consequently differs from amounts presently reported in the respective publications of results. So to keep the same basis of comparison, we are publishing comparative tables in our earnings release, the financial results as well as in the Investor Relations website.

I'd like to begin on Slide #3, an overview of the events since our last call. As you might have seen, we announced important changes in our management. Paulo Cunha, Chairman of the Board of Directors, yesterday announced his understanding that now it is the time to complete the process of his succession and, thus, secure a further step to ensure the company's perpetuity, and he decided to leave the company's Board of Directors.

In that sense, Ultrapar's Board of Directors in recognition of the inestimable value of his contributions appointed Mr. Paulo Cunha as the Chairman Emeritus of the Board, an honorary and lifelong position to be occupied by him as of this date.

Also on this date, Mr. Pedro Wongtschowski known by many of you, current Vice Chairman of the Board of Directors and former Chief Executive Officer from 2007 to 2013, was appointed to succeed Mr. Paulo Cunha -- [indiscernible]. Mr. Lúcio de Castro Andrade Filho, who joined the company in 1977 and has been a member of the Board of Directors since 1998, was appointed for the position of Vice Chairman of the Board of Directors. Both will occupy their roles for the remainder of their term of office as directors. The Board of Directors will appoint, in a timely manner, our new Director, who'll serve until the next General Shareholders Meeting of the company in accordance with the bylaws.

Additionally, the company informs that it received a letter from Ultra SA, communicating that a shareholders agreement was entered into by Ultra SA and Parth do Brasil Participações Ltda, holding companies of the 2 branches of the Igel Family as well as our former executives of the company.

This letter is available at the company's website, but I'll read a passage that states that the agreement aims to [ reforce ] without any change the principles that have been governing the actions of the reference shareholders of Ultrapar in favor of the continuous protection of all shareholders' interest and the guarantee that the company is managed in a professional and independent manner.

In November of 2016, we submitted the acquisition process of Liquigas by Ultragaz [ to catch it ]. For nearly 15 months between signature and a final decision, we worked hard to [ forecast ] the benefits of the transaction and to reach an agreement which addressed the comparative concerns raised by administrative court.

But in its meeting on February 28, the court decided by 5 votes to 2 to reject the acquisition and the operation, and therefore, it will no longer take place. Regardless, we will pursue other expansion plans for Ultragaz and Ultra. As you know, the rejection of the acquisition resulted in a fine of BRL 286 million paid in full March 1, the date [ project ] decision was published.

At our latest presentation, we commented that the first quarter would be a challenging one for our business. In the first 3 months of the year, we have noted a slower-than-expected pace in the recovery of the economy with the unemployment rate still high and the competitive market environment still intense.

In the table at the top right-hand corner of the slide, there are some indicators which support our vision and will help us in the analogies of the impacts on the businesses. In the fuel distribution sector, important volumes remain high during the quarter despite the recent change in the sector's operating environment. In gas distribution sector, there was a significant increases in raw materials cost in 2017. In pharmaceutical retailing, market growth was lower than expected over the last few months. I should also highlight that certain nonrecurring effect had an impact on our results, as I will explain during the course of the presentation.

Consequently adjusted EBITDA, excluding nonrecurring effects in the first quarter of 2018, was BRL 794 million, 12% below the same period of 2017. Please note that for this EBITDA comparison, we are excluding the fine which affected the results of Ultragaz this quarter and the reversal of the provision which positively affected Oxiteno's results in the first quarter of 2017. Net earnings in turn was down 26%, also excluding the impacts of the fine.

Let's now move on to Slide #4, where the performance of our fuel distribution business impede earnings. Sales volume in the first quarter of 2016 (sic) [ 2018 ] reached 5,461,000 cubic meters, a reduction of 2% compared with the first quarter of 2017. Performance was influenced by 1 less business day in the period ended, and this had a reducing effect of about 1.5% of the volume.

The business environment also remained challenging with imported volumes too high in the market. Otto cycle sales volume fell 2% compared with this first quarter of last year, and diesel 3%. It's important to mention, however, that ethanol also positive results with growth of 51% year-over-year, and NGV freezing this time of the year, reflecting the impact of [ gadget ] in branches combined with a more favorable parity and unemployment rate still high.

