Ultrapar Participacoes SA (UGP) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's 4Q15 and 2015 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 Pires, 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&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. Pires. Mr. Pires, you may begin the conference.

Thank you very much. Good morning, everyone. It's a great pleasure to be here with you to discuss Ultrapar's performance in the fourth quarter and in the year of 2015. Here with me helping to answer your questions, I have the executives from our businesses and the Investors Relations team.

Starting with slide number 3; the 2015 results were very positive, especially considering the challenging macroeconomic scenario in Brazil. I'd like to show Ultrapar's consolidated performance here in slide number 3. The graphs on the bottom of the slide show a deterioration trend for some indicators, [combined] inflation rates well above target, declining economic activity, increasing interest rates, and significant depreciation of the Real.

According to market forecasts, the GDP of 2015 should have declined between 3% and 4%, which has impacted the diesel sales volume at Ipiranga, bulk volume LPG at Ultragaz, and specialty chemicals in the domestic market of Oxiteno; all strongly correlated to GDP performance. Contrary to the economic environment, the resilience of our business, the investments made and the focus on differentiation and innovation allow us to keep on growing and creating value.

In 2015, we reached consolidated EBITDA of BRL4 billion, a 25% growth over 2014. Oxiteno's growth accounted for nearly half of Ultrapar's EBITDA expansion in 2015. Net earnings reached BRL1.5 billion, growing by 21% over 2014, with a return on equity of 19%. The same comments and explanation verified above are right for the fourth quarter of 2015. However, I'd like to highlight a specific point. In the third quarter earnings release, we saw a decrease in net earnings due to higher financial expenses resulting from a seasonally higher net debt and to the Real drop of nearly 30%.

As I mentioned at the time, in the fourth quarter we are expecting a reduction in our financial leverage and expenses, which could be observed. Our net debt at the end of 2015 was BRL4.9 billion, with a net debt-to-EBITDA ratio of 1.2 times. Our consistent earnings growth and the resulting cash generation once again allowed us to increase dividends. The Board approved a payment of BRL434 million in dividends for the second half of the year, equivalent to BRL0.80 per share reaching BRL871 million in 2015.

This amount is 12% higher than the dividends declared on 2014 earnings. Dividends per share grew a little more, because of the [sharp] share buyback program throughout 2015. The dividends represent a 2.5% dividend yield over the average share price in 2015, keeping the level of recent years, which indicates our confidence that we will continue to deliver good performance.

Moving now to the performance of our business, slide number 4, and beginning with Ipiranga. Looking at demand growth drivers, the fleet has probably grown around 3% in 2015, even with the 26% fall in light vehicle sales during the year. In addition, our service station network grew by 2.5% as a result of our constant investments in converting unbranded gas stations and opening new ones. The focus of these investments is the Midwest, North and Northeast regions of Brazil.

These are the regions with greater opportunities of converting unbranded service stations, and they also present the highest fuel consumption growth rates in Brazil. In these regions in 2015, our service stations network grew by 7%, and our volume also grew by 7% compared to 2014. In 2015, we had a gross addition of 335 new service stations to our network throughout Brazil, closing the year with 7,230 service stations.

In addition to the service station network expansion, we continue our strategy of differentiation through innovation in products and services and convenience. Ipiranga expanded am/pm, Brazil's largest convenience store network by 12% in 2015 and continue to roll out a series of differentiation initiatives. With this strategy, customers are offered higher value added products and services, while resellers are provided with an additional source of revenue and differentiation, thus maximizing value creation in the chain as a whole.

In summary, we continue to strengthen our business by relying on its continued growth. This led us to a 2% increase in Otto cycle sales volume in 2015. In the same period, diesel sales volume fell 2% due to macroeconomic scenario. Specifically in the fourth quarter of 2015, diesel sales were down 1% compared to the same period of 2014, reflecting the deterioration of the economy. Otto cycle volumes in the fourth quarter of 2015 were down by 3%, strongly influenced by the sharp deterioration in unemployment rate, and by the relationship between diesel and gasoline prices versus the reduction of disposable income.

