Ultrapar Participacoes SA (UGP) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would to welcome everyone to Ultrapar Second Quarter 2008 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's webcast at www.ultra.com.br where the slide presentation is available for downloads. 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 a listen-only mode during the Company's presentation. After Ultrapar's remarks are completed, there will be a question and answer session. At that time, further instructions will be given.

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We remind you that questions which will be answered during the Q&A session may be posted in advance in the webcast. A replay of this call will be available for one week.

Before proceeding, let me mention that forward-looking statements are being made and a 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 take place 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.

Good morning to the people in the United States, good afternoon if you are joining us from Europe. First of all, I want to apologize for the delay. We were told a number of your colleagues were having a difficult time in joining the call from the telecom operators. Apologies for the 15-minute delay. It is, as always, a pleasure to be here with you to comment on the results of Ultrapar and talk about our expectations outlook for the future.

I'd like to draw your attention, before I begin, to slide number 2 and to the fact that since January 2008, EMCA [Sanka] is now consolidated in Oxiteno and the financial statements for Oxiteno and Ipiranga prior to January '08 have been restated to reflect during consolidation. As a consequence, whenever I use, in this presentation, the term Ipiranga, it refers exclusively to the fuse and lubricants distribution business acquired as well as the related activities such as the AMPM franchises and the Jet Oil franchises.

Moving to slide number 3, this second quarter had many achievements with growing results and important steps made in terms of our Company's growth. In the results area, we saw volume growth in practically all the businesses resulting in a consolidated EBITDA of BRL248 million, 10% higher than the previous year. In other words, 10% higher than the second quarter of 2007 when we started to consolidate Ipiranga. Net earnings amounted to BRL104 million, practically three times the net earnings reported in the second quarter of 2007. Basically as a consequence of growth in EBITDA and the temporary effects in that and minority interests in the second quarter of 2007 related to the position of Ipiranga.

The good performance in this quarter contributed to a dividend distribution of BRL119 million, equivalent to 61% of the consolidated net earnings in the first half of 2008. Also during this quarter, Moody's assigned its Baa3 rating to Ultrapar responding to investment grade, while S&P, where we have a rating that is one notch below investment grade, increased its outlook from stable to positive. Investment grade is an important achievement. It demonstrates Ultrapar's cash flow generation ability as well as its sound financial management and corporate governance reinforcing our strategy focused on value creation.

Talking of value creation, we have made progress in our growth plans, in particular in relation to Ultracargo and Oxiteno during this quarter. At Ultracargo, we announced the position of Uniao Terminais which will take our logistics business up to a new level of size and scale. At Oxiteno, we completed the building of the oleochemicals plant at Camacari, and we have inaugurated our current sales office outside of Brazil based in Brussels, Belgium.

Talking now about specifically each one of our businesses and starting on slide number 5, with Ipiranga, in the second quarter the fundamentals which have contributed to the strong growth of Ipiranga remain solid as shown in slide 5. And the charts on the left side one can see the strong evolution of the number of new vehicles registered in Brazil compared to the same period in 2007. You should notice that the vehicle sales in the second quarter of '08 are compared to the second quarter of '07 in which the number of vehicles registered had already grown by 33% compared to the second quarter of 2006. The good performance in the automotive sector driven by the increased availability of credit, which in May of this year reached a level 37% of GDP compared to 32% of GDP in the previous year, but still low in comparison to international levels, all had a positive influence on fuel sales volume.

The combined volume of gasoline, ethanol and natural gas for vehicles grew by 13% in the southeast -- south and southeast regions of Brazil, the areas where Ipiranga operates. This was driven by the sales of light vehicles, fundamentally as shown in the top left graph. Diesel sales volume was up by 11% as a result of the good performance of the economy, the increased handling of products in the agricultural sector, in other words, more movements in the agricultural sector which is growing quite significantly in Brazil, and finally, the strong growth in the country's fleet of heavy vehicles which include buses, trucks, and agricultural machinery. As you may know, in Brazil, diesel is only used for heavy vehicles such as buses, trucks, and agricultural machinery.

At the same time, new measures are being implemented in the sector to reduce tax evasion on the sale products out of a specification, so increasing the degree of formalization of our market. For example, in April, it became obligatory -- it became mandatory for distributors the issuance of electronic tax invoices, making is easier to control sales in the sector, reducing the level of red tape, and permitting real time monitoring by the authorities.

With regard specifically to the sales of ethanol, in June, law 11727 was approved resulting from provisional measure 413 which includes higher concentration of the (inaudible) tax on ethanol producers, as well as the installation of flow meters in the distilleries. This law is expected to come into force on the first of October. This is one more step in the series of measures which aim to provide a sector with a healthier regulatory environment, progress of which can already be noted as shown in the chart on the right hand side of the slide which shows the share of the companies that are part of the [Syndicom] trade association compared to the ethanol market as a whole reached 60% in the second quarter of 2008 compared to 54% in the same period in 2007.