In the top right-hand corner, we can observe in the chart there. Throughout 2017, the imports of fuels was still attractive even the favorable parity. On the -- in the end of that year, we saw the convergence of domestic branches to international references, meaning these are indicating a more balanced market.

Therefore, the first quarter was too influenced by a challenging competitive environment. With this, Ipiranga posted an adjusted EBITDA of BRL 585 million in the first quarter of 2018, a reduction of 15% compared to the same quarter of last year. This was largely due to the lower sales volume, imperative comparative trading environment and increased level of expenditures with the start-up of iconic operation, including [ expenses, risk and ] damages. If we exclude the impacts of the consolidation of our JV [indiscernible] business and of their higher freights cost, Ipiranga's SG&A moved by 3% quarter-over-quarter.

As we have already mentioned, our [ optimism ] for growth in volume and results is based on 3 important assumptions: a recovery in the economy, a more balanced comparative environment and maturing of our recent investments. These factors tend to develop well, and for this reason, our expectation is for volumes to recover with a positive impact on performance in the next quarters. However, taking to account the performance of the first quarter, our expectation for the EBITDA growth level is reduced.

Moving on now to Oxiteno on Slide #5. Our sales volume of specialty chemicals in the domestic market was down 4% mainly due to a decline in sales to the agrochemicals and distribution segments. In the overseas market, specialty chemicals volume was down by 2% due to more competitive markets. This happened in spite of the higher sales to the U.S.A., reflecting premarketing sales for the new Oxiteno plant in Pasadena.

Sales volume in commodities fell 26% due to the scheduled stoppage at Camaçari. With decreases in specialty chemicals and commodities, Oxiteno's total sales volume in the first quarter of 2018 was 8% down year-over-year.

Please note that despite volume performance, the sales mix was more favorable in this quarter with a higher percentage of specialty chemicals. In that sense, we started to notice new timing margin expansion in dollars for Oxiteno.

Two factors affected our quarterly results more significantly: preoperation of expenditures in preparation for start-up of the new plant in the U.S.A.; and higher expenses with the stoppage at Camaçari, the latter having a BRL 15 million impact. These 2 factors added to the decline in sales volume, produced an EBITDA of BRL 51 million in the first quarter of 2018, 17% less when compared to the same quarter in 2017 in spite of the 3% depreciation in the real against the dollar, and unit prices in dollar also has a positive impact on EBITDA.

This comparison ignores the nonrecurring effect of the BRL 49 million in the first quarter of 2017, which is a reversal of the provision for excluding ICMS sales tax on the calculation of the fees and COFINS charges.

Looking ahead to the second quarter of 2018, the trend is for volume growth, both for specialty chemicals and commodities. On EBITDA, the expected growth in volume and the recent devaluation of the real against the dollar plus the expansion in unitary margins in our store should translate into an improvement in EBITDA for this quarter and, consequently, year-over-year growth. For the year as a whole, we expect volumes to continue on a growth trajectory, both to the economic recovery and also the start-up in operations at the new plant in the U.S. and scheduled for late -- for the second quarter of 2018.

Moving on now to Ultragaz on Slide #6. First quarter of 2018 sales volume at Ultragaz fell 1% compared with the first quarter of 2017, reaching 410,000 tons. In the bottled segment, the sales performance was stable year-over-year with 1% growth per business day. In the bulk segment, sales volume was impacted by the programmed volume reduction of an industrial customer that -- partially offset by improved performance in the industrial segment and condominiums.

Ultragaz reported 1 more quarter to meet initiatives for reducing expenditures, [ had it been a official effect ] on EBITDA. These improved in the first quarter of 2018 by BRL 116 million or 3% compared with the first quarter of 2017 disregarding the classifying in the slights lower sales volume. As we've already mentioned, there was a nonrecurring effect from the payment of the fine of BRL 286 million following the rejection of the Liquigás acquisition. Our expectation for the current quarter is for about -- is for a [indiscernible] evolution in volume. We continue to pursue tractions while reducing expenditures so allowing a better year-on-year performance than in the first quarter, not considering, of course, the effect of the fine.

