Ultrapar Participacoes SA (UGP) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's 4Q14 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at www.ultra.com.br/ri. 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 again just 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 may 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 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 perspective. Mr. Covre, you may begin the conference.

Thank you very much. Good morning everyone. Great pleasure to be here with you to discuss Ultrapar's performance and the fourth quarter and in the year of 2014, here to help me answer your questions, I have executive officers and our business units and Investor Relations' team.

I'd like to start our discussion by emphasizing Ultrapar's consolidated performance last year, which was once again very good, particularly in light of the worsening macroeconomic scenario, creating an increasingly challenging business environment, economic environment was marked by successive reductions into GDP growth expectations. We started the year at around 2%, and it's currently prompting towards a negative progression, according the first graph at the bottom of the slide, as a result those sales that occurred under wealth LPG in Ultra gas. In Specialty chemicals, so the industrial by Occidental or which are all strongly related to GDP were flattish in 2014, in relation to the FX rates, worsening scenario in the economy is normally followed by a depreciation of that rial.

However, what makes 2014 not only challenging but also a typical is the almost a positive movement procured in the first nine months, until September, the rial appreciated or remained stable against the US dollar. This fact created a second negative effect in Oxiteno.

In addition to the lower volumes as this contribution margin is in dollars. We also saw a strong growth in the interest rates compared to 2013, which increased financial expenses in a year in which EBITDA's progression was pressured by the factors, I just mentioned.

All considered in 2014. We presented consolidated EBITDA of [3.2] billion and net earnings of 1.3 billion 8% and 2% above previous year, our consistent earnings growth and the resulting cash generation has allowed the company to increased dividends.

The payment of 389 million reality dividends for the second half of the year that is approved totaling 779 million in the year. This amount is 5% percent higher than the dividends declared on 2015 earnings, dividend represent a 3% dividend yield over the average price of 2014 before maintain the level, which in years and educating our confidence for the good performance look into.

Overseas like forward to comment on the performance of our businesses and starting with Ipiranga, as seen prior periods, the growth in volumes was boosted by the increase in the light vehicle fleet, which positively influences sales in the field for lighter vehicles, as you can see in the bottom left chart, the Brazilian vehicle fleet estimated to have grown at about 5.5% compared to 2013, this estimate includes the 7% drop in licensing of new vehicles, the happened in 2014. Aiming at reaping the benefits of the market growth and to capture market share from the white flags, we have been investing for several years in the expansion of the Ipiranga service station network through the conversion of unbranded service stations and opening of new ones.

Following this strategy, we closed 2014 with 7,056 service stations, 5% above the number of service stations at the end of 2013. These investments has allowed the Company to grow faster than the market in the reseller segment and obtain an improved sales mix, as shown in the bottom right graph.

The reseller segment that we find highest potential to our strategy of differentiation through constant innovation and services and convenience, helping to increase the flow of traffic to service station, helping to increase customer satisfaction and loyalty. With this strategy and consumer has products and services with higher value added. The resellers enjoy an additional source of revenue in a differentiated position. Therefore, maximizing the profitability of the whole value chain, including the one of the Ipiranga.

This trial also be a convenience and service and the gas stations has become ground on in Brazil through a number of marketing campaigns and those famous again are ask Ipiranga service stations and Ipiranga a complete place waiting for yeild, both the bands summarized the value proposition to Ipiranga's clients. With all elements, Ipiranga recorded a 14% growth in the EBITDA compared to fourth quarter of 2013 and a 13% growth compared to 2013, even considering the already mentioned weak economic environment, which mainly impacted in this sales. We had some extraordinary impact in the fourth quarter that we highlighted in our earnings release and are shown in the EBITDA chart in this slide. These effects were in a very similar dimension in the fourth quarter of 2013 and therefore are neutral on the comparison of the two quarters. Now moving onto slide five, I'd like to talk a little about the expansion of the service network strategy and our strategy of depreciation in convenience and service, which as I mentioned has helped unstated results. Our expansion has been focused in the Midwest, Northeast and North regions of Brazil. On the left side of the slide, we showed its growth potential. In these regions car penetration is 11%, lower than the rest of the country. As a result, these regions has presented above national average growth of fleet and fuels consumption. This illustrates Ipiranga continued growth potential in this regions supported by the increase in the light vehicle fleet and accordingly in the consumption of fuels for light vehicles.

