Ultrapar Participacoes SA (UGP) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's fourth-quarter 2011 results conference call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at www.ultra.com.br/ri where the 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. At that time, further instructions will be given. (Operator Instructions).

We remind you that questions, which will be answered during the Q-and-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 under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Ultrapar's management and on the 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 begin the conference.

Thank you very much. Good morning to the analysts joining us from the United States. Good afternoon to the ones joining us from Europe. It's a real pleasure to be here with you today to discuss our performance in the fourth quarter and the performance of 2011.

I have here with me to help answer your questions Directors from the business units, Jose Manuel from Ipiranga, Julio Nogueira from Ultragaz, Ana Paula Santoro from Oxiteno, and Joao Marcos from Ultra Cargo as well as Rodrigo Pizzinatto, Director of Corporate Training, M&A, and Investor Relations together with the rest of the Investor Relations team.

Starting with slide number 4, I'd like to put bit of context and background to our results, particularly relating to the economic environment. As you can see on the graph on the top left, Brazilian GDP continued to grow in 2011, but at decreasing rates through the year reaching a 2% level at the end of the year. This slowdown in economic growth had the smaller effect on sectors more directly linked to consumption as some of our businesses are. This reflects mainly the favorable conditions in the labor market, which has been presenting historically low unemployment rates as well as the higher credit availability that reached the record level of 49% of GDP in the fourth quarter. These favorable conditions contributed for another good year for the automotive industry.

Light vehicle sales grew by 3% in 2011 with 3.4 million new vehicles added to the fleet. And with that, we had another year of high single-digit growth in the Brazilian fleet of light vehicles and therefore its reflects on consumption of gasoline, ethanol, and natural gas for vehicles.

Inflation rates remained at high levels although declining a little bit at the end of the year, reaching 6.5% for the year as a whole. The stable international environment mainly in the second half of the year, as a consequence of that crisis in Europe, contributed to the depreciation of real against the dollar, reversing the appreciation that we saw in the first half of the year. All things considered through the year, the real was 5% stronger when compared to 2010 that obviously impacts negatively the results of Oxiteno.

Oil price in turn stayed at high levels through 2011 closing the year at an average of $111 per barrel. That is 39% higher from the average of 2010.

Moving to slide number 5, we believe that Ultrapar started the new decade with great momentum with a year of achievements and good results. 2011 represented a very important milestone in the Company's history. We implemented in a pioneering matter a new corporate governance structure. In summary, we exchanged each preferred share into common voting share and joined the separate listing segment of Bovespa, Novo Mercado.

We also amended our bylaws and included practices that go beyond the requirements of the Novo Mercado listing and we believe that by enhancing the alignment of interest and increasing the Company's investment capacity, the new structure strengthens Ultrapar and provides the conditions for enduring growth of the Company.

I like also to highlight the investments we have made in 2011, which amounted to a little more than BRL1 billion. Ipiranga extended its resellers network by 424 service stations through the conversion of unbranded service stations and the opening of new service stations.

2011 was an important year for the implementation of our expansion strategy in the midwest, northeast, and north regions of Brazil, where we increased our network by 27%. We started our activities in these regions in 2009 with a 10% market share resulting from the acquisition of Texaco and we have closed 2011 with a market share of 12%.

As you might know, fuel consumption in the northern part of Brazil grows at higher rates than the national average, and therefore, it is a region with high potential that justifies our interest in our investments. Also Ipiranga significantly increased its franchise network opening 179 new convenient stores am/pm's and 170 new jet oil units, our lubricants change business. That represented growth of respectively 17% for the convenient stores and 24% for the Jet Oil units.

As you might recall, in addition to the direct revenues that these franchises provide, the expansion of am/pm and Jet Oil increases traffic at the service stations and strengthens our differentiated position in the market, which translates into benefits to all participants in the value chain and in improved profitability to Ipiranga.

At Ultragaz in October, we announced the acquisition of Repsol's LPG business in Brazil strengthening the positioning of Ultragaz bulk LPG business, a segment in the market where volume progression is strongly correlated to the GDP performance.

At Oxiteno, we concluded expansion of the ethylene oxide unit in Camacari increasing the total production capacity of this project by 26% and closing an important investment cycle for the Company and allowing with that the prospect of a strong volume growth for the next few years.