Let's go on now to talk about our liquid bulk storage business, Ultracargo, in Slide #7. Ultracargo's average storage area increased by 4% compared with the first quarter of 2017. This was due to an increased fuel and ethanol handling at Itaqui and Santos port terminals, in the case of Santos, reflecting a partial resumption in activities in June of 2017. In the first quarter of 2018, Ultracargo's EBITDA was BRL 41 million, an increase of 87% year-on-year due to greater average storage, again a reflection of partial resumption of activities at Santos in addition to higher price at the terminals. Note that this comparison is affected by expenses of BRL 16 million in the first quarter of 2017 with the Santos incident.

For the second quarter, the dynamics are very similar to the last quarters with growth in bulk liquid handling and, therefore, confirming the tendency get the level of results this first quarter will be repeated in the second. In this context, Ultracargo focused its efforts on expanding capacity and using its position of leadership as a growth lever to achieve still more positive results for 2018.

Moving on now to Slide #8. Let's talk about our pharmaceuticals retail business Extrafarma. Before going to Extrafarma results, I'd like to inform that Andre Covre, known by all of you, decided to step down from his position as Chief Executive Officer of Extrafarma and engage with new professional and personal projects. Rodrigo Pizzinatto was chosen to assume his position, and he's is also known by many of you as he has been with Ultrapar for nearly 20 years since its inception. At Ultrapar, Rodrigo held executive positions in corporate planning, investment relations and M&A, and since 2014, he is the Commercial Marketing and Logistics Executive Officer at Extrafarma.

Andre and Rodrigo will start the transition process in which they will cooperate to perform a natural handover, a feature of Ultra's culture. And besides that, it is an internal succession. We would like to thank Andre Covre for 15 years of great contributions and wish Rodrigo good luck.

Extrafarma reported a 25% increase in the number of drugstores, and it's now [indiscernible] the quarter to 401 stores and was addition of 100 stores in the last 12 months. At the end of the quarter, 54% of the stores have been operating for less than 3 years compared with 45% in the first quarter of 2017. This reflects an increasingly rapid expansion of the network and multiple events mean the opening of the first drugstore in the state of Amazonas, the 13th state to have Extrafarma.

First quarter gross revenue was 14% above the first quarter of 2017, which were 30% lower in retail sales resulting from a larger average number of stores and a more intensive base of promotional activities. It is important to mention that in addition to the strong comparison base of the first quarter of 2017 when sales growth was 36%, in the first quarter of 2018, Extrafarma's gross revenue was also affected by slower growth in the market.

On the same comparative basis, sales data published by Abrafarma rose by 6%. Therefore, slower growth in sales and the larger number of maturing stores resulted in an EBITDA close to 0 in the quarter. Excluding the effect of the new stores, EBITDA reached BRL 11 million compared to an EBITDA of BRL 50 million, excluding nonrecurring effects in the first quarter of 2017.

For the current quarter, we shall maintain our strategy of organic growth, which depresses EBITDA in the short term. However, we are forecasting a recovery for the second quarter results returning toward -- to the levels that were presented in the second quarter of 2017.

In the last slide, I'd like to comment some aspects which convinces that we are on the right track so far for generating consistent value despite the challenges which lie ahead. With the new operations at our Oxiteno plant in the U.S.A. at the end of the second quarter, which will benefit our margins over the year, we shall also be finalizing the entry into operations of Iconic, our new lubricants company in partnership with Chevron, helping to boost [ academic ] results.

In addition to this, we have also been working on other organic growth fronts. At [indiscernible], we are expanding the network of service stations and franchises so that we maximize the strategy of differentiation through constant innovation in services and convenience, helping us increase client flow, satisfaction and loyalty. It is important to mention that the addition of service stations through organic investment in the previous year was concentrated in the end of 2017, and therefore, several [ stationers' view ] in a preoperating stage and should start to contribute positively to volumes as they become operational. Meanwhile, at Ultragaz, we have the opening of resellers and the capture of new clients. At Extrafarma, an expansion in the network of pharmacies and enter into new markets, and at Ultracargo, the expansion of its capacity.

