Ultrapar Participacoes SA

BOVESPA:UGPA3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. Thank you for waiting. Welcome for the conference call of Ultrapar for the first quarter '23 results. There is also simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br and through MZiQ platform. This presentation will be conducted by Mr. Rodrigo Pizzinatto, Ultrapar's Chief Financial Officer, Investor Relations Officer. And the Q&A session will have the presence of Mr. Marcos Lutz, Ultrapar's CEO; and the CEO of businesses, Mr. Tabajara Bertelli, Mr. Decio Amaral and Mr. Leonardo Linden.

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

Before proceeding, we would like to state 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 also result to different -- could also cause results to differ materially from those expressed in such forward-looking statements.

Now we would like to turn the conference over to Mr. Rodrigo Pizzinatto, who is going to start the conference call. Please, you can now proceed.

[Rodrigo de Almeida Pizzinatto, executive]

Good morning, everyone. It is a pleasure to be here once more to talk about Ultrapar's results. On Slide #2, I want to remind you that at this moment, both the earnings release and this presentation consider Ultrapar's data from continuing operations in 2023. While for 2022, the company's data presented in the pro forma view, that is it considers the sum of continuing and discontinued operations as disclosed throughout last year, unless otherwise indicated.

Moving now to Slide #3 with Ultrapar's consolidated results. As you can see in the chart in the upper left side, our EBITDA from continuing operations totaled BRL 1,079,000,000 in the first quarter of '23, 20% higher year-over-year due to the higher EBITDAs at Ultragaz and Ultracargo, partially offset by Ipiranga's lower EBITDA. Ultrapar's net income was BRL 274 million in the first quarter, 41% lower year-over-year, mainly due to the deconsolidation of Oxiteno and Extrafarma's results despite the greater EBITDA from continuing operations, lower financial expenses and lower costs and expenses with depreciation.

Investments from continuing operations totaled BRL 365 million in the first quarter of '23, 20% higher than that of the first quarter of '22, mainly due to higher investments at Ipiranga and Ultragaz. We registered an operating cash consumption of BRL 711 million in the first quarter compared to a consumption of BRL 1,183,000,000 in the same period of '22, resulting from higher investments in working capital in the first quarter of last year, mainly due to the relevant increases of fuel prices at that quarter, partially offset by the reduction of BRL 897 million in the draft discount balance in the first quarter of '23.

And moving on to Slide #4 to talk about our liability management. We ended the first quarter with a net debt of BRL 8.3 billion, an increase of BRL 1.6 billion compared to December '22. This increase is mainly driven by 2 main effects. The first is the effect of the end-of-year holiday as December 31 was not a working day and, therefore, payments were postponed to the beginning of the year. And the second effect is the consumption of operating cash in working capital due mainly to the reduction in the draft discount operations in the first quarter of '23 that I just mentioned.

These 2 effects were attenuated by fuel prices reductions in recent months. With that, our leverage increased from 1.7x in December 2022 to 2x in March 2023 on the back of the net debt increase. I'd like to point out that the numbers of net debt do not include pending receivables of BRL 1.1 billion related to the sales of Oxiteno and Extrafarma.

And as we presented in the annual conference call, to provide more visibility in relation to our numbers, we have included at the bottom of this slide a table with the total amount of draft discount in vendor lines as well as pending receivables from the sales of Oxiteno and Extrafarma. All lines are highlighted in our balance sheet. The net debt of March 2023, adding draft discount vendor and divestment receivables would be BRL 9.4 billion.

And moving on to the next slide, Slide #5, to talk about another excellent quarter of Ultragaz. The volume of LPG sold in the first quarter was 4% higher year-over-year due to a 2% increase in the bottled segment on the back of greater market demand and a 10% increase in the bulk segment with higher sales to industries, commerce and services segments.

Ultragaz SG&A in the first quarter of '23 was 20% higher than that of the first quarter of '22 due to higher expenses with personnel, mainly collected for gaining agreements and a larger headcount as a result of the recent acquisitions of NEOgás and Stella, along with higher expenses with sales commissions and freight due to higher sales volume.

