Ultrapar Participacoes SA (UGP) 2012 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 2012 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, with 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 Ultrapars 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&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 management, and on information currently available to the Company. They involve risks, uncertainties and assumptions because the 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 begin Ultrapar's results in the quarter and discuss about perspectives. Mr. Covre, you may begin the conference. The line has disconnected. Just one moment please, there has been an interruption.

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, [Andrew]. Good morning and good morning, good afternoon depending on what part of the world you are. It's a pleasure to have you here with us again to talk about the first quarter results, and our plans for the future.

Starting on slide number three, with an overview of the results and the highlights for the quarter. In the first quarter of 2012, we continue to present EBITDA growth. The performance was boosted by the growth of the Brazilian economy, but increased operating scale of our businesses as a result of the investments made, and also by the consistent planning execution of our strategy.

Consolidate EBITDA reached BRL502 million in the quarter, a 7% increase over first quarter last year. EBITDA would have grown by 10% if we exclude the expenses related to the return of the Ipiranga brand to the northern part of Brazil. Also, if we were to exclude those extraordinary expenses, we would have had a positive progression in net earnings.

In addition to the results, the beginning of the year we received some important international recognitions for the quality of our results, and our leadership in corporate governance. In a survey conducted by Fortune Magazine, Ultrapar was ranked world's fifth most admired company in the energy sector. Among the criteria where Ultrapar stood out in the research were quality of management, innovation, financial soundness, and quality of product and services.

We are particularly proud to have been ranked by Fortune Magazine, in particular, for the quality of our products and services, and for the innovation which is something that is present in every one of the businesses that we carry out.

Additionally, we receive from World Finance the award for the best corporate governance in the country crowing our new corporate governance structure implemented in 2011. During this quarter, we also completed the conversion of over 1,000 Texaco service stations of the Ipiranga brand in the northern part of Brazil.

As you might recall, the restriction for the use of the Ipiranga brand by Ultrapar in those regions expired on March 19th. Since then, we have converted almost the totality of our network in these regions, marking the return of the brand to the region, and strengthening of the expansion of Ipiranga into the region, as well as its profitability.

We have also announced in this quarter, the expansion of Oxiteno's activities into the United States through the acquisition of a plant for the production of specialty chemicals in Texas of which I will talk more specifically in the next slides.

Moving now to slide number four, to comment on the performance of the businesses, starting with Ipiranga. In terms of volumes, we continue to present a strong growth of 11% compared to previous year. For the use of -- use in light vehicles, the growth results from the expansion in the light vehicle fleet and from the investments that we made to expand the network with a focus on the northern part of the country.

In addition to these factors, it's worth mentioning that we had two more working days in the first quarter of this year compared to the first quarter last year, in effect that tends to increase sales, plus this was offset by an increased share of gasoline in the sales mix in the first quarter of this year. And you might recall the gasoline has a greater energy power than ethanol.

Share of gasoline in the sales of fuels for light vehicles in the first quarter was 81% compared to 74% in the first quarter of 2011. Diesel volume increased by 15% due to the growth in the Brazilian economy, and the investments made to capture new clients. Also related to the economy, we had an effect related with the anticipation of the harvest season which was a little bit earlier this year, and little bit later last year.

Lastly, diesel volume was also boosted by the increased number of working days. Ipiranga's EBITDA amounted to BRL351 million at 23% growth excluding the items related to the return of the Ipiranga brands to the northern of Brazil. On a nominal basis, the increase was 18%.

The main growth drivers of such growth were the positive valuation in the sales volume. The resulting increased operating leverage and the bigger share of gasoline in the sales mix. I'll remind you that gasoline has higher margins than ethanol since ethanol margins are affected by a higher degree of informalities.

The BRL351 million EBITDA means that BRL64 per cubic meter margin in the first quarter of the year well above the BRL58 per cubic meter in the first quarter of last year.

As we progress through in the second quarter, our expectations for the quarter is -- remains very positive. We expect volume grow slightly below than what we saw between first quarter's mainly as a result of the anticipation of the harvest season that I just mentioned.