Regarding our investments, we continue to see good opportunities in our businesses. It is important to mention that the limited amount -- that the limit approved -- the budget limit approved by the end of the year is based on macroeconomic assumptions that should be put to test during the year. On that sense and considering the comments we have already made on the economic environment, we are slowing the pace of investments for 2018, seeking a balance between our continuous expansion, expected levels of returns and cash generation.

It is important to [ otherwise ] that despite lower results year-on-year, our investment's sense of procurement and discipline in the use of capital gives us the confidence to continue growing. We can also count on the proven capacity of our teams to execute our business plans as well as a comfortable and solid financial position through strong operating cash generation during the year reducing debt circumstantially above our historic levels.

With this, I come to the end of what we prepared for you today. I would like to thank you for your attention and would welcome any questions you might have. We can now begin the questions-and-answer session.

[Operator]

[Operator Instructions] And our first question will come from Frank McGann of Bank of America Merrill Lynch.

[Frank McGann, analyst]

I was just wondering if we could maybe focus on 2 things: one, just in terms of Ipiranga, I mean, the results came in relatively weak and you indicated that you expect some improvement as you go forward over the next several quarters, although perhaps a little bit lower than you might have expected before. I was wondering if you could maybe provide a little bit more information on exactly what you're seeing, specifically, as it relates to both the competitive environment, how you're seeing the key competitors respond, whether you're finding it more complicated to say to renew on franchisee agreements or those agreements would be coming a little bit economically less favorable for the company. And then, secondly just in terms of the investment program. You indicated you're going to -- you're slowing at. How -- what area that we likely to most see that in? And Ipiranga, you -- in the quarter, you did not open very many stations. I was just wondering if perhaps that's one area where you're looking to see lower investments in 2018.

[André de Oliveira Dias, executive]

Frank, thanks for questions. With the first question talking about the expectations in terms of improvement for the next quarters, I think your comment is right. Obviously, we've -- at least through the end of last year, we were not anticipating first quarter starting slower than -- the first quarter started much slower than we expected effectively, and this only effects the overall results for the year. However, this is both for volumes and also on the competitive environment as well. I mean, basically, what we saw in the first quarter was, let's say, excess supply in terms of imported fuel, which came at levels of a -- very low levels of prices. And therefore, the whole market even had to go down in order to compete for this excess supply. We are seeing a reduced level of imports in the beginning of the second quarter. So the percentage of imports in the market has been coming down. And the imports that are coming are coming with less competitively -- competitive -- less competitive than the work that's put in the first quarter. So because of that, we are, yes, expecting improvement in terms of both volumes and margins from the second quarter on. In fact, if we talk about April, specifically, we can already see volumes above April of next year, which indicates the recovery that we are seeing in the second quarter. So with that, what we basically mentioned -- what I mentioned in the call is that we are expecting to see better results in the quarters to come for Ipiranga. In terms of the competitive environment, we are not seeing more difficulties in terms of, for example, branding unbranded gas stations or converting unbranded gas stations. In fact, we believe the supply here has already improved because of the change in the competitive environment. I think many unbranded gas stations are more willing to be converted than before. I'll engage competition to convert them, which has always been the case, but we see an increase of supply, which should come through a large selectivity in terms of choosing the right ones and keeping the level of returns that we have. In terms of the CapEx, our organic investments, the reduction there should be around 20% across the board. I think the exception might be Oxiteno because we are -- we have, basically, to conclude the construction of our plant in Pasadena, and this plant should start to operate in the second quarter. But the other businesses they have more focused in terms of expansion type of CapEx, which we can slow down due to a relatively short cycle of investments for these businesses. And a new item, which -- normally, we have a first quarter that tends to be weaker in terms of opening of gas stations than the other quarters, but this first quarter was weaker than the first quarter of last year. And this is an indication of the slower pace that we are considering. So this CapEx adjustment should bring us back to the same levels of CapEx that we had in 2017 and should contribute to a more, let's say, significant reduction in our leverage, and we have the objective to bring the leverage it was, let's say, specifically higher than our average in this previous first quarter, the expectations to bring this leverage to the same levels that we had in average before so substantially below 2x. So that's the idea.

