Ultrapar Participacoes SA (UGP) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's First Quarter 2008 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at www.ultra.com.br, where the slide presentation is available for download. Please feel free to flip through the slides during the conference call.

Today with us we have Mr. Andre Covre, Chief Financial and Investor Relations Officer, together with other executives of Ultrapar. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After Ultrapar's remarks are completed, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

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. Covre, who will present Ultrapar's results in the quarter and discuss about perspectives. Mr. Covre, you may now begin the conference.

Thank you very much. Good morning to the analysts that are joining us from the United States. Good afternoon to the ones in Europe. It's a pleasure to be here with you again to discuss the results of Ultrapar in the first quarter 2008 and our outlook for the next quarters. I'm here, I'm joined here with a few people from the Company. [Jusa Menual], who is and officer at Ipiranga. [Sinkia], who is an officer at Ultragaz, [Americo] from Oxiteno, [Eduardo] from Ultracargo and the finance staff. These guys will help me answer any questions you have at the end of the presentation.

Before I begin, let me make sure I mention that since January '08, EMCA, which was one of the companies acquired in connection with the Ipiranga acquisition, is now consolidated into Oxiteno, as it is a chemical producer in line with Oxiteno's activities. And therefore, the financial statements for Oxiteno and Ipiranga prior to January 1, 2008, have been restated to reflect the current consolidation.

Consequently, any references to the term Ipiranga from this quarter onwards refer exclusively to the fuel and lubricants businesses acquired in the South and Southeast regions in Brazil as well as the related activities, such as the convenience stores and the lube changing franchises.

Well talking about the highlights of the quarter and starting with the financial results, we reported EBITDA of BRL223 million and earnings of BRL90 million, respectively 93% and 142% higher than the results obtained in the first quarter of 2007, largely as a consequence of the position of Ipiranga in the second quarter of 2007. At Ipiranga, since the first quarter last year, volume has continued to grow significantly and growth in volume continues to influence positively the results of the Company, leading to an improvement of 34% in EBITDA first quarter this year in comparison to first quarter last year.

At Oxiteno, sales of specialty chemicals grew strongly in the quarter, approximately 12%, supported by additional investment in organic expansion and acquisitions in Mexico and Venezuela, enriching the sales mix and helping to offset the negative effect of depreciation in the Brazilian real and increase in feedstock costs related to the ever-rising price of oil. At Ultragaz, the operating environment in the bottled segment continued to be challenging, with the same conditions prevailing since the third quarter last year, with a negative influence on the Company's overall results.

At Ultracargo, expansions that were carried out during the year resulted in a 14% increase in average storage levels compared to the first quarter of 2007. Besides the results, the highlight of the quarter was related to the Ipiranga acquisition process, where we successfully segregated and handed over the Petrochemical and Northern distribution assets to Petrobras and Braskem, acquired on behalf of these two companies and receiving BRL1.7 million pursuant to the terms of the investment agreement. The process is now largely completed. The only remaining staff being the segregation of the refinery operation with the handing over of the corresponding stakes to those three companies -- to those two companies.

Another important step in -- another important element in the first quarter was the significant increase in the liquidity of Ultrapar shares after the Ipiranga share exchange and the consequent issuance of 55 million preferred shares by Ultrapar, pushing out the Company's free float to 64% of our total capital. Average daily trading volume rose to BRL32 million in this quarter, up 218% on the same quarter of 2007, as shown in the slide number four.

Average daily trading volume is expected to continue to grow as different shareholders gain interest in the Company, especially a number of [Europe league's] foreign shareholders that, in the past, did not follow Ultrapar, given its very low trading liquidity. These increases have also enabled Ultrapar to join another share index, the IVBX2 in addition to the Ibovespa and the MSCI already mentioned in our last earnings call. It also helped us to increase our participation on Ibovespa on the last few weeks.