Accordingly, EBITDA growth will probably be slight smaller as well, excluding the non-recurring expenses of the Ipiranga brand. For the second quarter of 2012, these expenses are expected to be similar to the one we had on the first quarter, but they will be mainly directly to marketing campaigns related to the return on the brand to the region.

Moving now to our other distribution business, Ultragaz, in slide number five Ultragaz total volume in the first quarter grew by 6% compared to the first quarter of 2011. The volume in the bulk segment increased by 13% over the first quarter, boosted by the acquisition of Repsol in October last year, the higher consumption of large consumers and by the growth of the Brazilian economy.

In the bottle segments, volumes grew by 3%. In the year, we also had the influence of the additional two working days which contributed to a growth of approximately 3% in the Ultragaz volume. EBITDA in the first quarter totaled BRL62 million, a 15% reduction in relation to previous year, mainly due to the effects of inflation on cost and expenses.

For the second quarter, we expect to grow from volumes similar to that observed between first quarter's adjusted for the number of working days. As for the EBITDA, we have commercial initiatives and cost management initiatives underway, aimed at a gradual recovery in earnings -- margins and earnings.

Moving to Oxiteno on slide six, in this quarter, the volume grew by 19%, 24% in the domestic market, 8% outside of Brazil. Main volumes -- main growth drivers were increase sales of glycols as a result of the expansions in the ethylene oxide unit completed last year, and second, some non-scheduled stoppages of the Camacari petrochemical complex in the first quarter last year as a result of energy blackouts.

Another good news is that our core business dispatched the chemicals in the domestic market grew by 1%, resuming growth after three quarters of our customer's doing inventory adjustments due to the lower growth of the Brazilian economy.

EBITDA amounted to BRL64 million in the first quarter this year, a 14% decline in relation to first quarter of 2011. The variation is mainly due to two factors. First, in the first quarter last year, we had market conditions that we extraordinarily favorable which allowed for a superb sales mix.

We knew that there was a momentary event lasted for the first and second quarters, and then in the third quarter, it went away with the fourth quarter being a very regular quarter. The second element for a 14% decline first quarter of this year versus first quarter last year, we had in this first quarter, a reduction in the international prices of glycols, and the fact that was increased by the bigger share of glycols in our sales volume which normally happens after we do -- we finish an expansion.

Looking into the second quarter, we expect the volume grow similar to the one we had between the first quarters. In terms of EBITDA, such expected volume growth and the recent depreciation trend of the real against the dollar, allows us to expect an EBITDA close to the one we had in the second quarter last year, in spite of exceptionally high margins of that quarter as I just mentioned.

Moving on to slide number seven, we have recently announced acquisition of a specialty chemicals plant located in Pasadena, Texas, one of the most important chemical hubs in the world. As this is the first public conference call after the announcement, I would like to take this opportunity to go through the main points of the transaction and its strategic rationale.

The value of acquisition was $16 million, and Oxiteno will invest additional $15 million to retrofit the plant to its production line. Production capacity will be 32,000 tons a year, and it will Oxiteno to serve the home and personal care, food, and agro chemical sectors.

Estimated EBITDA margin for the business is similar to Oxiteno's current level, ranging between $200 to $250 which results in a normalized EBITDA of approximately $7 million and we expect the plant to start operation in early 2013.

Oxiteno already has a commercial office in the United States, and through which we established a customer base that is currently served mainly by production in Mexico. Part of this capacity will be directed to these customers, increasing and strengthening Oxiteno's position in the United States, which is the largest surfactants market in the world.

The acquisition also allows us access to competitive raw materials including the ones derived from natural gas. As you may already know, with the discoveries of shale gas in the United States, the country has become a highly competitive place for production of chemicals.

Other aspects of the low production cost in the United States are low cost of energy and a very efficient logistics infrastructure. Finally, the area available in the land that we acquire is about 200,000 square meters and this allows Oxiteno to use it as a platform for future expansions in the United States.

Talking about our storage business, Ultracargo, on slide number eight, average storage increased by 5% as a result of the increase of occupancy at the Santos terminal due to the increased handling of ethanol in this quarter. In terms of results, Ultracargo present a significant EBITDA and EBITDA margin progression, reaching a record level of EBITDA margin of 47% in this first quarter.