[Frank McGann, analyst]

Okay, I was just -- would you, by any chance, have an estimate of how many stations you might be targeting this year now to add next to Ipiranga?

[André de Oliveira Dias, executive]

No, not at this point. We don't have a specific estimate in terms of number of gas stations. But again, in terms of CapEx, should not be very different than what we did in 2017.

[Operator]

The next question comes from Luiz Carvalho of UBS.

[Luiz Carvalho, analyst]

Just a -- 2 questions from my side. Imports are not dropping as expected immediately since December and despite we saw some decrease when it compared to December levels as we had lots of, I would say, long-term [indiscernible], and also due to Petrobras renegotiation, I think that they tried to go [indiscernible] minimum utilization rate in the refinery. So assuming that there's no, I'm going to say, import gain, inventory gain this quarter, I mean, what can you expect in terms of recurring margins looking forward, assuming [indiscernible] the volume growth that you forecast? And second question, just would like to follow up at what stage is the renegotiation contract with Petrobras and Ipiranga in terms of how this could impact your, how can I say, your dynamics with year 2 with the supply?

[André de Oliveira Dias, executive]

Well, talking about import level, I think it was very clear that imports started the year much stronger than anyone anticipated. They have slowed down a little bit in February and March, and we are seeing or expecting that it will continue to slow. But again, we do not see, as we've mentioned many times, that imports will disappear from the market. I think that the market will have a more competitive -- a more even competitive environment, a more equilibrated competitive environment, this is the expectation. In terms of recurring margin that their EBITDA [indiscernible], as I mentioned before, it's very difficult to predict. You can estimate that throughout 2017, imports gains should probably represent -- probably represented BRL 5 to BRL 7 per cubic meters throughout the year. So obviously, this BRL 5 to BRL 7, probably, right. If the premium remains close to 0, it disappear. So that's a good number for you to work on your models. Talking about negotiation, the supply contract with Petrobras, there's no news about that. This is, as far as we understand, is being discussed between the distributors and Petrobras. I think that what Petrobras is trying to achieve, obviously, is good terms with their distributors. But we don't see any significant change in the operational environment that could, potentially, I would say, change the market dynamics significantly.

[Operator]

[Operator Instructions] And this concludes -- we do have a follow-up question from Frank McGann of Bank of America Merrill Lynch.

[Frank McGann, analyst]

Just in Extrafarma, at different points in time, management has suggested that, if the conditions were attractive, M&A could be a way for Extrafarma potentially to expand or expand more rapidly and add a lot more mass to the company. I was just wondering what you're thinking right now given changes in the market. And it seems to be a little bit more difficult market, more difficult to expand, if it's -- that might be an option for the company.

[André de Oliveira Dias, executive]

Frank, well, basically, I think we have mentioned many times that, let's say, our strategy, our focus is organic growth. We understand that organic growth, in terms of return on capital -- return on investment -- invested capital, ROIC, makes more sense than, let's say, bolt-on acquisitions. And bolt-on acquisitions have a lot of challenges in terms of combining many different management standards, many different ways of doing businesses that could be very difficult to integrate. So clearly, our focus is to grow organically. We don't see, let's say, much granular in doing a transformative M&A at this point in the case of Extrafarma. So the focus is to grow organically. Obviously, it is part of our culture and part of our tradition. We will not simply close our eyes to investing in many opportunities if they appear. We don't have any plans, but we're always going to look into it if there is an opportunity that we can mitigate those risks of integration that I mentioned before. But at this point, we don't have a target, and our objective is to continue to grow organically.

[Operator]

This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Pires for any closing remarks.

[André de Oliveira Dias, executive]

Okay. Well, thank you very much. Thanks for listening to the call and hope to see you all again when we discuss our second quarter results. Thank you, and good afternoon.

[Operator]

Thank you. This concludes today's Ultrapar First Quarter 2018 Results Conference Call. You may disconnect your lines at this time.