Ultrapar Participacoes SA (UGP) 2016 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 2016 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 question-and-answer 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'd like to turn the conference over to Mr. Pires. Mr. Pires, please begin your conference.

Thank you. Good morning, everyone. It's a great pleasure to be here with you to discuss Ultrapar's performance in the first quarter of 2016. Here with me to help answering your questions, I have my colleagues form our businesses and the Investors Relations team.

Starting with slide number 3, I would like to start our presentation by an overview of the quarter, which was once again very positive and proved the resilience of our multi-business model, even in an increasingly challenging environment. The decline in GDP which have been causing unemployment to rise and real income to decrease, while inflation rates remains stubbornly high, demanded our management team's intense dedication to react against the negative effects.

In this scenario, Ultrapar's net revenues amounted to BRL20 billion in the first quarter of 2016, growing by 12% over the first quarter of 2015. Consolidated EBITDA grew by 7% in the same comparison basis to BRL1.1 billion. Net earnings remained steady on a year-on-year basis, mainly as a result of higher interest rates and net debt.

We maintained our CapEx plan reaching BRL292 million in the quarter, concentrating our initiatives towards diversification of our products and services, providing greater customers convenience and satisfaction and increasing our scale. We plan to invest BRL1.8 billion this year, reinforcing our confidence in strengthening the Company to projects that add value to our shareholders.

We have been growing EBITDA by 39 quarters in a row on a year-on-year basis. This consistent growth that was followed by a return on equity of 19% and the maintenance of a strong balance sheet, a key characteristic that has been present for many years. The net debt-to-EBITDA ratio remained within its historical levels at 1.5 times. It is important to highlight that due to the seasonality of our businesses, the working capital needs in the first quarters are normally strong.

Moving on now to slide number 4, we will comment in more detail, the performance of our businesses, starting with Ipiranga. Ipiranga's volume in the first quarter of 2016 was 3% lower than the first quarter of 2015, following the same trends in the fourth quarter of 2015. Sales volume for light vehicles fell 5% influenced by the sharp deterioration in unemployment rate, which reached 11% in the first quarter of 2016, compared to 8% in the same period of the previous year. Disposable income also worsened, decreasing 3% in real terms since January 2015. The adverse environment which combined rising unemployment rate, with increasing prices for fuel had a stronger influence than the fleet growth on Otto cycle sales volume. The average fleet growth is estimated at around 2% for this year. Diesel volumes fell 1% compared to the first quarter of 2015 also as a result of the deterioration of the economy.

Even with the challenging economic scenario, Ipiranga is still reaping the benefits from its investments focusing on expanding and strengthening its network, as well as from strategy of differentiation. In addition, constant innovation in services and convenience, with customer satisfaction and loyalty helps to increase the flow at the service station.

In order to keep strengthening the Company and mitigating the effects of the current challenging economic scenario Ipiranga constantly are focusing on the expansion of its service station network. By the end of March 2016, Ipiranga had 7,241 service stations, a 3% growth over March 2015. It has been investing in converting unbranded service stations and opening new ones, focusing on the Midwest, Northeast and North of Brazil regions with larger growth potential due to the lower penetration of vehicles. In addition, we've added 204 new am/pm stores which are now present in 27% of the Ipiranga service stations, increasing the offer of services to our customers.

On the net earnings side, it is worth mentioning that we had same one-off effects throughout the quarters. Performance in the first quarter of 2016 benefited from the combined effect of the temporary inventory gains and a concentration of sale of assets, amounting to BRL89 million. In addition, still in the first quarter of [2015], the dynamics observed in the domestic and international fuels market created an opportunity to import products, which blocked gains of BRL42 million last year.

In the first quarter of 2016, (inaudible) also present, bringing equivalent gains to those in the first quarter of 2015. The EBITDA net of these one-off effects grew by 14% compared to the first quarter of 2015, following the same trend observed in recent quarters, reflecting the strategy of constant innovation and convenience in service station. Including the non-recurring effect, the reported EBITDA reached BRL712 million, stable on a year-on-year basis.