Much of this increase in EBITDA margin is the result of the operating leverage arising from the capacity expansions completed in the last quarters. In absolute terms, EBITDA in the first quarter was 15% higher than the same period of last year due to increased average storage in the terminals and an improved mix of handled products and contracts.

For the current quarter, we expect the same pace of growth that we had in the first quarter. This growth should accelerate in the third quarter when the other expansions will be operational. We have expansions scheduled to enter operations in 2012 in Santos and add two terminals totaling 68,000 square meters -- cubic meters, sorry, of which 12,000 cubic meters started already in the first quarter, and the remaining 56,000 will start off in the third quarter.

And the last slide, slide number nine, I would like to highlight the priorities we're working on. Starting by Iparanga, we continue to implement our expansion strategy in the northern part of Brazil where Iparanga has a smaller market share than in the rest of the country and where consumption of fuels grows even faster than the rest of the country.

Investments have been and will continue to be directed both to the commercial area towards an increase of the reseller's network and to the infrastructure to the expansion of our logistic facilities. In addition, we will continue to work to capture the benefits of the overall market growth.

I want to highlight that even in a scenario with significant reduction in car sales, the fleet will continue to grow significantly. For example, if we were to consider a 20% drop in new car sales in 2012, according to our estimates, we would still see a 6% growth in the average fleet.

At Ultragaz, we'll continue to present volume growth, mailing the bulk segment where we have an outstanding leadership position and where our volumes are strongly linked to the economic performance. The acquisition of Repsol will also contribute to this volume growth. On the results front, the focus will be on the commercial operational process optimization initiatives, aiming at recovering margins and resuming growth of EBITDA.

In Oxiteno, we concluded last year an important investment cycle in capacity expansion and we're starting to see the benefits of maturing those investments. This should provide an increased sales volumes for the next few years in addition to an improved sales mix as the Brazilian market grows.

I'll remind you that after an expansion, we first have an expansion in the volumes, in the commodities and in the international market. And then, as the Brazilian market grows, we redirect these volumes to the domestic market. Finally, in Oxiteno, as we mentioned, we will continue to work on our expansion in the United States due to our very good customer traction and great cost benefits.

At Ultracargo, we're working on the conclusion of the expansions scheduled for 2012 which will benefit earnings for the rest of 2012, and it will have its full effect in 2013. Given the consistent growth of the market during the year of 2013, we will already start working on the next cycle of Ultracargo's terminals expansion.

In addition to this outlook, we are always [attent] to possible acquisitions, and at this moment, we have tangible opportunities in our core business, with some of them possibly materializing in the short term.

Speaking of the outlook in a broader term, you might have seen that we announced on Wednesday the succession of our CEO. The decision is part of a planned succession process which has been regularly carried out by the executive board of the Company and the executive board of each one of our businesses. Starting January 1st next year, Thilo Mannhardt will hold the position of Ultrapar's CEO.

Thilo is currently a member of our board of directors, and at that same date, Pedro Wongtschowski, the current CEO and my boss will become a member of the board of directors. Thilo has developed his professional career with Mackenzie where he was until recently a senior partner. He was one of the executives responsible for launching and managing Mackenzie in Brazil in the '80s and '90s, and he also run Mackenzie operations in South Africa and in Mexico.

At Ultrapar, he has participated intentionally for 15 years in the strategic and operational projects in our business, and has been the member of our board for now a year. As a consequence of these 15 years of work with Ultra, he's completely familiar with the Company and shares the vision of business and management philosophy with the board of directors and the Company's current executive board.

As a consequence, Thilo's appointment to CEO and Pedro's appointment to member of the board of directors represents the continuity of Ultrapar, business and management philosophies. Thank you very much for your attention. I'm available together with the team here to answer your questions.

Thank you. The floor is now open for questions. (Operator Instructions) Frank McGann, Bank of America/Merrill Lynch.

Hello. Good afternoon. Just two questions, if I might. One is you're expanding in the mid-west and north and northeast of the country. I was just wondering if you could, perhaps, speak to the profitability of the stations that you're opening relative to the existing stations, how we should think about that, what terms you have maybe over the short term as well over the intermediate and long term that you would expect to have from the expansion.