Moving to slide number six and talking about each business in more detail, beginning with Ipiranga. We have, in this quarter, a continuation of deposited influence of expansion in the Brazilian economy, the increase in the variability of credit and improvement in disposable income in the Brazilian population, helping to continue to boost alternative sales to new records, particularly sales of flex-fuel cars, which in turn resulted in higher fuel consumption, comparing first quarter to last -- first quarter last year.

Additionally, improvement in legislation and more stringent enforcement measures introduced in the sector, as well as a significant in Brazil's ethanol production, have contributed to push up the trend of sales volume, which grew by 5.5% in the first quarter compared to the same period last year, with particular strong sales of gasoline, ethanol and natural gas for vehicles, which together were up by 10%.

The improvements in the sector, which I just mentioned, combined with the increased supply of ethanol in the country led to a 5% increase in gross profit per cubic meter compared to first quarter of 2007. Another positive effect on the quarter was the reduction in general and administrative expenses, largely as a consequence of the organizational optimizations that we've been working on since the acquisition and CPMF.

As a consequence of the scenario of increased sales volume resulting in more operating leverage, the improvement in gross profit per unit and the reduction in operating expenses. EBITDA at Ipiranga amounted to BRL128 million on this quarter, a 34% growth in comparison to last year.

Looking to the future, during this second quarter, the same factors that led to the 34% increase in EBITDA remain in place with some elements bringing positive surprises and leading to an expectation that the improvement in EBITDA in the second quarter of 2008 should be at least a similar growth shown in the comparison between first quarter this year and first quarter of last year.

Providing a little more color to the growth of the fuels market, slide seven shows sales of light vehicles, which totaled 617,000 units, up 32% on the first quarter of 2007, with flex-fuel vehicles representing 88% of this total. Such growth was driven by the increase of availability of credit and increase in financing terms, as I mentioned.

Ladies and gentlemen, this is the operator. At this time, all lines will be placed on music hold until the conference resumes.

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Mr. Covre, you may continue the conference.

Gentlemen, I know the news are not very exciting. Apparently the telephone company wanted to spare some of your time. Well, we're back. I was talking about slide number seven and referring to the increase in the sales of vehicles, 32% up from last year, with flex-fuel cars representing 88% of that total.

As a result of that, you can see that the volumes of gasoline, ethanol and natural gas increased by 12% between first quarters of both years, according to data obtained from [A&P], reflecting not only the growth from the sales of cars, but also the improvement in legislation and enforcement in the sector, as those provide growth of the formal market and detriment of the informal market.

Moving onto slide number eight, as we spoke about, as I mentioned, improvements in legislation and enforcement, some substantial advances have been made recently in those areas with introduction of new measures that should continue to reduce tax evasion and bring this market more within the formal economy. The first of these measures recently adopted was adoption of electronic tax invoices for sales of fuels, which became mandatory as of April 1st. This measure will facilitate the control of the trading activities in the sector, reducing the level of bureaucracy and allow real-time monitoring by the fiscal authorities.

Another important initiative was the agreement for the approval of Provision Measure 413, which includes further concentration of the PIS/Cofins stacks on ethanol producers, who will become responsible for the collection of 40% of the tax levied on the production and the distribution chain of ethanol. The provisional measure also required installation of flow meters of ethanol production plants.

Ipiranga has been dedicating significant efforts to improve the degree of formalization in the sector and we believe that these initiatives will help to curb unfair competition in the distribution of fuels. However, as shown in the charts in slide number eight, a significant proportion of the sales of ethanol in Brazil is still part of the informal economy.

On slide nine, we list some of our progress and implementation of benefits of the acquisition of Ipiranga. In the area of organizational optimization, we have carried out another important step in consolidating Ipiranga's finance activities into the Ultrapar corporate center in the same way we operate the finance functions of Ultragaz, Oxiteno and Ultracargo. The next step will be to eliminate any remaining duplicated structures within CBPI and DPPI, the two entities that carry out the distribution business between Ipiranga, which will take place during the next couple quarters.