Throughout the quarters of 2014 and 2015, we had one-off effects that influenced the short-term performance, mainly in fuel costs. In the fourth quarters, gasoline and diesel prices increased by Petrobras generated higher temporary inventory gains in the fourth quarter of 2015, as mentioned below in the EBITDA chart. This factor together with our differentiation strategy contributed for the 22% EBITDA growth over the fourth quarter of 2014. In the year, Ipiranga had a 21% EBITDA growth over 2014, mainly due to the same factors mentioned in the quarterly explanation.

The volume trend observed in late 2015 should remain for the first quarter of 2016. Unemployment effects, lower disposable incomes, and fuel price increases affected Otto cycle with more intensity by the end of the year. However, when the economic environment stabilizes, we'd be well positioned to keep growing due to our investments in network expansion and to our strategy. On the EBITDA side, we had a significant influence of temporary inventory gains due to the increase of CD tax in the first quarter of 2015. Excluding those effects, growth should return to previous recurring levels.

Now, moving to Oxiteno in slide number 5. Total sales volume at Oxiteno fell 14% in the quarter and 7% in the year, reflecting the further deterioration of the economy observed in the fourth quarter. The volume of specialty chemicals was 14% lower compared to the fourth quarter of 2014 and 8% lower in the annual comparison. This reduction is the result of the strong contraction of the Brazilian economy, which impacted the volume of specialty chemicals in the domestic market. We also suffered the impact of the unscheduled stoppage of the Maua plant, as a result of the fire accident in our supplier.

In order to continue serving our customers with minimal impact during the 40 day stoppage of the Maua plant, Oxiteno implemented an alternative service plan to products taken from its plant in other locations, incurring an additional cost. Glycol sales decreased in both comparisons as this is a more volatile product in terms of prices and demand.

In spite of the lower volume, Oxiteno's EBITDA totaled BRL180 million in the fourth quarter of 2015, an increase of 84% over the fourth quarter of 2014, due to the resilience of margins of specialty chemicals, coupled with a 51% weaker Real against the US dollar. This factors were negatively impacted by the effects of the unscheduled stoppage of the Maua plant in the amount of BRL9 million. In 2015, EBITDA grew by 83% compared to 2014.

For the short-term, the economic downturn will continue to impact volumes, but the effects of this stoppage were restricted to the fourth quarter. On the other hand, due to the current raw material prices, we expect a recovery in commodity sales. I like to remind that Glycols margins are typically lower than those of specialty chemicals.

Moving now to Ultragaz on slide number 6. In the fourth quarter of 2015, Ultragaz sales volume reached 413,000 tons, a 4% decrease compared to the fourth quarter of 2014, which was offset by commercial initiatives such as capturing new customers in bulk segments and new resellers in bottled segment. In December 2015, we had another price increase of 4% on LPG and refineries, this time in the bulk segment only. We remind that in September we had increases in bulk and bottled segment.

In 2015, Ultragaz sales volume decreased by 1% compared to 2014, mainly due to the effects of the economic slowdown that affected mainly the bulk segment. Such reduction was partially offset by the capture of new customers in the residential condominiums and small and medium-sized businesses segments, and by the 1% growth in the bottled segment.

In recent years, in addition to strong cost control culture, Ultragaz has also focused its initiatives in innovation and differentiation aiming to add more quality and convenience to its customers. Those initiatives include, for instance, reseller qualification programs, faster installations of Ultra system, Ipiranga's loyalty program, Kilometer de Vantagens for Ultragaz consumers, among others. With this background, Ultragaz EBITDA increased by 33% in the fourth quarter. In 2015, EBITDA increased by 17% compared to 2014. Looking at the future, we expect a pace of business and results similar to those observed in the fourth quarter of 2015.

Now, let's talk about our liquid bulk storage business Ultracargo, moving on to slide number 7. Ultracargo's average storage had a 9% reduction compared to the fourth quarter of 2014 and an 8% reduction compared to 2014 as a whole. These reductions are explained by the partial interruption of the Santos terminal due to the fire accident in the beginning of April, and reduction in the handling of chemicals, partially offset by the increased fuel handling by distributors.

Ultracargo's EBITDA reached BRL13 million in the fourth quarter of 2015, a 66% decline compared to fourth quarter of 2014, mainly due to the lower handling and the partial interruption of the Santos terminal and its fire related expenses. Excluding Santos operations, other terminals reported a 30% decline in EBITDA in the fourth quarter of 2015. Over the year, Ultracargo's EBITDA decreased by 84%, and again, excluding Santos operations, other terminals reported a 5% decline in EBITDA.

