Ultrapar Participacoes SA

BOVESPA:UGPA3

Earnings Call Transcript 2022-Q1

[Operator]

[Interpreted] Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's First Quarter 2022 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.

The presentation will be conducted by Mr. Rodrigo Pizzinatto, Ultrapar's Chief Financial and Investor Relations Officer. And in the Q&A session, we will have the presence of Mr. Marcos Lutz, as well Ultrapar's Chief Executive Officer.

We would like to inform you that this event is being recorded. [Operator Instructions] A replay of this call will be available for 7 days.

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 the 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. Rodrigo Pizzinatto. Mr. Rodrigo, you may now begin the conference.

[Rodrigo de Almeida Pizzinatto, executive]

Good morning, everyone. It's a pleasure to be here once more to talk about Ultrapar's results. Starting off with Slide 2, I want to highlight 2 important topics on the earnings report. The first one I already mentioned on our last conference call related to our divestment. Due to the signing of the sale agreements of Extrafarma and Oxiteno, we have classified these companies as assets and liabilities held for sale in December 2021 as discontinued operations. Our financial statements reflect this classification. However, to better enable comparison with previous periods, both the earnings release and this presentation consider the company's pro forma consolidated information that is Ultrapar's data also comprise Oxiteno and Extrafarma's results, adopting the same concept that we have been reporting.

The second topic relates to 2 adjustments we have incorporated in our recurring EBITDA from this quarter going forward. One adjustment is the exclusion of results from disposal of assets of Ipiranga from the EBITDA for a better comparison of the company's operating performance with competitors. It is important to highlight that despite the fact the disposal of assets is not our core business, it is something we've managed very closely, given that we still have a relevant stock of real estate assets to the mobile lives. This means that there is quite a lot of value and cash to be generated and there will be a recurrence in this line over the next quarters as we move forward with the sale of these assets.

The other adjustment is the exclusion of extemporaneous tax credits from the EBITDA, which we have already been highlighting in the results explanations to provide a better understanding of the recurring performance of the businesses and their comparability with competitors. These credits will be monetized in due course by compensation of payable taxes.

Well, now moving forward to Slide 3 to talk about Ultrapar's consolidated results. As you can see in the chart in the upper left side, our recurring EBITDA from continued operations totaled BRL 873 million in the first quarter of '22, 16% higher than that in the first quarter of '21, positively impacted by improved results from the 3 businesses. The total recurring EBITDA, which includes Oxiteno and Extrafarma, was BRL 1.225 million, 24% above year-over-year. Ultrapar's net income in the first quarter was BRL 461 million, 236% above that in the first quarter of '21, mainly on the back of a stronger EBITDA as well as the net effect of the cessation of depreciation from discontinued operations in the amount of BRL 65 million in compliance with IFRS 5, effects attenuated by increased depreciation and amortization from the continuing operations.

Our Board of Directors that you should already have seen approved the payment of BRL 450 million in interest on equity, equivalent to BRL 0.41 per share on account of the mandatory dividend for the year of 2022. With the 15% withholding income tax, net interest will be BRL 0.35 per share, except for corporate shareholders that have proven to be immune or exempt. The complete amount of this distribution are included in the notice to shareholders we released yesterday.

Moving on, on the bottom left chart, CapEx from continuing operations totaled BRL 304 million in the quarter, 28% above that of the first quarter of '21, mainly due to greater investments in Ipiranga, including Oxiteno and Extrafarma, CapEx totaled BRL 382 million. I want to highlight that at the end of April, we announced our investment plan for 2022, which includes BRL 1.7 billion in investments on continuing operations. This amount is greater than the investments made over the last 2 years.

In the last quarter, we also registered an operating cash consumption of BRL 1,183 million compared to BRL 128 million in cash generation in the first quarter of '21. This consumption resulted from investments made in working capital driven by increases in fuel and LPG prices despite the higher EBITDA.