Finally, at Ultracargo, we announced some expansions that together will increase its storage capacity by 15%. The first expansion at the Suape terminal started operations in September adding 26,000 cubic meters to its capacity. We believe, in summary, that it was another year of significant achievements and preparation for further growth and value creation of the Company.

Well, talking about the results, I am now on slide number 6, starting with Ipiranga, this year as we had anticipated, volumes continued to progressively to grow positively with an 8% growth compared to 2010. The 6% higher volumes sold in the Otto cycle in 2011 was the result of a continued growth in the light vehicle fleet and investments both that I've mentioned a little earlier.

Our investments and the growth was focused mainly in the midwest, northeast, and north regions of the country. So, that growth or those factors were partially offset by an increased share of gasoline in the sales mix due to the reduced availability and competitiveness of ethanol in 2011. The volumes sold for light vehicles on a gasoline equivalent basis, that is equalizing the volumes of gasoline and ethanol by the respective energy values, was 10% higher compared with 2010.

Diesel volume was up by 9% as a consequence of the growth in the Brazilian economy and the investments that we have made to capture new clients. We believe we have a better value proposition that most of our competitors [have been] our competitors due to our operational flexibility, agility, and better business solutions for large consumers.

In the fourth quarter, EBITDA excluding non--recurring expenses, amounted to BRL358 million, an increase of 11% over fourth-quarter 2010. This represents an EBITDA margin of BRL64 per cubic meter, which is BRL3 per cubic meter higher than the margin of the fourth quarter of last year.

We highlight for your references the non--recurring effects in the graph on the right side of the slide. As you might recall, when we acquired Ipiranga, Petrobras acquired the rights to the use the Ipiranga brand in the northern part of Brazil for a five-year period, which is due in mid-March. As a consequence, our service stations in the region still use Texaco and DNP brands, the two acquisitions we made.

During the fourth quarter, we had non--recurring expenses of BRL16 million related to the preparation of the conversion of these service stations to the Ipiranga brand, which we expect to take place intensely in the entire region starting today, the 19th of March.

Now, for the year as a whole, EBITDA amounted to BRL1.286 billion, a 16% increase over previous year also excluding the non--recurring events for both periods. The significant EBITDA growth results mainly from increased sales volume and improved sales mix when increased share of gasoline, which has better margins even the ethanol margins are affected by a higher level of tax evasion and product adulteration.

Talking now about the future, this first-quarter 2012, we expect currently an evolution in volumes a little higher than the one we had for the year of 2011 with investments made over the last 12 months starting to mature. This growth in volumes allows us to expect a slightly higher EBITDA margin in the first quarter of 2012 than the one we had in the first quarter of 2011 and I am always here talking about margin excluding the non--recurring effects related to brand conversion. We expect the spending for brand conversion in the first quarter to be a similar amount to the one we had on the fourth quarter.

Moving on to our other distribution business, Ultragaz sales volume had a positive progression in the fourth quarter and in the year as a whole with a 3% growth compared to the previous periods. In the bulk segment, volumes grew by 7% in the fourth quarter led by the economic growth, the investments made to capture new clients, and the fact of about two months of the acquisition of Repsol in October.

Ultragaz recorded an EBITDA of BRL51 million in the fourth quarter, down 10% from fourth-quarter 2010. The variation observed in the fourth quarter occurred mainly due to the effects of inflation on cost and expenses and non--recurring events related to an integration of Repsol and contingencies on the fourth quarter of 2011 totaling BRL15 million. These effects were partially offset by non-recurring expenses of BRL12 million in the fourth quarter of 2010 related to studies and expansion projects as well as higher volumes sold.

If we are to exclude all the non-recurring events both from the fourth quarter of 2010 and '11, Ultragaz EBITDA would have been 4% lower, a smaller decrease than the 12% -- the 18% drop observed between the third quarters.

For the year, EBITDA totaled BRL282 million, down 8% from 2010, as we work to align our pricing and expenses to increased inflation we had in 2011. We have been working in a series of internal and commercial initiatives to resume earnings growth. However, for the current quarter, considering that first-quarter 2011 was last year's strongest quarter in terms of unit margins, we expect the progression in volumes and EBITDA similar to the one we had between fourth quarters.

Moving to Oxiteno on slide 8, in this quarter, volumes sold increased by 5% mainly as a result of higher sales of glycols in the domestic market, partially offset by the effect of global economic instability on our exports. In the year, Oxiteno sales volume reduced by 4%. The main factors affecting sales volumes were the unplanned stoppages in Camacari in the first half of the year and the adjustments on our clients' inventories, as a result of the lower level of economic growth, mainly during the second and third quarters.