Another element is the greater investment capacity and simplification of the decision-making process which has already beared some fruits with the conversion of unbranded service stations or opening of new service stations in 2007, being twice as much or as many as in 2006. In additional, we are currently analyzing acquisition opportunities in the sectors with the aim of speeding up the Company's growth.

We have also finished implementation of EVA in Ipiranga, linking the variable remuneration of the executives to EVA growth targets as we have in our other businesses, with a view of aligning interest of the Company's executives to those of the shareholders as a way to generate value for the Company.

On the next slide, we show the divestment of certain real estate assets that used to be owned by Ipiranga. In this quarter, we sold the headquarter buildings of Ipiranga in Sao Paulo and Porto Alegre for respectively BRL11 million and BRL50 million with the second building, the one in Porto Alegre, belonging to the Ipiranga employee pension fund and their four producing benefits to the pensioners.

The reason behind the sale of the two different offices is that, under the management of Ultrapar, the three administrative head offices are unnecessary. In addition, we're currently working on approximately BRL40 million worth of assets in process of being sold. They basically consist of plots of land where there are guard stations and where the property value exceeds the MPV of operating those respective stations. When that's concluded, the divestments implemented would amount to about BRL115 million.

In addition, with the introduction of EVA in Ipiranga, we expect that the Company's capital location will be further improved, with an aim of maximizing value and the forward potential of generating other opportunities through the continuing process of asset evaluation. Finally, at Ipiranga, on the operating side, we have continued to make efforts to improve the efficiency of the division's gas network station.

Sticking to improved productivity by increasing the volumes sold per gas station. Such efforts have resulted in a 10% increase in monthly average volume of fuel sold per service station, which has risen from a volume of 167 cubic meters per service station, in the first quarter of '07, to 183 cubic meters per service station in the first quarter of 2008.

Turning now to Oxiteno, the sales volumes of specialty chemicals in this quarter was us 12% over the first quarter of 2007 as a result of largely three elements -- increased production, as a consequence of the investments in capacity expansions in Brazil and [acquisitions] in Mexico and Venezuela last year; the second element was a dynamic economy that continues to perform strongly in Brazil; and the third were a number of merge initiatives and development of new products by Oxiteno, resulting in gains of market share and leveraging the new capacities that have become -- have come on stream in Brazil.

The increase in the sales of specialty chemicals and a drop in the sales of [licos] that we experienced this quarter led to a significant improvement in the product mix, increasing the participation of specialty chemicals to about 90% of total volume. In addition, Oxiteno's operating expenses were 15% lower than in the first quarter of last year, basically as a consequence of lower sales expenses, with a reduction that was greater than the reduction in volume and certain initiatives implemented by the Company to reduce administrative expenses.

The factors that I just mentioned were fundamental in compensating for the very strong negative effects of the exchange rate appreciation and the increasing in raw materials, resulting in an EBITDA of BRL47 million, 9% higher than the EBITDA reported in the same quarter of 2007. For the second quarter, we expect growth in the volume of specialty chemicals to be maintained at the same level as the growth shown in the first quarter.

However, at the other side, currency appreciation and the increase in oil price became more pronounced as we progressed during the first quarter, continuing in April and May and therefore resulting in a more challenging microeconomic environment in the second quarter of the year.

In addition, a maintenance stoppage is scheduled at our supplier of ethylene in Camacari, Braskem for this quarter with a consequent expected a reduction in the supply of ethylene. With all of this, we expect, at this moment, that the EBITDA in the second quarter will come at the same levels as the EBITDA in the second quarter of last year. Talking now further into the future, over and beyond the second quarter, we have in slide 14 an update on the new production capacities at Oxiteno for the rest of the year.

The first one, the fatty alcohol plant construction is substantially finished, with inauguration planned for late June and therefore with products available for sale in the third quarter of this year. The increase from there on in capacity utilization will occur gradually during the subsequent months and quarters. We will have also the additional ethanolamines capacity coming on stream during the third quarter of this year. And finally, some additional ethylene oxide production capacity at our plant in Maua, scheduled to come on stream on the fourth quarter of 2008.