Moving on to Slide 4 to talk about our liability management. We ended the quarter with a net debt of BRL 13.4 billion, an increase of BRL 1.7 billion compared to the net debt of December '21. The increase is mainly explained by 3 factors: the consumption of cash with working capital during the first quarter I just mentioned, the payment of dividends made in March '22 and the lower financial result impacted by the higher interest rates. Our leverage, therefore, went from 2.9x in December '21 to 3.1x in March '22 due to the increase in net debt, partially offset by the higher EBITDA level over the last 12 months. Our average cost of debt was DI minus 0.3% a year in the quarter, substantially below the cost of DI plus 2.3% in the first quarter of '21. As a result of the initiatives we have been taking to reduce the carrying cost of debt, which I could explain in more details in the Ultra Day.

I remind you that this cost of debt does not include the negative effect of the cash flow hedge in the financial results, which amounted to BRL 48 million in the first quarter of '22, an effect that we will no longer have with the conclusion of the sale of Oxiteno. With the inflow of funds from the sale of Oxiteno in early April, I want to call your attention to the repurchase of the '26 and '29 notes, which are our debts with the highest cost repurchase we did last month. We repurchased $600 million in notes out of a total of the $1.4 billion outstanding at an average premium of 101.75%, which will contribute to a further reduction in the cost of our debt. Before I present in the next slide, I highlight that with the conclusion of Oxiteno sale, we stopped detailing the explanations about the performance of the discontinued operations.

Moving then to Slide #5 to talk about Ultragaz. Sales volume during the first quarter were 2% lower than that in the first quarter of '21, mainly resulting from the 3% reduction in the bottled segment on the back of lower market demand. The bulk segment on the other side increased by 2% in the quarter with higher sales to the industrial commercial and service segments. SG&A in the first quarter was 21% higher year-over-year due to greater personnel expenses, mainly collective bargaining agreements and increased variable compensation, which is aligned with the progression of results of Ultragaz, in addition to higher expenses with legal proceedings and freight.

Moreover, I remind you that in the first quarter last year, we had some expenses contingencies. Ultragaz EBITDA, therefore, reached a record level for first quarter of BRL 213 million, an increase of 42% over the first quarter of '21, resulting from the pass-through of LPG cost increases despite higher expenses. And for the current quarter, we expect the continuity of good results with seasonally better volumes in the second quarter.

Moving on to the next Slide #6, to talk about another great quarter of Ultracargo. Average static capacity of the company reached 955,000 cubic meters in the first quarter of '22, a 13% growth year-over-year on the back of the startup of operations of the Vila do Conde terminal in December '21 and the expansions in tank capacity implemented in Itaqui terminal over the last 12 months. Ultracargo's net revenues were BRL 197 million in the first quarter, 15% higher than that of the first quarter of '21, led by contractual readjustments and higher amount of cubic meters sold due to the capacity expansions. Combined cost and expenses were 11% higher than those of the first quarter of '21, due to higher depreciation costs arising from capacity expansions and the effect of inflation on inputs and materials, partially offset by lower IT and personnel expenses with productivity gains.

Ultracargo's EBITDA reached a new record level of BRL 140 million in the first quarter, 23% higher than that of the first quarter of '21, resulting from the expansions with profitability gains, contractual readjustments and lower expenses due to operational improvements highlighted by Decio also in the Ultra Day. EBITDA margin reached 58% in the first quarter, higher than the 54% EBITDA margin we registered in the first quarter of '21. And for the current quarter, we expect Ultracargo's good operating performance to continue at levels close to those achieved in the first quarter of '22.

And to conclude my presentation, moving on to Slide 7 to talk about another quarter of recovery for Ipiranga. Volumes sold remained stable compared to the first quarter of '21, with a 2% growth in diesel volumes attenuated by a 2% decrease in the auto cycle volumes, largely due to greater participation of gasoline instead of ethanol in the product mix. We ended the first quarter of '22 with a network of 7,131 service stations, 27 more than that of the fourth quarter of '21, with 82 and 55 closures in the quarter. The average volume contribution of the new service stations is 310 cubic meters per month, while the closed ones had average volumes of 28 cubic meters per month.