Investment in new service stations and conversion of unbranded ones allowed Ipiranga network to grow by 12% in this regions in 2014, compared to 3% in the South and Southeast regions. In the last three years, we've added 318 service stations in the Midwest, Northeast and North regions of Brazil compared with 216 in the West of the country.

On the right side of the slide show several activities that are carried during the year to strengthening Ipiranga's attributes of convenience and services, which as I mentioned one of the pillars of our strategy. am/pm, Brazil's largest convenience store chain continue to grow by increase its penetration in the Ipiranga service station, and that work with a 9% increase in total stores reaching a 1708 units in the year. Of those 360 now have break rates and added feature though we are declined across the country.

One the other three in 2014 was beer case and these average purchasing experience for am/pm store customers, it is a locking cool container with a large variety of the national and its offered beer brands. This is the concept of the beer, which has been a great success with independent network in 2014 a [104] am/pm stores throughout Brazil started off during the beer case. We also had a significant growth in ConectCar, which operates in the segment of electronic payments for tolls parking and fuels, which leads to 350,000 customers and it's already accepted in almost all toll roads in Brazil. The raw materials of the advantage Brazil's largest loyalty programs reached 18 million subscribers at end of the year.

In summary, we had a year of relevant strengthening of convenience and services, activities of Ipiranga's network, which will continue -- we intend to continue going forward.

Now looking into the current quarter to talk about our expectations. First, I'd like to remember you, that these are not specific projections, the trends and levels of progressions. At Ipiranga, the long-term trends when the macroeconomic scenario that influenced the fourth quarter have not changed and (inaudible) present in the first quarter of 2015.

However we expect to have a better earnings projection than that in the fourth quarter due to well known elements, one of imports of derivatives and the temporary inventory gains, the later one (inaudible) in the purchasing costs of derivatives in Brazil.

Turning to Oxiteno on slide 6. Total sales volume increased by 9% in the quarter and remained stable in the year. Glycol sales increased in the three comparisons as a result of the scheduled stoppage of the Camacari petrochemical complex in the second half of 2013, which impacted glycol sales in the period. In (inaudible) specialty chemicals sales was down 3% in both yearly and quarterly comparisons. This decrease reflects the different economic conditions in the two periods.

In 2013, the Brazilian economy was grown contrary to 2014. Additionally, we have highlighted since the beginning of the year, we have reduced the level of operations in Venezuela, since the first quarter of 2014 due to the limitations in importing raw materials in countries, which have also contributed the overall decrease in the volume specialty chemicals, Oxiteno's EBITDA in the fourth quarter dropped by 9%. Those are the full year with an 8% decrease compared to 2013. In addition to the volume, a less favorable sales mix and lowered vehicle prices in the international market also influence the results. Particularly in the fourth quarter, we also had the facts of extraordinary expenses made on studies and projects partially offset by the rial. But years a whole an additional and important factor on Oriento's low results with a particularly a typical combination of GDP and fixed rate that I mentioned at the beginning of the presentation, in which that rial remain stable against the dollar and through September despite the slowdown of the column.

But in the current quarter, volume trends at the European 2014 have not changed. On the other hand, we had changes in two elements. The rial is now weakening and the cost of raw materials are decreasing as a result of the lower oil prices, which allows us to have an EBITDA margin expectation above the levels seen in power completion of the expansion cycle in 2012.

Moving to slide seven, an Ultragaz in the fourth quarter sales volume grew 2%. The growth was mainly due to commercial initiatives and market growth in the North, Northeast regions and the investments made to capture new clients in our total segments, which are the residential condominiums and small and medium-sized business. Such growth was partially offset by the lower demand of large customers influenced by the microeconomic scenario.

EBITDA increased by 30% in the quarter mainly as a result of increased sales volume, commercial initiatives of differentiation and sales channel management, reduction of costs and expenses, and the beginning of the higher requalification and (inaudible) of LPG bottles in the fourth quarter of 2013. Volume and EBITDA behavior for the year was influenced by basically the same factors of the fourth quarter with a fact of the re-qualification of an increased number of LPG bottles present and to the end of the first half of the year.