EBITDA in the fourth quarter was BRL80 million, a surge of 47% from fourth quarter previous year, mainly as a result of the recovery in margins during the year, the higher sales volume, and the 6% weaker real. As we had anticipated in our last earnings announcement, Oxiteno's margin returned to normal levels after a third quarter with strong adjustment effects in our inventories. With the weaker real, EBITDA reached $247 per ton, a level above that of the nine months of the year, which was $231 per ton.

For the year as a whole, Oxiteno amount -- Oxiteno's EBITDA amounted BRL261 million, 8% higher than 2010, mainly as a consequence of the recovery in margins during the year and the improved sales mix in the first semester. Such effects were partially offset by a 5% stronger real, as I mentioned in the beginning of the presentation, and the 4% decrease in sales volume, which was largely related to the unplanned stoppages in the first half of the year and the weakness in the world economy.

For this first quarter, we expect the volume growth of around [7%] with a significant growth in glycols. As you probably recall in the first quarter last year, our volumes were adversely affected by the unplanned stoppages in Camacari as a result of the power outage in the Northeastern regions, the one I mentioned already. Additionally, through the year, we concluded expansions, in particularly, the expansion of the ethylene oxide unit in Camacari, which increased our capacity of that project by 26%.

In terms of profitability, we expect an EBITDA margin of order of magnitude $200 per ton, which we consider to be normal -- within the normal levels. However, that is lower than the same margins we had in the first quarter of last year and the margins that we had on the quarter that just finished, the fourth quarter.

The reduction in margins which I stress coming back to levels that we considered normal have to do with the very high margins that we had in the first quarter of 2011, where we had a very positive market environment in some private lines with very strong demand and lack of supply around the world.

Oxiteno took advantage of the moment, focused its production on sales on these private lines, which contributed for the improved sales mix in the fourth quarter of 2011. Comparing to the fourth quarter of 2011, the variation is explained mainly by the appreciation of the real during the quarter given that our prices get updated by the exchange of the day of the invoicing and our costs are updated in reais by the exchange rate of some months before often given that we have between 60 and 100 days of cycle of production.

Moving on to slide 9 and Ultracargo, in the quarter, our storage was 13% higher than previous year as a result of the startup of the expanded terminal in Suape in September and the increase in ethanol imports in the Santos terminal driven by the lower availability of the product in the country. In 2011, for the entire year, Ultracargo's average storage was 5% higher than in 2010 given that our main expansion was only ready in September.

In terms of EBITDA, we had a 16% growth in the quarter, mainly as a result of the volume growth, and for the year 6% higher also following the evolution of volumes. Ultracargo results could have been even stronger given that the benefits of higher volumes and terminals were partially offset by the effects of the sale of our previous in-house logistics, solid book storage, and road transportation business at the end of the second quarter of 2010.

I highlight another important effect of that the disposal, which is the positive and significant EBITDA margin progression that increased from 38% in 2010 to 44% in 2011. For the first quarter, we expect a higher average storage in our terminals. On other words, another quarter of increase in volumes on the back of the expansion we made in Suape, resulting in an EBITDA growth of approximately 10%.

During 2012, we expect volumes and EBITDA to accelerate their pace of growth given that the expansions in Santos and Aratu will startup in a couple of months increasing the capacity of Ultracargo by another 10%.

Concluding with slide 10, I'd like to make a few points about our overall performance. The good performance of our four businesses in the year allowed Ultrapar to reach record levels of EBITDA and net earnings in the year with growth of 13% and 12% respectively. Return on equity was 16%, up from 15% in the previous year. The strong earnings growth and value creation helped to influence the Company's share price. Ultrapar share -- shares appreciated by 22% in the year, one of the highest increases in the year amongst the companies that are part of the Ibovespa index, which fell 18% in the same period.

In addition to the strong return on Ultrapar shares, we increased our dividends by 23% in 2011 distributing more than BRL0.5 billion in the year, which represented a pay-out of 61% and a 3.5% dividend yield.

The earnings progression over the past years together with the leading position that we have in our business allows the privileged position to benefit from the good investment opportunities we have. Our investment plan for 2012 excluding acquisitions amounts to BRL1.88 billion and aims a growth to increase scale and productivity gains as well as modernizing and maintaining our existing operations.