In addition, we ended the first quarter with 1,881 AmPm stores with same-store sales growth of 13% year-over-year. Ipiranga's SG&A increased 14% in the quarter due to higher freight expenses in line with the increase in diesel prices, higher provision for doubtful accounts and higher expenses with AMPM company-operated stores, which increased from 79 units in the first quarter of '21 to 229 units this quarter. The other operating results line totaled negative BRL 110 million in the first quarter of '22, down BRL 91 million compared to the first quarter of '21, mainly due to higher expenses with carbon tax credits. The disposal of assets line totaled BRL 26 million in the quarter as a result of the sale of 7 real estate assets.

Ipiranga's EBITDA totaled BRL 620 million in the quarter, 10% higher than that in the first quarter of '21. Also, recurring EBITDA was BRL 594 million, 7% above the first quarter of '21 as a result of recovering margins despite higher expenses. Ipiranga's recurring EBITDA margin was BRL 110 per cubic meter compared to BRL 104 per cubic meter in the first quarter of '21 and BRL 94 per cubic meter in the fourth quarter of the '21, an evolution supported by the ongoing results recovery plan presented by Linden in the Ultra Day as well as by market conditions. For the current quarter, we expect volumes to be seasonally stronger than that of the first quarter of '22 with profitability levels close to those of the last 2 quarters.

And with that, I now conclude my presentation. I appreciate your interest and attention. And now let's move to the Q&A session. Marcos and I are available to answer your questions. Thank you very much.

[Operator]

[Interpreted] [Operator Instructions] Our first question from Luiz Carvalho, UBS.

[Luiz Carvalho, analyst]

[Interpreted] I have 2. One about Ipiranga. I want to understand the recurrence of the gross margin. We believe the second quarter -- this quarter has been robust. And what do you expect from changes in the company? And what can you say about volume? My second question is regarding capital. You've sold Oxiteno by the end of April. Then on second Q, you will have a result without Oxiteno with -- and you will have the cash of the sale of Oxiteno. I would just like to -- you to elaborate on these things.

[Marcos Lutz, executive]

[Interpreted] Luiz, thank you for your questions. We had difficulties in hearing your audio, if I understood correctly was the margin -- the gross margin from Ipiranga and the second question would be Oxiteno's capital allocation, was it more or less what you asked?

[Luiz Carvalho, analyst]

[Interpreted] Yes.

[Marcos Lutz, executive]

[Interpreted] I will start by capital allocation. We have a cash entry due to the payment -- first payment of Oxiteno sale, and we announced a bond buyback program, BRL 1,300 million and we received BRL 600 million that were used to buy back but because this is the highest outstanding debt that is the highest transfer that is CD. Now we have 110 CD. We use part of these funds to reduce our most expensive debt. And the other part is for our cash, because we have the maturity of debt that are coming close now. So now we are working with our indebtedness to reduce the transfer cost.

Now regarding recurrent margins, they are recurrent and there are more structural commercial mergers. Although during Q1, we observed a lot of volatility in volume and in prices. Today, as we have mentioned, we have a pricing area that is correctly structured and can capture these variations and correctly price point by point, where things should be done. So we must observe the quarter with attention. But during the past 6 months, we've seen an operational improvement in the commercial margin. So I am very comfortable to say that we are doing what I said in the past is to come closer to the sector peers, and we will continue doing this throughout the year.

[Operator]

[Interpreted] Our next question, Thiago Duarte, BTG Pactual Bank.

[Thiago Duarte, analyst]

[Interpreted] I would like you to elaborate 2 things about Ipiranga. #1, we've seen a significant gain in liquid due to net in your gas stations, I believe that this is not your main focus. You are focused on average, and you showed important figures in your presentation. But this is the bad addition in a number of years when we see the first quarter of the year. So I would like to know how you see the scenario for flags because as we've seen in the fuel market, there is a great domestic disparity vis-a-vis the parity. We believe that Ipiranga and the other banners present a guarantee that they will guarantee supply, and this is very favorable for your banner. So I would like to know if you have verified this and what will this mean to you in terms of base growth in average gallons sold.