And then secondly, looking at the LPG distribution segment, in terms of cost, it seems to have crimped or your ability to pass through cost increases seemed to have crimped margins. I was just wondering maybe you could give us a little more information on what cost specifically may be causing the issue, how quickly you think you can resolve that.

And then, perhaps, also, as part of that, the long-term competitiveness of that business, I'm just wondering what trends you're seeing in terms of competition and how you expect the business to develop over the next three to five years?

Thank you very much, Frank. Thanks for attending the call. On expansion to the north, and I'm using north to mean, mid-west, north and northeast of Brazil, we don't see at the moment a great deal of different in profitability, although I have to say it is not very easy to measure, because sometimes things are not like-for-like.

But overall, we don't see a big difference in profitability. However, the northern part of Brazil has a much bigger part participation of the so-called white flags than the south of Brazil, and we are working through our trade association, together with the other market participants, to reduce informality in those regions. We are also, through the process of expanding the capillarity of our network, converting many of the white flags into a brand at Iparanga gas station.

And thus both things helped to align prices and margins to a level playing field given that the white flags charge lower prices on the back of artificially low costs, which they attained by not paying taxes or selling product below specification.

So the potential for margin in the north part of Brazil is bigger than the potential for margin expansion in the south of Brazil due to that evolution of the market. It is not something that it's going to happen from one way to the other. It's been happening now for a good 18 months and will continue to happen probably for a few years until the participation of the white flags has been significantly reduced.

In the northern part of Brazil, it currently sits at about 26%. Overall, the country is 20% and that percentage is declining.

In Ultragaz, this is -- Ultragaz deals with inflation historically over time and the only reason this has become a topic of discussion at this time is that inflation last year was very high. Most collective labor agreements will reach around 8% to 10% for example in the country.

Most freight contracts have automatic inflation adjustment mechanisms. So the inflation is high. That triggers all sorts of things and it's obviously more laborious to work the alignment of prices when you have 4% or 5% inflation than when you have 7%, 8%, 9% inflation.

Over time, we've dealt with it. This is not the first time. It won't be the last time. Over time, we have dealt in the past and we will deal with it through a combination of commercial initiatives and also a combination of debt with looking for ways to do the same with less cost, and we're in the midst of doing that. We expect a gradual recovery in margins, some of which could already have, in fact, in the second quarter.

In terms of longer term, if we look back in the last few years, in spite of this moment of lower margin, margins have increased as a trend, and I don't see a reason why that's not a continuing trend because I think that's been triggered by a different type of dynamic in the market resulting from about four players having 85% of it.

There is something that is in the radar screen for some years for now. It could fall in your timeframe of three to four years and it's related to the fact that with all the refineries that Petrobras is building. Brazil will be producing a lot more LPG in possibly three or four years.

And today, Brazil imports LPG something to the tune of 15% and regulations are heritage from the time Brazil was a very heavy importer of LPG and, therefore, it was not in the interest of the country to incentivize the consumption of LPG. If and when we have all the refineries of Petrobas and potentially have gas from pre-salt there'll be abundant LPG in the country. And then these restrictive regulations will no longer make sense.

So all of this to say that there is a potential and a few years from now for a new cycle of growth in the LPG market, and we continuously monitor that aspect or work through our trade association, with the government, trying to draft legislation and discuss legislation that can make the restrictions, prepare the restrictions to be lifted by the time Brazil has a lot more LPG.

Sorry for the long answer, but as I know some of you think on the long term, I thought it was worth going to it.

That's really helpful. If I could maybe follow up just a little bit on just the very end there. Do you expect the greater supply on balance to be a position, because it gives you lower cost supply? Or is it likely to lead a more competitive market that could hurt margins?

We expect to be positive on balance, because the biggest effect is not so much in the increased supply effect on a potentially lower price. But it's the fact that from a macroeconomic standpoint in the country with abundant supply, Brazil will not have to import LPG anymore and, therefore, the prohibitions for the use of LPG in a lot of applications will be lifted. So the benefit in volumes is potentially very large.