Turning now to the specific performance of Ipiranga in slide number 6, the same factors that influenced the performance of the market in terms of volume, also had a positive impact on the sales volume of Ipiranga which grew 11% in the second quarter of 2008 compared to the same period of last year. Also in the second quarter, more specifically in the month of May, the cost of diesel which had been unchanged since September '05, was raised 9% by Petrobras resulting in a period of price realignments. Ipiranga's EBITDA amounted to BRL151 million, up 45% on the second quarter of 2007. There was also an increase of almost 30% in EBITDA per cubic meters sold compared to second quarter of 2007. This evolution in results was basically due to four factors -- strong growth in sales volume, the improvement in legislation and enforcement in the sector, higher operating leverage driven by the higher volumes, and the reduction in general in administrative expenses which, in this quarter, were down 33% compared to the second quarter of 2007.

Looking now to the future for the third quarter, we expect EBITDA growth rates reported in the second quarter to continue, influenced by the same factors that I just mentioned. Vehicle sales data for July showed an increase of 33% in relation to July of last year, which is even higher than the growth seen between the two quarters. In addition, we saw a sale -- a growth of 12% in car sales between June and July which is quite significant in historical levels. In this third quarter, we will also complete an important step in the organization optimization process as a result of the acquisition of Ipiranga by Ultrapar. With the integration of the IT systems between the two legal entities of Ipiranga that carry out the distribution business, CBPI and its DPPI. This is an important step to allow the elimination of the common structures between these two companies which is expected to generate further cost reductions once the IT integration is finalized.

Speaking now about Oxiteno, again the highlight in the quarter was the volume sold of specialty chemicals which was 7% higher than in the first quarter of -- second quarter of 2007. This was due to basically three factors -- additional specialty chemicals production capacity in 2007, improvement in the performance of the economy, and the acquisitions in Mexico and Venezuela during last year which, as we will go into further detail later, currently exceeds our initial expectations. Specialty chemical sales volume would have been even higher in this quarter had it not been for the scheduled maintenance shutdown at the Camacari plant. The sales of the specialty chemicals resulted in a significant improvement in Oxiteno's sale mix, with the specialty chemicals rising from 80% of total volume sold in the second quarter of 2007 to 92% in the second quarter of 2008. This improved mix, together with Oxiteno's initiatives for the development of new products, were fundamental to face the negative impact of the exchange rate of appreciation and the rising cost of raw material related to oil prices. We also have the fact of the maintenance shutdown which had an impact of approximately BRL6 million on costs. As result of these factors, Oxiteno's EBITDA in the second quarter of 2008 amounted to BRL27 million, 6% lower than in the same quarter of 2007.

In the third quarter, the oil and exchange rate scenario remains challenging. Ethylene price is currently at $1,900, 50% higher than in the third quarter of '07 and 18% higher than the last quarter, second quarter of this year. The exchange rate on the last few days has been around 1.58, signifying a BRL18 and 5% stronger than in the third quarter last year and second quarter of this year, respectively. In addition, Oxiteno will also br impacted by the [Mentos] shutdown scheduled for the Maua plant at the same time as the shut down of [PQU], with a consequent reduction in the supply of ethylene and additional costs associated with this stoppage. With this, we expect EBITDA for the third quarter to be of a similar level to the one in the second quarter. In this challenging scenario, Oxiteno continues to work on the development of new products and to carrying out of capacity expansions with the aim of increasing sales volume and reaching sales mix and increasing economies of scale.

The first of the major expansion projects which will have the effect I just mentioned, increasing sales volume and reaching sales mix and increasing economies of scale, was completed at the end of June. Oxiteno's oleochemical unit, shown on slide 9, is the first plant in Latin America for the production of fatty alcohols, a product widely used in [liquismatic] detergent and agrochemicals segment, markets which are growing at a rate of around 10% a year. Oxiteno is currently the largest consumer of fatty alcohols in Brazil and these products are used in the manufacture of specialty chemicals. However, in addition to the internal consumption, the plant will also be serving the Brazilian as well as the Latin America market, and makes Oxiteno the only producer on the continent, a similar position it enjoys in the production of ethylene oxide.

The oleochemicals unit has an operational scale which is comparable to the largest fatty alcohol plant in the world and has the advantage of producing fatty alcohols from raw materials from a vegetable origin, in our case, palm kernel oil. The unit has a production capacity of about 100 tons of products, fatty alcohols, and its byproducts. And once again, fatty alcohol is derived from a natural route, have great appeal in the end markets for this product, due to its high degree of biodegradability as well as its appeal in the cosmetics industry where most of the products getting touched with your skin and therefore having a vegetable origin is an important element. The unit is already producing fatty acids and glycerine according to specifications and is in specification stage for the production of the mainstream product, fatty alcohols. Our expectation is that it will start to invoice products from September and should have a significant impact on the volumes and earnings of Ultrapar from the fourth quarter of 2008 onwards. Estimated revenue at full capacity is over $200 million based on current prices. In particular, this plant should allow gains of scale, increased operating leverage and a richer product mix leading to the expectation that the positive impact on Oxiteno's earnings should be much higher than the corresponding growth in production volume.