Ultragaz had another quarter of strong results. EBITDA totaled BRL 394 million, 80% higher than that of the first quarter of '22. This growth is mainly explained by efficiency and productivity initiatives implemented in the last quarters by better sales mix, by inflation pass-through and by higher sales volume despite higher expenses. And for the current quarter, we expect results close to that of the last quarters.

Moving now to Slide #6 to talk about another great quarter of Ultracargo. The company's average installed capacity was 955,000 cubic meters in the first quarter of '23, stable in relation to the first quarter of '22. The cubic meters sold increased by 7%, mainly due to increased handling of use in Vila do Conde; of ethanol in Suape; and of chemicals in Santos. Ultracargo's net revenues was BRL 236 million in the first quarter of '23, 20% higher year-over-year as a result of contractual readjustments, spot sales and higher cubic meters sold. Combined, costs and expenses were 11% higher than those of the first quarter of '22 as a result of higher expenses with personnel, mainly collected for gaining agreement and consultancy services linked to expansion and profitability projects.

Ultracargo's EBITDA totaled BRL 142 million in the quarter, a growth of 25% year-over-year due to higher capacity occupancy with profitability gains, contractual readjustments, spot sales and productivity and efficiency gains despite higher expenses. EBITDA margin was 60% in the first quarter of '23, 2 percentage points above that of the first quarter of '22. And for the current quarter, we expect Ultracargo to continue its good operating performance, which results similar to those of the first quarter.

And to conclude this presentation, moving now to Slide 7, let's talk about Ipiranga's results. Volumes sold increased 2% year-over-year, with a 1% growth in diesel and a 4% growth in the auto cycle. We ended the quarter with a network of 6,526 service stations, 245 stations less than that of the fourth quarter of '22, which is in line with our strategy of managing the legacy of low potential service stations. A total of 49 new service stations were added to the network with an average volume contribution of 265 cubic meters per month, and 294 service stations were closed with an average volume contribution of 39 cubic meters per month.

Despite the reduction of the number of service stations, the volume net effect was positive, reinforcing our strategy of higher density and improve the standards in our service stations network.

In addition, we ended the quarter with 1,555 AmPm stores, with same-store sales growth of 13% year-over-year.

Ipiranga's SG&A increased 17% in the quarter due to higher personnel expenses and depreciation as well as provisions for contingencies. The other operating results line totaled negative BRL 139 million in the first quarter of '23 compared to a negative BRL 110 million in the first quarter of '22, mainly reflecting higher costs with CBIOs Brazilian carbon tax. The disposal of assets line totaled BRL 56 million in the quarter resulting from the sale of 10 real estate assets in the quarter.

Ipiranga's EBITDA totaled BRL 596 million in the quarter, 4% lower than that of the first quarter of '22, and as expected, a good improvement over the fourth quarter '22 results. Recurring EBITDA was BRL 540 million, 9% lower year-over-year due to more pressured margins resulting from inventory losses and higher expenses despite higher sales volume.

Looking now to the second quarter. We expect seasonally higher volumes, and in the current market context, profitability levels close to those of the first quarter of '23.

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

[Operator]

[Operator Instructions] The first question comes from Monique Greco of Itau BBA.

[Monique Greco, analyst]

I would like to congratulate the team for the results, and I'm going to take this opportunity to ask 2 questions. First, maybe Linden can share with us a little bit about the recent dynamics, in terms of competition really, of fuel distribution in the second water, whether it's still open, arbitration and rearrangement of global flows because of the actions and the sanctions of the European Union against Russia.

Secondly, about your strategy of closure of service stations. You've mentioned that you want to expand this network. Will it have one specific regional impact? Should we expect a change in the footprint of the company because of this strategy? Any regional specificity that it's worth highlighting?

[Leonardo Linden, executive]

Speaking of the dynamic of the second quarter, I think you've emphasized what is characterizing the second quarter. Open arbitration has been the case since February. It's not something just specific to this quarter. A market with a full offer because then we have -- when the market is open, you have greater offer of products, and it does bring us some challenges in terms of margins, for example.