And number two, going back to Marcos' answer regarding the margin recurrence -- reference, I would like to know that if when you see this margin from Q1, do you consider this margin, especially when we talk about the gain of stock because the difference in prices that we've seen throughout the quarter. Although Marcos, your past answer suggest this, I would like to know that if the starting point of the quarter makes sense of like in terms of replenishment margin.

[Marcos Lutz, executive]

[Interpreted] Well, number one, our focus is, yes, is a good relationship with resellers, and there is a side effect is that it's an increase of number of gas stations with quality. We have gas stations of high volume and quality and certain resiliency. So the team's interpretation is very -- that is close to the reseller and that communicates with them and approaches them correctly, is that, as a matter of fact, we have a natural market share in the reseller that is above the market share of reseller. So we will increase our banners vis-a-vis the churn. I believe that we will continue seeing this effect. We have a quality pipeline. And therefore, we have a structural space in addition to this, there was distortion in the Brazilian market that is being corrected.

There were many uncontracted players on the supply side, and they had commitments in the sales area. So when you have a more -- a market where everybody has to go after their products and everything that we have contracted. As Ipiranga, we have the purchase contracted. The difference is in the spot when you have short periods like we saw at the end of February and March. As a matter of fact, who has contracted, has a structural advantage vis-a-vis who doesn't have contract. So I believe that this has many people are valuing a long-term contract relationship that provides you more efficiency to have a chain and whoever supplies can contract ships and receive the supply to deliver. We've done all of this with quality. This has been part -- this is why we have a sound result in Q1. We had risk during Q1. And I believe that we came out with a lot of competency.

On the second side of your question regarding the margin recurrency, well, there is a gain of stock. We do know the negative is that we had an increase of working capital that you can see in the reported figures. And this in a certain way at a given moment may drop, but we know that when it drops, we have a parachute effect, but the effect here is that we correctly price throughout the curves upwards and downwards. That was a moment of volatility. And our pricing area was very accurate, consistent and extremely transparent with the resellers so that everybody could understood what was happening. So they could weather through this quarter. These results are results that we have gained of stock is part of the gas station business.

If I could strengthen a message, our focus is in gaining gallonage of the network. And during Ultra Day, we have 10, 15 and we are focused on improving or closing. And although we're working with new banners, we are analyzing the banners that do not provide us good profit.

[Operator]

[Interpreted] Our next question is Vicente Falanga with Bradesco BBI.

[Vicente Falanga Neto, analyst]

[Interpreted] I have 2 questions. Rodrigo, as you mentioned at the beginning of the presentation, you -- if you could -- what is the tax effect of the payment of regarding the sale of assets? And my second question would be the Ultragaz margin that was significant because there was a transfer to GLP, and I would like to know -- how is your resourcing outside of the Petrobras system. And if you could talk about the margins?

[Rodrigo de Almeida Pizzinatto, executive]

[Interpreted] Vicente, thank you for your question regarding interest rate on capital. This was the first time that we declared this because Ultrapar's holding did not have tax gain and the expenses of interest rate over capital is deductible. And for the first time, we've had a relevant gain in the holding after selling Oxiteno and we analyzed how we could balance all of this. The minimum mandatory dividend for 2022 with the tax optimization of the tax gain. This is why we did clear the BRL 450 million of interest rate over our own capital and regarding taxes -- regarding Oxiteno sale when we held the call selling that we -- saying that we were selling Oxiteno, we expected a disbursement of $70 million and we are still analyzing and seen the strategy, but I can say in advance that from that amount with the use of credits and loss and the interest of our capital, we advanced a disbursement volume below $20 million.