Looking now for the current quarter and talking about expectations, I like to highlight that they are not specific projections, but rather trends, levels or order of magnitude of the progression in our results.

In Ipiranga's case, the trends and the economic environment that influenced the last two quarters did not change and should remain for the second quarter. Therefore our expectations for the current quarter, is of a similar growth in volume and EBITDA compared to the last few quarters.

Now moving on to Oxiteno and slide number 5. Total sales volume at Oxiteno grew by 4% over the first quarter of 2015. The evolution was concentrated in the Glycol segment, which as a commodity occasionally offers good opportunity to offset the effect of a more challenging economic scenario by contributing to fixed cost dilution.

Sales volume of specialty chemicals fell 6% compared to the first quarter of 2015, influenced mainly by the strong contraction of the Brazilian economy, which was partially compensated by the growth in exports. The 75% growth in Glycol sales is a significant percentage change, which is not unusual in the case of this commodity, as it was mentioned before. [Such improvement] was driven mainly by more attractive raw material prices as a result of the 36% average oil price drop on a year-on-year basis.

The decision to produce more commodities in the current scenario reinforces our strategy to seek better capacity utilization rates and cause dilution of the plants, while specialty chemical sales in Brazil are hit by the weak performance of the economy.

The 37% depreciation of the Real against the US dollar contributed to a very positive result progression of our -- at Oxiteno, together with overall sales volume growth. These effects were partially offset by a larger share of commodity in the sales mix, resulting in BRL198 million of EBITDA, 37% growth over the first quarter of 2015.

For the current quarter, we expect that the challenging economic scenario should continue to influence sales volumes and the sales mix. This increasing participation of commodities driving average margins. Additionally, it is important to highlight that the volatility of the FX normally impact Oxiteno's results.

Moving now to Ultragaz on slide number 6. In the first quarter of 2016, Ultragaz sales volume grew by 1% over the first quarter of 2015. In the bottled segment, which is usually very resilient during challenging scenarios, our volume grew by 1% due to the commercial initiatives to add new retailers. In the bulk segment, we reported the performance similar to that in the first quarter of 2015. In that segment, we outperformed the market due to the initiatives to capture new customers, mainly in the condominiums and small, medium businesses segment and also through initiatives to add some industrial clients, mitigating the negative effect of the economic slowdown.

In the first quarter of 2016, Ultragaz EBITDA reached BRL109 million, a 50% increase over the first quarter of 2015. This achievement is a result of the initiatives to increase the [overall] convenience and satisfaction to its customers and the addition of new clients, plus the culture of straight, controlled fleet costs.

For the current quarter, even in the challenge macroeconomic environment, we expect results at similar levels to those presented in the last few quarters, due to the resilient nature of Ulragaz businesses and its ongoing commercial initiatives.

Now let's talk about our liquid bulk storage business Ultracargo, moving on to slide number 7. Ultracargo's average storage, excluding Santos operations, increased by 6% compared to the first quarter of 2015, mainly due to the stronger volume of fuel handling, while the handling of chemicals declined, reflecting the weak economic activities. Ultracargo's total average storage decreased by 13%, basically explained by the partial interruption of the Santos terminal, due to the fire that occurred in April of last year.

In the first quarter of 2016, Ultracargo's EBITDA, excluding the Santos operation, reached BRL26 million, in line with the first quarter of 2015 when we also exclude Santos. Reported EBITDA reached BRL33 million in the first quarter of 2016, a 32% reduction compared to the first quarter of 2015, mainly due to the partial interruption of the Santos terminal and fire related expenses, which were partially offset by insurance reimbursements.

Throughout the first quarter, we had BRL30 million of revenue from insurance reimbursement, which were related to certain containment and recovery expenses incurred in 2015. We also had expenses from a fine in the amount of BRL16 million, paid to the Sao Paulo's State Environment Authority and had an additional BRL8 million of expenses related to the second phase of the decommissioning process.