Looking ahead, general trends have been changed. The progression seen in volumes in EBITDA in 2014 is representative for the fourth quarter except by the fact of the increase in re-qualification on the first half of 2014. And with that we expect an EBITDA progression in the first quarter of 2015 higher than that one observed between the years of 2014 and 2015.

Moving to Ultracargo, it's average storage had a 2% reduction in the quarter and a 3% increase in the year. The main elements that negatively influenced this performance to lower exports of ethanol and the facts of the slowdown of economy on the movements in handling of chemicals. In the other hand, we had a positive effects from the higher handling of fuel oil for thermoelectric plants and automotive fuels, due to the growth of these segments.

Ultracargo's EBITDA grew 1% in the quarter and 6% in the year, mainly due to tariff incurring adjustments and lower expenses related to potential investment projects. Regarding the first quarter here as well the performance in 2014 is representative of trends both in volume and EBITDA and therefore we expect for the first quarter of the year on a dilution similar to that off 2014.

Moving now to slide nine to discuss our (inaudible) of Extrafarma. During the fourth quarter that as planned we completed Extrafarma's speculation and start a more accelerated growth. This included adapting our structures in the design process to allow us a factory opening of stores seeking a great specialization and maturity. Those activities completed and had been over to a start our more accelerated expansion with opening of 13 stores in the quarter. We finished a year with 223 stores in the North and Northeast regions of 15% increase inflation from last year.

Gross revenues increased by 18% in the quarter closing the year with a 16% growth, above the average growth of the national market as measured by Abrafarma. The growth was due to the increase in the same-store sales and the increase in the number of drugstores. Due to the integration of Ultrapar and the structuring of the Extarfarma for more accelerated growth include inclined expenses were R$15 million in the quarter and R$39 million in the year as previously announced. Extrafarma's EBITDA in the quarter was R$3 million or if we exclude the integration and structuring expenses R$19 million, which is a 69% increase in capacity of fourth quarter of 2013. Such growth is due to the greater revenue partially offset by the greater number of stores opened last in the year ago, which had on the first year of live negative EBITDA. In 2014, as the whole EBITDA reached R$30 million, if we exclude again the integration restructuring expenses R$69 million a 29% increase.

Before we talk about the first quarter trends, I like to remind you that separation of the integration and structuring expenses used in 2014 was heavy objective of presenting a comparison dates with a results of 2013. From now on, we'll start talking about simply the reported EBITDA of our 2015 and the 2014. Of the expenses that was made for integration and structuring approximately a little more than how our recurring expenses as they were related to restructuring, creating new structures and processes for the factory opening the stores. For the first quarter, the trend of EBITDA is close to that reported in the fourth quarter, affected by the costs of the new distribution center and the faster opening of stores during the last quarter, which as I mentioned has negative EBITDA.

Before closing the discussion, we look our overall longer-term outlook. I'd like to quickly pass you a few messages on slide 10. As you might know we completed 15 years as a publicly traded company in 2014. Since the IPO in 1999, we had invested R$20 billion in the organic projects and acquisitions. This is excellent that allowed increased geographical footprint of the Ipiranga's and Ultragaz's distribution network, the increasing quality than sellers in differentiation footprints.

At Oxiteno, we strengthened the focus on specialty chemicals with great differentiation scale. At Ultracargo, it significantly expanded our storage capacity with expanded terminals and wider geographical coverage. Finally invested in entering the new segment as the Extrafarma, which combined with other businesses form part of sustained growth platform of the company.

During, this 15 years, the ballet code at an average of 20% annual growth into the EBITDA, 23% in net earnings and total shareholder return of 22% per year on average.

Over this period. We have undergone through the most diverse economic and political environments, both in Brazil and abroad. For example, we had Brazilian GDP growing 7.50% and dropping by 0.3%, had the Brazilian exchange rate at R$4 and R$1.50 and the interest rates in Brazil at 7.50% per year at 45% prior year.