Our expectations is that this is going to be maintained as is for a while, a market with high offer, with imported product in the market. And this is going to apply pressure to our operations, of course. But it's not very different from what we have observed since February in the first quarter. We just have to wait and see how Petrobras is going to behave in terms of pricing. But that's the environment, and it's a given condition, right?

In terms of closure of service stations, it's very much consistent with what we've been seeing right from the beginning. We are removing the low productivity tail, and it is not something that's going to change our regional footprint of Ipiranga, but it does bring some more productivity to our network because then we have more efficient service stations. But there is no idea of being more or less concentrated on specific regions. Ipiranga is a Brazilian company, where we can see opportunities in some regions more than in the others, but this elimination of the tail is something uniform that has to be done because of the characteristic of the business itself much more than for any regional strategy, so to speak.

[Operator]

The next question comes from Leonardo Marcondes of Bank of America.

[Leonardo Marcondes, analyst]

I have 3 quick questions. First, concerning the sale of real estate lots by Ipiranga. We've seen some initiatives along those lines. How many land -- real estate lands do you still have to sell? How much do you expect to get from that? And when do you expect to have them all sold?

Now concerning that closure of some service stations, how has it been affecting the P&L of Ipiranga, especially when we consider the SG&A? Now concerning Ultragaz, we've seen that once again, it has delivered results, which were even exceeding the expectations. So I would like to understand what are the competitive advantages of Ultragaz that you believe are unique to the company and that other distributors do not have? And what can we expect in terms of margins and ROIC from now on?

[Rodrigo de Almeida Pizzinatto, executive]

I'm going to answer the first 2 questions, and then Leonardo will talk about Ultragaz. In terms of sales of real estate land, we've sold 10 units this quarter, BRL 140 million. And we have 300 real estate assets at Ipiranga to sell, and we intend to do that for the next 3 or 4 years. If we have the average sales, that would be BRL 3 million to BRL 4 million. So that would total BRL 1 billion to be acknowledged in the upcoming 3 or 4 years. It should be very careful because this is an opportunity to bring a more qualified network and more resellers.

As to the closure of service stations, as Linden pointed out, we close 250 real estate -- service stations. So amortization was BRL 140 million, greater than expected. We estimate to have it all completed in the second -- third quarter of this year, and then this effect will no longer impact that line of depreciation and net income.

Now next question will be answered here.

[Leonardo Linden, executive]

Answering your question about the results of Ultragaz, we go back to seeing it from a broader perspective. We've already talked about our long-term strategy, and we've been building the design of a company, which is focused on operational efficiency. We've been investing in it throughout the years. And these things just get more -- they turn into results throughout time. And really, company focused on clients, towards innovation, digital channels, and we've been really trying to strike a balance between distribution of the molecules and offer of additional services. These are the most recent moves we've made really to increase the offer of energy.

It's not a short-term extraordinary movement. It's a long-term strategy that we've been put in place throughout the recent years, and we really believe in it. It is building a company that is closer to the customer, closer to retail, delivering additional solutions, which has a different perceived value to it.

[Operator]

The next question comes from Pedro Soares of BTG Pactual.

[Pedro Soares, analyst]

I have 3 quick questions. First, to Linden most probably about Ipiranga and trying to address the discussion about margins and also ROIC. It was somewhat challenging in the quarter, which has led to some use of inventory levels. But still, the margins seem to be very resilient. How much of that is due to the -- your work with suppliers? I see -- and there was a substantial reduction in payment terms, days and delivery. So is there really an effect of changing payment terms for price? And inventories, what can we expect that turnover and invested capital to try to think about the progression of Ipiranga's ROIC?

The second question based on what Pizzinatto has just said, you've said that the process is expected to evolve up to the third quarter this year.

And finally, at Ultragaz, I would like to hear more about what has changed from the first quarter to the second quarter, or rather, the results of the fourth quarter last year to the first quarter of this year? And why do I say that, in your last earnings conference call, you brought a very good perspective for the industry but closer to what was the second half last year. And the numbers were much better. So was that just a one-off situation? Have you done anything in sight to produce this result? So these are my questions.