For the current quarter, the trend recently observed for the terminals, excluding Santos earning. Regarding Santos, we should continue to report expenses related to the second phase of the decommissioning process and revenues from insurance at the same level we reported in the first quarter.

Before moving to Extrafarma, I'd like to make a brief update about the Ultracargo's operations in Santos. In February, Ultracargo obtained approvals by the authorities and started the second phase of the decommissioning plan, which constitutes in removing the equipment and structures damaged by the fire. We expect to conclude this phase by August. During this work, experts of the (inaudible) will conclude a report determining the causes of the accident. We expect the recovery work of the damaged areas to take place during the second semester. Terminal should be ready for operational licensing by the end of this year.

Moving now to slide number 8, to discuss our retail pharmacy business, Extrafarma. Extrafarma entered the first quarter of 2016 with 261 stores, an increase of 35 drugstores compared to March 2015. Seven stores were opened during the quarter. In April, continuing the process of capturing synergies among Ultra's businesses, Extrafarma opened its first drugstore in an Ultragaz [reseller], in Fortaleza, state of Ceara. Extrafarma's gross revenues increased by 10% compared to the first quarter of 2015, mainly due to the 16% increase in retail revenues, excluding mobile phones, resulting from the growth in average number of drugstores and the 12% increase in same-store sales, despite the deterioration of the economic scenario and the decline of the real disposable income.

In the first quarter of 2016, Extrafarma's EBITDA reached to BRL5 million, a slight increase compared to the first quarter of 2015, mainly due to the increase in revenues ex-mobile phones and initiatives to improve the management standards in the retail pharmacy network. This result was achieved despite the deterioration of the economic scenario and a higher share of new drugstores, still in their maturing process.

After a seasonally weaker first quarter, we are working with an estimated goal of 20 new stores for the second quarter, which allows us to keep on track to open from 60 stores to 80 stores this year. The accelerated stores opened pace with the objective to gain market shares from independent drugstores, continues to influence results since the deals maturing drugstores tends to impact on our EBITDA.

Now on slide number 9, to talk about our priorities and perspectives and to conclude our presentation, I'd like to reaffirm the priority of our businesses, which have been pursuing ways to continue growing, even in more challenging scenario.

Ultrapar's growth has been supported by our investments which place us in a solid position to see market opportunities offered by the current economic environment. We're also prepared and strengthened for the return of the economic growth. It is necessary to continue following our market's needs and keep the sense of opportunity, the analytical desk and the capital disciplines that brought us here.

The beginning of this year was a demonstration of our team's capacity to react to difficulties in the challenging macroeconomic environment and we should continue in this path to report one more year of growth in 2016.

Now with that, I conclude my part of the presentation. I now open for the Q&A session.

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

Hello, good afternoon. Yes, just a couple questions if I could. One, in terms of Ultragaz, the results were quite strong, I mean, that's on top of what was a fairly strong quarter in the prior year. I was wondering if you could give maybe, a few more details on the commercial initiatives and how that enables you to get what looks like very, very strong leverage from additional sales.

Secondly, with a potential economic recovery at some point, timing I guess remains to be seen, where do you think you're going to have the most leverage and how are you preparing for what could be a pick-up at some point over the next one to two years?

Hi, Frank. Thanks for the question. The first one regarding the Ultragaz commercial initiatives. I think in many segments, I think because that has been very successful in a way, compensating or mitigating declining markets by being able to capture new customers and new segment. If we look at the bottle segment, is basically the focus on opening new resellers or looking for new resellers throughout the country. But more specifically, in the bulk segment that has a more I'd say, strong correlation with economic activity.

Ultragaz has been very successful in penetrating into small and medium businesses, which going to suffer less in a scenario like that as opposed to let's say, large industrial clients. And even in the large industrial clients, we know that these applications that Ultragaz has been able to develop, kind of created for Ultragaz, a new entrance in market that were before eventually only available for natural gas. So same technology that has been implemented as well, they have been in a way, allowing Ultragaz to compensate for a very weak let's say, a market for the bulk segment.