Net inflation of 3.50% per year and 12.50% per year, we had oil prices at $130 and a $10 per barrel, and in spite of this very diverse economic and political environment, we have reached approximately 20% of revenue growth in EBITDA earnings in shareholders return.

This performance on the ground through this most of diversely manners, the consequence of the investments made Brazilian nature of our business, our corporate governance designed to value creation and that execution capability of our internal teams.

Looking to the future, in tend to continue to make investments. We paid the way for a similar trajectory as shown in the divestment plans for 2015, which is in the last slide, slide 11.

The investment plan approved by the Board of Directors, who is here amounts to R$1.4 billion, which demonstrate the of good opportunities to grow, to grow through increased scale and completed the gains as well as utilization of existing operations, amount but now finish occurs, we have a Ipiranga expansion of the service station network of am/pm and Jet oil, focused on the Midwest, Northeast and North regions of Brazil. As well as the expansion of the related logistics infrastructure.

At Ultragaz, the growth initiatives are mainly focused on capturing new clients in the small box segment and continuing the construction of the new (inaudible) plant in Southeast (inaudible), at Oxiteno will have investments in the modernization of its production plants in an integrated probability. At Extrafarma, we invest to accelerate the opening of new stores and finally the Ultracargo's main growth investment good expansion EBITDA key terminal attractive term which we expect to start operating in 2016. The fundamentals of our business in these investments allows us to have visibility to continue the growth trajectory of the mix periods.

I conclude here while we prepared and we are now available to your questions.

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

Good day. Two questions; One, just in terms of demand trends. I'm just wondering how you're seeing picking Ipiranga demand growth in the early part of the year and what your expectations are now that it seems that the economy is weakening somewhat more than previously been expected? And then secondly, a little bit more of a big picture question, but just looking at your investment program and the returns on your different businesses. I'm wondering how you're seeing the return on investment, say, an Extrafarma versus Ipiranga versus some of your other segments and how that affects your decision of work capital?

Hi Frank, we're happy that you are with us today. In terms of demand trends for Ipiranga, we continue to see the combined demand of gasoline, turmoil and natural gas for vehicles following the deletion of the fleet cars. For last year, the fleet grew about 6% -- 5.5%, 6% and Ultracycle fuels as well. And what we are seeing at the beginning of this year and it's indeed the expectation that I passed just a few moments ago. There is diesel, its correlation is enough as you know, (inaudible) with economy, so we have had a flattish to negative evolution and that's the trend for the moment

Thanks to the return investment question we tend to look at our investment decisions on a case-by-case basis, considering the cost of capital of each one of our business units and the risks the risk will follow the opportunity and this needs potential benefits. A good investment is (inaudible) book sales. Want to have significant NPV -- positive NPV and we will now compare the returns of the project and business areas -- with project and business team, and so far we haven't done that, because our investment process has not so far (inaudible) was to have more projects -- more cash than projects. Moreover if we have the positive NPV project, we'll do it. If we don't have the positive NPV project and we don't do it. We haven't had the situation where we only have as much cash to deal with too many positive NPV projects or organically -- it's our philosophy to do that on a case-by-case basis, calling the reason we never had the situation where we have access projects in relation to excess cash, is that our corporate governance is designed both to generate a lot of business opportunities, but also to the skill and separate the good ones from the bad ones, say when it comes to decide, we only have been very good one that ever had.

Okay, thank you very much.

Gustavo Gattass, BTG Pactual.

I had three quick questions. The very first one, it's probably more of an accounting or holding Company allocation nature, I'm just trying to understand it's been, I think the second quarter, we've seen in quite a long time, in which if we add up the EBITDA that you guys have for business unit that is reported. We get a significantly larger number than the consolidated sector. So this quarter in particular we had about BRL17 million, up BRL17 million less than the EBITDA, then the sum would seem to indicate. And I just wanted to check, if there is any particular event that was raising that or if there is any kind of a shift in the accounting policy, that you guys have that would lead us to have (inaudible) not for the future. So that's the first point.

The second point is just a quick check. When you mentioned in your outlook for the first quarter in Ipiranga, I was writing it down and I got -- we expect to have better earnings projections than in the fourth quarter. I just wanted to double check, did you mean you were looking for something that's better in absolute terms or was it a more positive trend than what you were seeing before?