During 2012, we will continue to increase the operating scale of our business. I mentioned, I can highlight the continued expansion of Ipiranga's distribution network, which increased significantly in 2011 and we plan to accelerate even more in 2012.

We acquired the LPG business of Repsol in October and that's poised to produce benefits during this year and positions Ultragaz to capture a bigger share of the growth in the bulk segment in the country, which I have highlighted grows in line with GDP.

And finally, we have had expansions in Oxiteno and Ultracargo being finalized at the year, which allows for increased volumes throughout 2012 and the years after. We believe we are all positioned in terms of the operating environment given that, as most of you know, part of our business is Brazilian in nature, but is leveraged on the economic growth of Brazil.

Last but not least, as I highlighted in the first slide, in fact the most important event of the year, we implemented a new corporate governance structure, which believe is an instrument that will strengthen and endure the Company and its growth. In addition, should that be necessary the initiatives allow us for additional sources of funds for good investments, which together with our track record of planning and executing, we believe create conditions for Ultrapar to repeat in the coming decades the performance and value creation that it presented since the IPO in 1999. Since that year for the last 12 years, therefore, we have had earnings growth of more than 20% on average and we have had total shareholder return of more than 20% a year on average.

Well, thank you very much for your presence. That's what we have prepared for today. I thank you for your presence, in particular the folks in the United States, as I know Monday is Presidents' Day. And we are now available for any questions you might have.

(Operator Instructions). Frank McGann, Bank of America/Merrill Lynch.

Just kind of a big picture question really, the last year or so has seen a major change in the fuels market with the reduction in attractiveness for consumers of ethanol and a surge in gasoline demand.

And I was just wondering if -- as you look out over the next couple of years, obviously it depends on pricing and I know that's difficult to predict, but how are you feeling about the market, because many looking back say two or three or four years felt that gasoline would continue to decline and that clearly has not happened because of the other pricing issues globally in terms of commodities. But I am just wondering if you believe that, if you look out two, three, four years, we'll go into a period where gasoline demand will again fall and what would be the effect for you of that and any other thoughts you have on the overall market.

Frank, thank you very much. It's a real pleasure to have you with us today. Unfortunately, my crystal ball on this topic, it's no better than what the crystal ball of our colleagues in the ethanol industry. So I probably will repeat some things you probably have heard. We have seen indeed on the last two years a reduction in the availability of ethanol that is due not only to the very high sugar prices, but also because as the Brazilian fleet of [car] was growing, there was no growth or significant growth in the area --- planted area of sugarcane.

The root of that problem especially related to the 2008 economic crisis, which left a large number of the sugarcane producers relatively uncapitalized and highly leveraged. What they say, the industry says is that that our investment is now underway, but obviously you need to plant and sugarcane takes its time to grow. There seems to be no major change in the relative prices of ethanol and gasoline for the next couple of years. Some people have spoken about two years, some people have spoken about three years.

For us, if and when that happens, obviously we might start seeing, due to more competitive ethanol, a shift from gasoline to ethanol and margins of gasoline are higher than the margins of ethanol, because a much lower level of tax evasion and product adulteration. Well, we are -- and therefore a shift back to ethanol in two, three years will be negative for our mix of products.

However, we see this as a window to work with the authorities, to work with our industry partners to try to make a further step into reducing the informality of the sales of ethanol. So that by the time the mix shift back, the industry is relatively indifferent between selling ethanol and gasoline. It's not only our interest for that to happen, it is the interest of the consumers that will have products that have lower risk of product adulteration and it is the interest of the governments, which will have more tax revenues. So, it is something that will benefit everyone, except the people that practice some form of illegality, which obviously shouldn't be benefiting from anything.

Okay, great, thank you. Very helpful.

Gustavo Gattass, BTG Pactual.

Andre, just a quick follow-up question still. Can you help us, let's say, think a little bit about the speed of conversion of investments in the Ipiranga business? Let me put this into context. We saw a very large acceleration of investments in Ipiranga in the fourth quarter. There is a good deal of investments expected for next year and I just want to have a sense from you guys. When you are putting more money into the conversion of new service stations or into new am/pm units, usually when do you expect to see the impact? Is it, I'd say, more of an automatic thing or is it something that you guys see with a lag of one to two quarters? How should we think about that?