On slide 15, we discussed briefly one of the elements that has been challenging to the Company on the last quarters and years, which is the increase in ethylene costs as a result of the increase in oil price. In other words, an adverse economic factor for the Company in the recent past. Well according to some specialist research firms in the petrochemical market, in this slide represented by CMAI, the projections for ethylene production capacity increases over the next few years, particularly in the Middle East, are likely to be much greater than the growth in demand for ethylene.

As a consequence, the global ethylene capacity utilization rate is likely to drop significantly, as shown on the chart on the left of slide 15, which may help to mitigate the pressure from rising oil prices on ethylene costs and eventually result even in a drop of ethylene costs. For Oxiteno, this dynamic opens up the prospects of a more favorable or less unfavorable raw material costs for the next few years.

Passing now to Ultragaz, in this first quarter, the operating environment remains challenging, with the first competition in the bottled segment since the third quarter of 2007 maintained notwithstanding stable in relation to the previous quarter. The LPG market had a 2% increase in volume as a result of the improved performance of the economy and the rise in disposable incomes.

As a consequence, our volumes in the bottled segment grew as well. In the bulk segment, we reported a decrease of 3% in sales volume, influenced by the expected loss of two significant clients. Also in the bulk segment, from the beginning of January, Petrobras increased the cost of LPG sold in the segment by 15%, which had been unchanged for nearly five years.

During this quarter, Ultragaz also implemented a number of initiatives to reduce expenses, resulting in a 2% reduction in SG&A, despite the facts of inflation between first quarter last year and first quarter this year, with inflation being around 5% in Brazil. For the second quarter of 2008, we see signs of recovery in certain regions of Brazil in this month of May just recently, which opens up the possibility for a potential improvement in the quarterly comparisons in the same quarter a year earlier.

Looking also towards the rest of the year, with regards to new projects being implemented, Ultragaz made further progress in assessing the demand in the propellant market for DME, a project that we announced late last year and is expected to start invoicing during the fourth quarter this year. The results of our demand -- preliminary prospect of demand came significantly higher than our expectations and therefore allows us to be very optimistic about the growth in volumes in that segment.

Last but not least, Ultracargo reported a 14% increase in volume store in cubic meters compared to the first quarter last year as a result of expansions in Suape and Aratu terminals, increasing ethanol and vegetable oil storage capacity in those terminals. We also had an increased capacity utilization rate in our terminal Santos, with an increase in the volume of chemicals and ethanol handled.

In the transport segment, we saw a decline in the kilometers traveled due to the reduction in a number of transport operations as part of our refocusing on operations that provide differentiated services. EBITDA at Ultracargo amounted to BRL10 million in the first quarter of '08, down approximately BRL1 million compared to the first quarter of '07, with increase in the storage services and in-house logistics operations offset by the reduction in transport operations.

In this quarter, we won an important new client, the recently launched Petroquimica Paulinia, where we will provide integrated logistics services from transport of raw materials and handling in-house logistics to the distribution of finished products. This achievement is very much in line with Ultracargo's strategy of providing different shaded logistics services.

We have also in this quarter embarked on a new internal review of the transport operations with the aim of improving the Company's efficiency and profitability. To this end, we hired a consulting firm specialized in reducing costs and improving profitability, named [Proudfoot], to provide us advice on this subject. We have also in this quarter finished implementation of the SAP ERP, making another step in constructing Ultracargo as a platform for solid growth in the future.

Expectations for the second quarter are in line with first quarter of this year, with growth levels for storage and in-house logistics being positive, but at the other hand, continuing our repositioning in transport services, which should see another decline in the second quarter. With that, I am available to answer any questions you might have.

(OPERATOR INSTRUCTIONS)

Our first question is coming from [Phyllis Camara] with Pax World Funds. Please go ahead.