The terminal is expected to be able to request the operational licensing with the authorities until the end of this year. We have completed the preparation of the decommissioning plan of the affected area, which consists in removing the equipment and structures and submitted this plan for approval by the authorities. For the current quarter, the trend recently observed for the terminals, excluding Santos, remains stable. Regarding Santos, we should have expenses related to the second phase of the decommissioning plan, and we continue to estimate Santos resuming its activities in 2017.

Moving now to slide number 8, let's discuss our retail pharmacy business, Extrafarma. Extrafarma ended 2015 with 254 stores, a net increase of 31 stores compared to December 2014, which shows a more accelerated pace of expansion. Over the year, the gross addition was 37 stores, 11 of which in the first semester and 26 in the second semester. As a result, Extrafarma ended the year as the sixth largest drug store network in Brazil according to Abrafarma, which is a retail pharmacy association, two positions above 2014.

By the end of the fourth quarter of 2015, 37% of the drug stores were under three years of operation compared to 32% in the fourth quarter of 2014. Extrafarma's gross revenues increased by 4% compared to the fourth quarter of 2014, mainly due to the 9% increase in retail revenues excluding mobile phones, resulting from the growth in the average number of drug stores and the 4% increase in same-store sales.

On the other hand, the negative effects of the macroeconomic scenario led to a higher level of discounts among players and a 20% decrease in mobile phone sales. In 2015, Extrafarma's gross revenues increased by 21%, also due to the increase in the number of drug stores and in the same-store sales. In the fourth quarter of 2015, Extrafarma's EBITDA reached BRL9 million, an increase compared to the fourth quarter of 2014.

In the fourth quarter of 2015, Extrafarma had extraordinary gains, which resulted in a net positive effect of BRL7 million. This effect is mainly due to the inventory gains indicating better management standards in retail. In 2015, Extrafarma's EBITDA decreased by 4%. In this weak economic environment and its related effects mentioned above, we are accelerating stores opening to gain market share from the independent pharmacies, which burden EBITDA in the beginning. On the other hand, the initiatives to strengthen the retail management standards are starting to generate benefits, which will be felt throughout the year.

Now talking about our priorities and perspectives in slide number 9, we have just announced our investment plan for 2016 amounting to BRL1.8 billion. This amount is a testament to our confidence in the continuity of good opportunities to grow through increased scale and productivity gains as well as modernization of existing operations. Among the main growth initiatives, we have the expansion of Ipiranga service station network, focused on Midwest, Northeast and North regions. The expansion of its logistics infrastructure and differentiation initiatives, which will increase the offer of products, services and convenience.

As a most recent example, we have developed am/pm Super Store, which increases the offer of convenience in urban service stations by recently offering fresh products, fruits, vegetables, meat and a broader range of fast foods, which was opened in Sao Paulo recently. We also can mention am/pm [Estacao], a model developed for highway service stations.

Oxiteno will continue its focus on innovation with the development of new products, also on accelerating its international expansion with the investment in the ethoxylate plant in the United States. Ultragaz will continue its focus on differentiation in its markets. In bulk segment, Ultragaz will continue capturing new customers, the customers among small and medium-sized business in residential buildings and other business. Also in the bulk segment for large clients, Ultragaz will focus on those who value our technical differentiation and our customized solutions. In the bottled segment, its focus is the qualification and expansion of resellers.

At Ultracargo, the priority continues to be the management of the impacts derived from the accident incentives and to resume the operations, but also keeping an eye on the opportunities in the demand for port operations in Brazil. Finally, at Extrafarma we'll continue focus on the expansion of the Company and on the evolution of the retail management.

I finish here, what we have prepared for today. Thank you again for your attention and we may start now our Q&A session. Thank you very much.

(Operator instructions) Showing no questions, this concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Pires for any closing remarks.

Thank you very much for your participation. Just remind you that we're going to have our first quarter results by May 11 and our conference call on May 12. Thank you very much. Bye-bye.

Thank you. This concludes today's Ultrapar 4Q15 and 2015 Results Conference Call. You may disconnect your lines at this time.