Now regarding your second question regarding the Ultragaz margin. Ultragaz has a margin similar to Q4. Therefore, it is maintaining the profitability presented last quarter and the prospects continue positive. This is a result of the improvement of market condition and the increase in productivity that Ultragaz achieved that we mentioned on Ultra Day and sourcing that was mentioned, sourcing will benefit throughout this year with gradual FX, but the effect on Q1 was very significant on the result and on our working capital.

[Operator]

[Interpreted] Our next question, Bruno Montanari, Morgan Stanley.

[Bruno Montanari, analyst]

[Interpreted] One regarding Ipiranga in terms of imports. Ipiranga was less active in imports on Q1. I would like to know how the sourcing strategy is evolving for imports and maybe the pace to increase imports throughout the second semester of the year? My second question regarding working capital. It is difficult to calculate if we -- if prices remain stable, how much of the investment in working capital could be reinvested in the business in the next quarters and the third quarter, just to confirm something. Now the cash entry of Oxiteno has there been another adjustment regarding closing adjustments. We've seen some intercompany operations before the closing of this operation. Just to make sure that we have the right numbers in terms of cash entry.

[Marcos Lutz, executive]

[Interpreted] The first 2 questions are easy to answer. One, we weren't less active than the other players. Proportionally our import activities were the same. If prices continue stable, well working capital remains stable. It doesn't go up, doesn't go down. If the prices go down, it goes down. If the price goes up, it goes up. So this is a mathematical answer straight to the point. Bruno, as you stated, we start selling some intercompany that's between Oxiteno and other companies of the group, this is the effect when you compare continuous operation with discontinued operation. So we have the head counting with Oxiteno that was to hedge the part of the bond that we have in dollar with the sale of Oxiteno, we no longer have the hedge account of our bond and our debt is 100% hedged in reais because we no longer have flows in dollars because of the sale of Oxiteno.

[Operator]

[Interpreted] Our next question, Christian Audi, Santander.

[Christian Audi, analyst]

[Interpreted] I have 2 questions. One, going back to capital allocation. How will you prioritize? I know you talked about the improvement of the debt costs, CapEx, dividend payout and potential M&A. If you see an opportunities of participating in the energetic process, what is more important for you? What are you prioritizing amongst these 4 points where you could invest your cash? Talking about leverage, now once Oxiteno's funds come in and all this cash comes into the company, could you give us what net debt EBITDA ratio you will have?

[Rodrigo de Almeida Pizzinatto, executive]

[Interpreted] I'm going to start talking about our leverage position and Marcos will talk about capital allocation regarding our debt. If we include in 2022, what is coming out from the funds received after selling Oxiteno that declared dividends and half of the value of the sale of Ultrapar will -- we will reduce our debt at one time. And I am not including the second payment of Oxiteno, we have $150 million paid in 2024 and the other payments will be in the other 2 years. What we will receive this year net of the declared interest rate over capital, I believe that our net debt will drop one-time net debt over EBITDA.

[Marcos Lutz, executive]

[Interpreted] Now capital allocation. This present moment is a timely moment to reduce our leverage, and we are doing this, and we are reprogram liabilities and as a matter of fact, we will reduce our costs and the net debt outstanding. This is a priority. This is not a moment of being above 3x net debt over EBITDA, #1. Now the rest is a matter of capital allocation because of return rates, we will be disciplined when we allocate capital. We will analyze our non-organic opportunities. As I said during Ultra Day, we will analyze small things in the first moment, but what we are going to do is to be disciplined when we allocate capital and the profit has to be according to the risk that is assumed in the operations. What I can promise is that we will have strong allocation discipline. I can't promise a target because we have to see what's going to happen with the Russians as well.

[Christian Audi, analyst]

[Interpreted] And what about dividends?

[Rodrigo de Almeida Pizzinatto, executive]

[Interpreted] One thing depends on the other, the dividend in practice is the surplus capital that I don't invest organically or inorganically. It's a matter of math. It's the surplus.

[Operator]

[Interpreted] Our next question, Citibank, Gabriel Barra.