Thank you. Hello. Could you talk a little bit about the remaining operations that need to be separated -- the refiner and what that's going to look like on your financial statements going forward? And then also if you could talk about any kind of remaining infrastructure that's duplicative and what you're expecting to gain from taking some of those resources out?

Thank you very much, Phyllis. It's a pleasure to have you again with us.

Thank you. It's a pleasure to be here.

Well first about refining. The refinery that Ipiranga had is indeed the last step to finalize the transaction. We expect to do that shortly over the next few months. The refinery, pursuant to the terms of the investment agreement, belongs ultimately to the three buyers and, as such, from the date of acquisition, we only consolidate our portion of it, which is one-third of it. And therefore, when we do the separation, there will be no effect on our financial statements whatsoever.

In relation to duplicate structures between CBPI and DPPI, that action is part of a wider program, as I mentioned in the presentation. We expected that eliminating the duplicate structures between CBPI and DPPI, integrating the finance functions in the head office of Sao Paulo and demobilizing the previous corporate staff that service largely the previous shareholders, those three things together amounted -- would amount to about BRL100 million in cost savings.

Two of the actions have been already executed. The finance department at the beginning of this year and therefore the gains will show during this year. And what's left will be done on the next few months, showing gains for the remaining of the year and a little bit at the beginning of the next year as well.

The duplicate structures relate largely to the fact that the two companies were managed separately in the past, as they had some common shareholders, but a lot of different shareholders and therefore had to be capped separate. And there was, at some point, that the companies had two CFOs and two CEOs and two commercial directors. Some of that has been eliminated already, but some of it remains and will be eliminated now.

Okay. What do you think you're going to end up doing with the cash that you have received so far? Is that going to be plowed back into initiatives that you've already outlined or will you be repaying debt or what are you thinking of?

Phyllis, we do intend to have some indebtedness in Ultrapar's balance sheet. We remain a prudent company, but we will have some debt on the balance sheet and we will get there through a combination of investing in the Company's growth and returning cash to the shareholders. In the terms -- in relation to investing in the Company's growth, we have a very significant CapEx program for this year. There is nearly BRL500 million planned of investment in Oxiteno's production capacity expansions and we also have a meaningful CapEx in relation to Ipiranga, largely aimed at increasing and improving its service network.

Over and above that, in almost every one of our businesses, our positions are an integral part of the strategy. And the acquisitions could happen, therefore, at Ipiranga, where the rationale of the economies are scaled to provide a very significant incentive for acquisitions.

It could happen at Oxiteno in relation to its international expansion strategy and it could happen also at Ultracargo, as the market in which it operates is currently undergoing a consolidation process. We are very attentive to all the acquisition opportunities and pursuing all of them that arise, and therefore should also be a profitable value-creating use of the cash that we have received from Petrobras and Braskem.

Thank you. Do you foresee doing another transaction similar to this one with companies like Petrobras in the future or are you just focused on integrating what you're doing right now? Or not integrating, but just expanding what you're -- what your operations are right now?

Acquisitions in the distribution segment are very strong value-creating factors because the business benefits significantly from economies of scale. So if opportunities arise in the area of M&A in distribution, we will certainly be involved on that.

And then the last question. Dividends paid, I think, jumped up quite a bit this quarter. Should we expect to see that -- this same sort of volume of dividends throughout the year or was this just a one-time type of thing after you got the cash from Petrobras?

Our dividend policy and practice has not changed. That means that we pay at least 30% of our profits. And in the moment, where we do not have immediate use for the excess available cash, we distribute to the shareholders. The amount paid in this quarter was designed and paid with that mindset and within that policy of dividends.

Okay. Thanks so much.

Thank you.

(OPERATOR INSTRUCTIONS)

There appear to be no further questions. I would like to turn the floor back over to Mr. Covre for any closing comments.

Well thank you very much to all of you. It's a pleasure to be here to discuss the business of Ultrapar. I look forward to seeing you again on the second quarter results. Thanks a lot.

Thank you. This does conclude today's Ultrapar's conference call. You may now disconnect.