To complete our discussion of Oxiteno, slide 10 shows a general view of evolution and success of our international expansion. Internationalization, which so far has been successfully based on our technology differential in the area of specialty chemicals, and the [co-merchants] relationships built over many years with multinational clients. It all started in 2003 when we acquired Canamex, today Oxiteno Mexico, entering the Mexican market of specialty chemicals. We began then a process of transferring product and process technology from Brazil, as well as relationship with major clients that have global operations through our unit in Mexico. With this, Oxiteno Mexico, in a little more than three years, has moved from a distant third player to market leader in (inaudible) in the Mexican market with an average annual EBITDA growth of 34% since the first complete year of operations in 2004. The success in Mexico, where we compete with various of the world's multinational chemical companies, has strengthened our conviction of Oxiteno's ability to compete based on its technology for specialty chemicals and therefore allow us to move ahead in expanding the Company internationally.

In September of '07, we acquired Arch Andina, renamed Oxiteno Andina, and the only ethylene outside producing country in Latin America where we did not have a presence. The operation of Oxiteno Andina, under the management of Oxiteno, generated EBITDA BRL4 million in the first half of '08 before approximately BRL8 million in annualized basis compared to a negative EBITDA of BRL2 million for the entire year of 2007.

Another step in the Company's internationalization was taken in July with the inauguration of our first office in Europe located in Brussels and this makes our third sales office outside of Brazil, having already opened one in Argentina in 2006 and in the United States last year. Through our sales offices abroad, Oxiteno aims to establish a local presence in these countries and increase its sales of specialty chemicals as well as serving as a base from which prospects for new acquisitions are searched. With this new office in Brussels, we intend to form closer relationships with clients for specialty chemicals in the markets of Europe and Africa. Also, as part of the strategy, we aim to open an office in Asia in 2009. This process of international expansion might be speeded up through other acquisitions abroad with a focus -- with a geographical focus in the North America Free Trade Agreement area. In these potential acquisitions, we seek basically two main elements -- complimentarity to our product portfolio and acquiring the knowledge of markets and/or applications, always bearing in mind the potential for significant value creation.

Moving now to Ultragaz on slide 12, in this quarter, the volume sold by Ultragaz was up by 2%, slightly higher than the growth in the market driven by the sales volume in the [bulk good] segment, which grew by 4%. Volume sold in the bulk segment was in line with the second quarter of 2007 and in spite of this casual withdraw of too large customers which consumed 8,000 tons last year. This was possible because of new clients captured in the bulk segment as a result of investments made in expansion of Ultrasystem as well as the good performance -- the strength of our performance of our local economy.

Also in the bulk segment, in April, the LPG costs sold in this segment was increased by Petrobras by 10% in addition to the price increase of 15% from January, and generated a realignment of prices during the quarter.

Ultragaz EBITDA totaled BRL54 million in this quarter, down 31% on second quarter '07, basically as a consequence of the operating environment in the [bulk good] segment which remained challenging in this second quarter. On the other hand, the positive news is the gross profit per ton sold grew 5% in the comparison between first quarter and second quarter, or about BRL14 n compared to the first quarter of 2008.

Note on slide 12, on the graph on the right side, the labels of the graphs are incorrect. From left to right, the labels should read -- first quarter '07, then second quarter '07. The second is correct. And then the third one should be -- first quarter '08, which is incorrect. And then the fourth one -- second quarter '08.

The positive increase in gross profit opens the prospect for improvement in the next quarter and also allows us to expect an EBITDA to be slightly higher than in the first quarter than in the same period on the year before.

Finally, on slide 14, Ultracargo reported a 7% increase in effective storage in cubic meters, compared to the second quarter of 2007 as a result of expansion carried out at our two terminal in 2007. In the second quarter, we also began new operations, particularly in the area of integrated logistics operations evolving raw material transportation, in-house logistics and delivery of final products to Petrochemical [Paolina], a large new client that I commented last quarter that we have acquired.

We have also a few new storage facilities, particularly the new storage facility in Maua. In the transport segment, total kilometers traveled was up by 4% as a result of the new integrated logistics operation, Petrochemical Paolina. Despite the growth in operations, Ultracargo was affected in this quarter by higher freight and personal expenses largely due to the rising of diesel prices and salary increases as a result of the annual collective wage agreements. In addition, Ultracargo incurred additional costs related to the new operations which are in process of maturing resulting in an EBITDA of BRL8 million in the second quarter of 2008, down 32% compared to the second quarter of 2007.

For the third quarter -- during the third quarter, we expect to complete the acquisition of Uniao Terminais, beginning the integration of the business acquired into Ultracargo and Ultrapar. In terms of results, excluding Uniao Terminais, we currently expect a position evolution EBITDA compared to the second quarter as a result of the process of maturing of the new investments.

Finally, I would like to thank you for taking part in our Ultrapar presentation and look forward to your presence in future calls. Please I'm available for any questions you might have.

Ladies and gentlemen, the floor is now open for questions.

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Please hold while we pull for questions.

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

Thank you very much, everyone. I was thinking that one or two things happened -- either the presentation was absolutely clear, or I managed to get everyone sleeping. Either way, we look forward to having you on the next call. Have a good day. Thanks a lot.

This concludes today's Ultrapar Second Quarter 2008 Results Conference Call. Thank you very much for your participation and have a good day.