[Leonardo Linden, executive]

Pedro, Linden speaking. And then I think Rodrigo can make additional comments. But giving you the overview of the quarter, just to have the background, right? In January, it was a very weak month in terms of volume. There was a loss of inventory because of the end of December, high branding. So January was a complicated month in terms of volume, and everyone had high inventory levels with expectations of the returns of PIS/COFINS in taxes. But then things changed somewhat. There was an open arbitration. And then it has impacted the business, but there is a better situation of volume and a better work with our actions. There was a decrease in inventory, but also some contributions in the first -- so the PIS and COFINS, it was a partial return, which helped the month of March. But basically, that's it.

What we can see in terms of margin in Ipiranga reflect our best efforts really to have the business gain more consistence, more body and better margins, something which is compatible with what we do in working within the 4 pillars. We have to learn how to deal with market volatility, and this is exactly what we've done in the first quarter.

Concerning the financial impact, I would like to ask Rodrigo to jump in and complement.

[Rodrigo de Almeida Pizzinatto, executive]

Concerning working capital, and in January after Americanas case came to the market, our draft discount balance impact and was impacted. And we thought it was better to have long-term debt at more appropriate terms. And there was a difference then in terms of draft discount balance. It increased our debt level but impact our working capital, of course.

In addition, in this first period, we have a calendar effect because as December finished in a nonworking day, 31 December is not a working day, a calendar day, so that has impacted our payments. And then the working capital of the first month was somewhat negative, which impacts your second question because when you look working capital, it tends to generate more cash in the second half of the year historically. It is a period of the year, which has much better leverage, businesses have higher volume in the second half of the year. This is why it generates more cash than the first half of the year.

Now concerning that closure of legacy, we expect to have it completed by the third quarter. As of the fourth quarter, we are going to have the normalized closure of stations as we would expect in a normal operation.

And you've also asked about the cost of the effect of draft discount in cost. In Ipiranga, it happened more in the end of the quarter, and the effect of the quarter was less than BRL 2 per cubic meter.

Well, Pedro, about the progression of the past 2 orders, and I'm just building up on what I've said before, we have been operating in line with our expectations. And if you really look closer, it is continuity of the last quarters, right? In the last quarter, I think we had conditions to deliver better results in terms of operating costs compared to previous quarter, better commercial performance when we look at trade volume. And in our operation, then we can have some specific force that help us in the relationship with our traditional customers, so a broader relationship with everyone. So the combination of all these factors was positive and has given us this short-term understanding.

[Operator]

The next question comes from Gabriel Barra of Citibank.

[Gabriel Coelho Barra, analyst]

Three points that I would like go over with you and a follow-up. The first one, the acquisition, I would like to hear more about the strategy of the company. To what extent is the impact in your program? Is there any leverage there for distribution of fuel? Tell us about the strategy of the company that's going to help us understand more about to what extent it can help the company competitiveness, especially with ethanol.

Second point about branded operations. It had really a very positive perspective of branded network, more favorable work and buildup we've seen. About -- you're talking about competition and sourcing with Russia, maybe we can have more competition with white labels and regional brands. So have you received any impact yet, or maybe it's too early to talk about that? I would like to hear more on it.

And finally, it is a topic of the fourth quarter, which has been discussed and brought to the attention. You had tax credit in the fourth quarter. We see a strong strategy you had in the right points here. Is there a possibility of how any more amount and more value to be added and dividend credit exercise in the book? Is there any risk of feeling the impact during the year? And it figures, so to speak that we would have to pay attention to. So these are my 3 points.

[Décio de Sampaio Amaral, executive]

This is Decio speaking. First part of the strategy of Ultracargo of integration of getting into the new market. It is a high capacity terminal with the integration of different modalities of transportation, railway, highway. And it can get even more volume with expansion of railway system and getting connected to Santos, which is a project we've already addressed, and we are waiting for authorization. This will be the main channel of arrival of corn ethanol into Paulínia, and it also increases our exposure to biofuel.