Gattass, thank you very much for joining us, the English call as well. It's a real pleasure to have you. Very roughly, the investment of last year benefits this year's volume. That is very broadly put. When we make a conversion of an unbranded gas station into Ipiranga, that is a faster process given that you have a gas station that it is operating, it is selling product, but it needs to be brought into the procedures and a look in few of Ipiranga.

When we are talking about a new gas station, that takes a longer period more than a year overall from the time you come to an agreement, then you invest, we get the licenses and then you ramp-up volumes. So, all things put together very roughly, we are talking on converting unbranded gas stations and putting new gas stations about a year.

On the am/pm's and Jet Oil, that tends to be a little faster. And on bottling -- sorry, storage facilities that tends to be longer, because -- to get longer than a year, because unless you buy one. So, if you are doing a build-out, the time to get the licenses to operate -- and the license to build, then the license to operate, and the period between -- period for building it takes more than a year, often a couple of years. That's why I said roughly, the investment of this year benefits volumes in next year, except for the storage facilities, which is more a two- to three-year horizon.

Okay. So, the acceleration in the pace of investments, should we think of it as more of a second-half 2012 impact or --?

So, there is always the concentration of investments in the fourth quarter extended a year, that's quite common. We are now seeing the benefits of, let's say, the investments that we made in late 2010, early 2011 and we are growing faster in the market as you saw in the results. As having investments that we made in the second year of 2011 mature, that pace will accelerate in the second half of 2012. So you're absolutely right. And we should have a further push in 2013 given that the investments of 2012 are higher than 2011.

Okay, perfect. Thank you.

(Operator Instructions) [Michael Home], CQS.

I've got two questions. The first one is regarding the conversion of the stations. Just like to get a better idea of what impact this has on your business. Is this something that would allow you, for example, to charge a higher premium in those stations? Does it allow you to possibly reduce your costs? How should we think about that?

And the second question I had is, minimum wages are going up I think is 14% this year in Brazil. How does that impact your cost structure? How many people are getting paid salaries that are linked to the minimum wage? Thank you.

Thank you very much. It's great to have you with us. Well, starting from your last question, I think the increase in the minimum wage, probably all things considered, is positive in our business, because a very small percentage of our labor force has salaries that are indexed to the minimum wage. On the other hand, the minimum wage will put an increased disposable income in the lower levels of the population, which are heavy consumers of LPG for cooking as you know.

On the conversion of the brand of the stations in the Northern Brazil, first of all, that's something that intuitively from simply a business perspective we should do. It doesn't make sense to have different brands to do with nationwide. They generate --- the single brand generates some operational benefits. We don't have to run, for example, different advertising campaigns. We can do promotions. There are similar or the same. Today, we have to adapt promotions to the brands. So, from an operational standpoint and from a brand awareness standpoint, this is a lot better proposition.

In addition, we have during the last five years made everything we could to make the Texaco and the DNP gas stations have the positioning of an Ipiranga gas station without the Ipiranga brand. Obviously, we can do that to a certain extent, but we come short of certain things. So, having the brand in the gas stations now will be probably a first step into finalizing the market positioning of the Ipiranga gas stations in the north of Brazil in a way that they are similar to the ones we have in the south.

I would say our first step into finalizing a process, because also our strategy in the northern part of Brazil is currently more focused on capturing scale through opening and converting gas stations. Once we've done a lot of that and increased our participation on behind that, it will come the push into increasing of the penetration of am\pm, Jet Oil, card acceptance and so on. But changing the brand is not an isolated event, it's part of a bigger plan that would take place over the next few years and will increase the profitability in the margins and the regions.

When we did Texaco in the south, we had significantly improvements in margins, EBITDA margins. Obviously a lot of that was operational synergies that's all gone. A part of that was also improvement in profitability in the gross margins, and we expect to see that in the northern part of Brazil, but not something that one should notice in one or two quarters. It will be a process that will take a couple of quarters.

Okay, very good. Thank you, Andre.

(Operator Instructions). This concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Andre Covre for any closing remarks.

Well, thank you very much. We look forward to seeing you on the first quarter conference call. We have conferences scheduled in the next couple of months both in Europe and the United States. And we look forward to seeing you in person further discussing our views in the business for this quarter and for the next couple of years. We remain very confident that we are putting the right steps to produce good returns for our shareholders, to increase scale, and to probably investing the resources of our shareholders and managing our expenses. Thank you very much. Have a good weekend.

Thank you. This concludes Ultrapar's fourth-quarter 2011 results conference call. You may disconnect your lines at this time.