Okay, great. That's very interesting. Thank you.

(Operator Instructions). Marcus Sequeira, Deutsche Bank.

Thank you. Hello, Andre, again. Just one question. I know it's a bit difficult to respond. It is about possible M&A moves from you guys. From the Portuguese conference call, you said that this -- we could see something soon. But I know that you can't comment on more specific now, but on other segments like natural gas distribution, we've seen a recent transaction in the market, and also if you could comment on the possibilities of expanding on petrochemicals in the West given your recent acquisition there.

How real with regards to the US and how soon that could take place? And on the natural gas distribution, I just wonder if you have looked at the possibility of entering this business, and if you could share with us some of your thoughts.

Marcus, thanks for your presence again. In fact, first of all, I wanted to rectify a number that I mentioned on the Portuguese session, which I think was the result of a question maybe you asked. The question was, what was the difference between international and local prices for LPG and if there was an increase in LPG prices, refining prices, will that have an effect in our volumes.

At the Brazilian-Portuguese conference call, I mentioned that in relation to LPG use for residential uses, the local price is similar to the international price. That's correct. But for LPG use -- I'm sorry, for LPG use for residential consumption, I mentioned that there was a difference of 15% and that difference is in fact 30%. So it's much bigger, twice as much as I had in my last data.

On the LPG used for industrial and commercial use, there is no difference, and that's you know, the information remains. The difference between 15% and 10% doesn't really change the -- I think the important part of the question which was, you know, if there was an increase in LPG cost and price, would that affect volumes? And that really doesn't change the answer.

Now coming to your questions, natural gas, that's a business that we have known for a long time. IT competes with Ultragaz in a few segments particularly the industrial segment, and we've known it very well. There is one fundamental difference in that business to any of the four business that we have, and that fundamental difference is that natural gas distribution is a regulated business.

And we believe that that somewhat could constrain our possibilities in terms of profitability. So we have not pursue actively an acquisition in natural gas at this stage.

In relation to the United States, we're doing our first step establishing a production facility in the US during this year, starting production next year, we -- as we progress, we will work towards subsequent strategic moves in the United States.

They could be building a bigger plant in the site that we have acquired. It could be doing subsequent acquisitions in the country as we become more familiar and more confident, our business plant.

There is at this moment in the United States, nothing under negotiation. All the efforts are focused on putting the plant to work, and I think it's likely that once we see it progressing, and producing results, we would do subsequent steps.

Perfect. Thank you very much 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.

Thank you very much. There was a specific question in the Portuguese conference call about acquisitions. Let me take just another minute of you to repeat what I mentioned, given that I think we are at the moment where there are some tangible opportunities.

And In Ipiranga, we have had now for you know, good 18 months, a portfolio of potential regional companies that we'd like to buy. We monitor them in a continuous bases just -- we need the right time to approach them for a transaction.

There is at this moment one company which whom we have now engaged, and I think there is a reasonable possibility we end up acquiring it. It is, you know, in terms of size, similar to the acquisition we did in 2010 of the entry.

At Ultragaz, we are in the initial stages of looking at an acquisition outside of Brazil, and Latin America in one of the countries with good economic environment, and good regulatory environment given the very large market of LPG in Brazil in relation to Ultragaz is a relatively small acquisition.

At Oxiteno, as I just mentioned, we 're not working towards an acquisition in the United States in the moment. The focus there now is indeed get the plant working. But we are working on one acquisition in Latin America to further strengthen our position in the region.

If it happens, it's an acquisition of order magnitude something like $90 million. Last, at Ultracargo, we're in the midst of a discussion to acquire a terminal in of course that we don't operate.

You'll be marking an entrance in a new port, opening new possibilities for further expansions. We're talking an acquisition that has an order and magnitude BRL200 million.

So we're quite busy. Some of these could be maturating on the very short term, and we look forward to that. Thank you very much again for your time. Our investor relations team is available for any further questions you have, and I look forward to seeing you on the upcoming conference. Thank you very much.

Thank you. This concludes today's Ultrapar's first quarter 2012 results conference call. You may disconnect your lines at this time.