It's very much aligned with our strategy of a logistic solutions provide or dealing with the bottleneck of the country and also aligned with sustainability. So we want to transform that terminal into a better turnover, really terminal, which is our expertise and what we do the best.

Concerning our branding stations, our pipeline of branding network is consistent with what we have been planned. It is a robust pipeline. This year, in addition to branding, we are going to rebrand some of our service stations, updating the image of our brand, and we expect to produce positive results. And at present, I have no expectations of any variations.

Quite to the contrary, what we see in Brazil in terms of supplies, Ipiranga has value to deliver in this situation at the company, which has the structure, commitment with its business in Brazil. It's positive. We are within budget and plan. And we are going to follow through.

In terms of market competitiveness, you've talked about Russian fuel. With that open, as a whole, impacts the market, as we've told you. There is oversupply, of course. But this were all important of it, even coming from the Gulf, products coming from the Gulf. It's expected volatility, but then things get more under control. We are not a company to speculate the market. Of course, we are here just to supply the needs of our customers and grow structure while we are always going to get adjusted to the market and import, if needed.

The impacts within the market in terms of supply and is very volatile, and things are going to change eventually.

Concerning 192, Rodrigo will say something.

[Rodrigo de Almeida Pizzinatto, executive]

Well, considering fiscal or tax credit, we've recognized it, considering the total tax credits to be recovered for Ultragaz and Ipiranga. And as profitability continues to increase, we can also include additional credits at Ipiranga. That may be done throughout time. The risk of having it reverted is really low in our understanding.

[Operator]

The next question comes from Luiz Carvalho of UBS.

[Luiz Carvalho, analyst]

I have 2 questions. The first, as we have Linden, Lutz, rather, with us, and it's a question that I've been asking in all different calls. Lutz, the company in recent years has been through relevant process when we think the long-term history. Then having you coming to the team and others, then there was a significant relevant change in your Board structure.

Can you please tell us watching this movement and the way you see the company today, not a snapshot, for the whole history we've seen in recent quarters an operational turnaround of your businesses? And what was discussed when you got to the company was to speak about advanced capital allocation, reduction of the company's stake in some of its subsidiaries? What is -- what are the updated plans with the new Board members in terms of capital allocation?

Second question for Linden. I know you don't talk about the traded strategy, especially for imports, but we are in contact with the market. And in 2 of the events that we've been together, at least someone mentioned that Ipiranga would be bringing products from Russia. We've seen new products -- importing the product into Brazil, 15 ships. I would like to understand whether there is any risk for investors there. How have you been mapping it as a specific opportunity? Or do you think that this flow coming from Russia will be something more long staying in the market in general?

[Marcos Lutz, executive]

Thank you for the questions, Luiz. The first part, yes, it is a history, right? Ultra is 85 years old, and it has been through different moments and a number of very specific achievements, of course. I joined the company, and many things have already been taking place with renovation. There are many people here with me, part of this process. Pátria joined the team, was good. It's the first time a private equity just become part of Ultra. So a number of things have changed. Nothing disruptive or absolutely unexpected that have on a single day. But what has happening is a natural progression and a different Brazil and different world for the next 85 years, right?

And we are getting prepared for the next 85 years. It is a process of construction, building operational quality. And as Ultrapar, we are getting prepared to be a capital allocator, more active than we used to be in the past. We've had capital allocation, Ipiranga, for example, received capital allocation from the shares very successfully. There were some operating initiatives, some corrections, of course, but we have to improve our working terms of assertiveness, efficacy. The present is not disruptive at all. Rather, it is consistent towards modernization, renovation and adaptation to a more modern digital world.

Concerning Russian supplies, Brazil has as country -- except for the restrictions of the yuan, Brazil has been open to receive supply. And in the long term, it is -- the Russian product will have more penetration. Part of what we are currently importing will be from this originates and the decision of the Brazilian government. In fact, 1.2 billion of [ supply ] coming into Brazil, more than half of that has come from Russia. But you're right, we do not talk about our strategy. But clearly, we always state that we observe all the rules. We always follow compliance.