[Gabriel Coelho Barra, analyst]

[Interpreted] Can you hear me? Most questions have been posed. There are just 2 points. One Extrafarma. There was -- you talked about the antitrust agency in the material fact. And what are the next steps of the company regarding the closing of the sale and something that drew my attention during the Ultra Day was the backlog that you have of gas stations -- of Ipiranga gas stations. Could you talk about what do you have within the network that has to be improved? And what is the time line to do this? I would just like to understand how would you improve these gas stations that are contaminating this margin, because the margin is lower than the company's margins?

[Marcos Lutz, executive]

[Interpreted] Starting by Extrafarma. I believe that you saw the decision of the antitrust agency and 8 municipalities were pointed out. Now this process rig is in the court of the antitrust agency, and it's difficult to know how long it will take the court to rule to give us a ruling, but this will be between June and September. That is the limit time to conclude this process. So this is the bad estimate if it's a quick trial in June or September. That is the limit date. Now the closing of gas stages, now 15% of the network has profit levels below what we expect. We believe that we will -- work will be closed in 1 or 2 years or they will go back to profit levels as we're going out of a pandemic and volumes are more normal and we're accelerating the process of the type -- of the assessment of the network and what kind of network we want. We have to remind you that there is always a certain churn level in these -- in our network.

[Operator]

[Interpreted] Our next question, Bruno Amorim, Goldman Sachs.

[Bruno Amorim, analyst]

[Interpreted] I have 2 questions on Ipiranga regarding your suppliers. Rodrigo talked about the last years, the price of fuel increase that increased this line. But when we see the amount will suppliers, this tripled since the beginning of 2020 in Ipiranga there was an increase higher than the price of fuels. I want to understand what is Ipiranga's financing strategy if you increase the percentage that comes through suppliers, if there are other financing alternatives. And if in the future part of this increase in the suppliers comes or goes away. Is there -- if you will, improve the commercial conditions with your traders. This is good, but many times, this represents a cost, which is reflected on the price and the price of fuels? And my second question, that would be, I want to know if you can tell us what the gain of stock is in Ipiranga per cubic meter and the CBIOs impact on Q1? And what do you expect in the upcoming quarters?

[Rodrigo de Almeida Pizzinatto, executive]

[Interpreted] Bruno, Thank you for your questions. You are asking about -- you are talking about our partner suppliers. Well, this math, this number increased in the past 2 years, the marginal cost is a cost close to our debt marginal cost. Therefore, there is not a high transfer cost, and we use these lines, thinking about the optimization of cash flow if you have a short-term need, this debt makes more sense than having a long-term debt. And this will -- this is part of our debt management, and we always see it from the economic point of view because we can have a long-term debt if it has a more attractive cost, we can reduce this line throughout the time and to increase the long-term debt if it makes sense. But we have to see, if it's short-term or long term.

The second question about inventory or stock gain. Well, we gain our -- there was a gain of stock during the first quarter. There was a loss in imports. This is part of the day by day in the business, nothing different from what we've seen in the past quarter and based practically the same as Q1 last year.

[Bruno Amorim, analyst]

[Interpreted] And regarding CBIOs, any estimates? How much you will spend per cubic meter vis-a-vis what was observed during Q1?

[Marcos Lutz, executive]

[Interpreted] Bruno, we will follow our fair share of the CBIOs purchase. And the price of the market will be reflected on the results. It's very difficult to predict this because the cost of CBIOs is transferred to our products, and it is reflected on the company's margin.

[Operator]

[Interpreted] As we have no further questions, I will give the floor to Rodrigo Pizzinatto for his final comments. Mr. Rodrigo, you can continue with your final remarks.

[Rodrigo de Almeida Pizzinatto, executive]

[Interpreted] So thank you for your attention and for your questions. The questions that we weren't able to answer will be answered by our IR department. I thank all of you and see you on our next call.

[Operator]

[Interpreted] Thank you. The Ultrapar earnings results conference call has come to an end. Please disconnect your lines. Thank you very much.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]