And the third one, if I could just touch on this. Over the course of this last year, we heard a lot of noise about the potential for changing in the procedures that will really done in your negotiations between yourself and service stations over those five-year contract, I was just wondering if you could talk a lot anything about whether or not that idea to potentially change the relationship you have with our service stations is evolving in any different way or if you guys think that it's just going to continue in the way that has been for the last years? Thank you.

Well, thanks for the questions. On the first one, there is no shift in accounting policies. The numbers that you see relates to two things. One is the negative EBITDA of ConectCar which is inspite of it's early success, it's in different stages of its life and therefore has negative EBITDA. Second element there is the number of expenses related to the Extrafarma transaction. So those are basically the two most relevant ones in explaining (inaudible) 80% and 90% of that.

In Ipiranga.

Are those, sorry, but are those in any way you're recurring?

Well, Extrafarma's -- no, it's finished now ConnectCar. I want to believe that obviously will be a positive EBITDA at some point in the future, but it will probably take next year or so. Can I move to the next one?

Yeah, sure. Sorry about that.

Okay. And the expectations for Ipiranga in the first quarter, I meant to say that the percentage of revolution will be higher than the percentages of revolution between four quarters.

Perfect.

Okay. And the third question, I believe is about and suppose it's about the way so called beneficiation works. It seems when we call in Brazil (inaudible)product, is that correct?

Yes.

Well, those ways of contraction became and the service station almost exist in the market. The more common one is where you make net from payment and gas station owner signs the contract, that amount of money is not in the use to refer this to gas station or to construct if it's a new gas station and it's accounted as a intangible asset and it's amortized over the last of the contract.

The second type is even in a discount to the gas station owner and the price of flues that it acquires, if we achieve certain metrics normally of volume purchase over the life of the contract. This one is accountant as the discount to quite. So it reduces gross margins. Most of the market practice both of them and we're are not different. The first one, the upfront one is by far the most relevant one. We have heard through the investment community that one of our competitors impended to do more of the second type and maybe that's what you're referred (inaudible). We are opened to both cases, it depends on what fits better our interests and our (inaudible) interest. And the evaluation of this subject will depend on floor and how the interest in both parts will move over time.

(Operator Instructions) Marcello [Audi], Cardinal partners.

Hello, Andre. I have two questions. One is, you always -- recently gave the guidance that the electricity of the Ultracycle should be consider third, in line with the increase of the fleet. What is changing now is that the disposable income of the families will likely deteriorate, which is something that we haven't seen, at least not since 2003. Do you consider a more conservative assumption on the growth of the auto, cycle in the coming years?

Well, we had the last year as an indication already, because last year was not a good year. As you expect of phenomenon scenario and Auto, cycle good growing in the line of the fleet and we're not seeing anything different. So far this year. So we going to extract any meaningful effect in relation to that.

Okay. And my second question is, do you plan the launching of any new initiatives regarding the loyalty strategy of customers, such as surgical dodging the A&P and any new strategy related to loyalty plans for this year or next?

I am not tell that we have that the loss of the prevent our Ipiranga distribution was a retail mentality. And it's one of the well known abstracts of retail management have to go novelties of clients, we have some outsourcing in India something once in every year. A number of years ago. The Ipiranga branded credit card and the non-accruals of advantage then the bakery. I think last year we had the beer case as I mentioned, and they'll be one or two new things this year, which will be able to talk about once they've launched largest scale maybe in the Mexico -- start in the next quarter.

Okay. Thank you.

And ladies and gentlemen, that will conclude our question and answer session. I would like to turn the conference back over to Mr. Andre Covre for any closing remarks.

Thank you very much for your presence, we will look forward to have you on first quarter, I just want to finish with deteriorating few aspects, one is the consensus, that the economic environment in Brazil inspires a lot of caution, but we feel very blast in this position while we can look towards 2015 extracting a better year that have in 2014 than the revolution of EBITDA and (inaudible). Look forward to see you in the next call. Thanks.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may disconnect your lines at this time.