There are investors. We also have received a number of investments, and all compliance rules will always be respected by our company. But we always goes to the market, as Linden has said, the market that's going to have high offer. In Brazil market, we'll have to deal with distribution challenges.

While we have that level of arbitration in Petrobras -- as the main regulating arm of it all, we have to really use Petrobras product as a reference and arbitrating on that. Thank you very much.

[Luiz Carvalho, analyst]

A follow-up in the first question, a plan of reducing your stakes in some companies, is it still something considered? And what's happening now in Brazil, in the world, is it getting second priority?

[Marcos Lutz, executive]

Well, we are open to everything. We really have to look close as capital allocators, then decide when is the right time to make such moves. A fact is that we do not consider opening capital or opening an IPO with the business as something independent. It's just going to be considered if we are going to create value by taking this step.

[Operator]

The next question comes from Vicente Falanga of Bradesco BBI.

[Vicente Falanga Neto, analyst]

I have one question about LPG. This government of Brazil has been somewhat more clear, vocal in the market, while during President Bolsonaro. There was -- the price of LPG index on price on abroad. And this government has been trying to create more stable prices. So what -- how have you perceived these movements on your side?

[Tabajara Costa, executive]

Vicente, Tabajara speaking here. Concerning pricing policies, Brazil has been evolving, and we've had a free market for a while. The case of LPG in Brazil is a national -- it's an international reference. We have very modern regulation, pro-consumer, pro-client, with a lot of freedom. And we believe there is room for improvement. Of course, there are some restricted use issues. And the government has been trying to analyze that. But our perspective is always to have a market that's going to get more and more competitive. We can see an expansion of the supplies.

And this is going to bring another side of competition to LPG. So thus, we expect to have really a highly competitive market, which can -- gives -- which can give better offer to customers just at large. And this is our perspective and what we work with.

[Operator]

The next question comes from Bruno Montanari of Morgan Stanley.

[Bruno Montanari, analyst]

I have 2 follow-ups and one question. First, about the draft discount balance. Have you already concluded that we use those things in the network and we still have the migration of draft discount into more traditional debt strategies?

Now concerning branding of the network, can you please tell us about the anticipated payment or post-bonus payment? And finally, concerning the acquisitions you've made, although somewhat more shy, can they -- can help with Ultragaz, Ultracargo and Ipiranga? Do you have any future perspective of acquisitions, small-sized acquisitions, not [ heavy-muscled ] and anything about timing of when we would have these businesses contributing more to the company results?

[Rodrigo de Almeida Pizzinatto, executive]

Starting from the draft discount balance, there might be a decrease in terms of balance, but we have BRL 1.1 billion to get from the divestment. If we analyze the indebtedness profile and the terms, this is also going to get into additional costs.

Now let's speak about the payment purification. In terms of branding, let me see if I understand. Prepaid and postpaid, the negotiations differs. Each case is unique. And we try to strike a balance between different concessions. We don't want to just have too much on one side or on the other side. We want to have everything aligned with what we plan in our budget, but we do not expect to see any radical changes to either side. Just maintain what we've been doing throughout time.

Now speaking of Ultragaz and the acquisitions, as we've told you, for this year, our vision, that's not something that needs to be very relevant. It's near where we're going to build these avenues as a platform. And that's how we've been operating together with the offer of LPG, through resellers and through corporate clients, we are very enthusiastic with what we've built. But it's a long-term perspective for the company. It's not something that's going to impact us in the short term.

[Operator]

If there are no further questions, I would like now to hand it over to Rodrigo Pizzinatto for his closing remarks. Pizzinatto, please?

[Rodrigo de Almeida Pizzinatto, executive]

Thank you all very much for your questions, for your interests. The questions, which weren't asked for the webcast will be answered by our IR team, and I hope to see you next time. Thank you very much.

[Operator]

Thank you all. The earnings results call is concluded now, so you can disconnect now. Thank you all very much.