As for the potential economic recovery and who knows, like I mean, it's something that is very difficult for us to predict, but we believe that the fact that we have a strong balance sheet and the fact that we are always looking at opportunities, will allow us to be prepare and ready. It's not a question of if, but when the economy starts to recover. And I think pretty much in all segment of Ultragaz, specifically segments that are linked to the Brazilian GDP, so we can talk about Ipiranga, we talk about Ultragaz which we just mentioned already and Extrafarma as well, segments that are linked to the consumption and we believe that we are very well positioned when the economy starts to recover, (inaudible) and the businesses, and the other business as well, but those are the ones that have a more I'd say, strong correlation with domestic consumption. Oxiteno also does have this correlation, but has other let's say variables, like the foreign exchange rate, like commodity prices. So there are more, I'd say more indicators for Oxiteno as opposed to other three that are more linked to overall economic activity. And Ultracargo as well would benefit from the recovery in the economic activity.

In terms of demand, are you seeing any changes in trends in the second quarter for better or for worse? Are they continuing more or less in the same level in terms of demand in -- at Ipiranga, demand in some of the other segments?

They are more or less at the same levels, Frank. I think, whatever expectations eventually start to improve is from now on. I mean, when we look at what would be today as compared to the first quarter, we are -- or you compares as well to the fourth quarter 2015, we are pretty much in the same levels.

Okay. And if I could just one more, in terms of Santos, what you're expecting in terms of potential insurance recovery over the next several quarters if any? And when you get to restarting up the facility there, how much incremental volumes would that imply and what would be the comparison of where you expect to be in terms of capacity there, versus where you were prior to the fire?

If you look at our balance sheet, there has been an increase in our assets and also an increase in our liabilities, which pretty much of the same magnitude. I think it's BRL140 million for the assets and BRL110 million in the liability, which in a way is already a testament of the expectation that we have in terms of our obligations from now on, and the expectations that we have regarding the receivables of insurance from now on. So BRL112 million of let's say assets and BRL110 million of obligations from here on. So this is something that we expect and it is already been included in our balance sheet.

Loss for let's say the Santos terminal, once we conclude, then we have all the final authorization form let's say, all the authorities and we start let's say, remodeling and rebuilding the portion of the terminal, but is still interrupted. We believe that we should start operating there by the beginning of 2017. [Then when all is starting], then probably we will deal with a capacity close to 95% of the capacity that we had before the fire. So there is a portion of this capacity that probably do not comeback in line.

Andre Natal, Credit Suisse.

Hi guys. Thank you for taking our questions again. Well, you just mentioned about GDP, I just wanted to go back to that a bit, if I may, a little bit more specific on diesel. We've seen that, in the last five years or so prior to 2015 of course, we've seen diesel consumption actually increasing above GDP growth rates, instead of the more long historical trend that had been prior to that GDP, actually grew pretty much in line with diesel consumption growth. So of course, this recent increase might have been boosted by incentives to trucks' fleet expansion and also a boost in agriculture production, especially in the Midwest region where you're basically trying to focus now.

But looking ahead, I wanted to -- I was wondering how do you guys think about it, when you do your longer-term investment plans and things like this, how do you guys think about the long-term prospects of diesel consumption growing going forward, assuming the country at some point in the future will resume growth? How do you think about diesel consumption growing? Is it -- do you expect it to keep in line with GDP or do you see a period of accommodation in which basically diesel could grow at a lower rate than GDP for a while. How do you -- how should I think about it?

And just connected to this one, there are investments expected to happen in the Midwest region to increase capacity of existing railroads and this might capture a bigger share of transport of crop, especially soy and corn towards the southeast ports. So I just wanted to know how do you -- if this is something you guys are following very closely? And if you have any ability to give us a hint of how relevant this might be to diesel volumes in coming years.

And the other one if I may, is concerning the branding strategy that you have in the North, Northeast and Midwest regions. The strategy, we've seen although there is very limited reliable data about the exact number of stations, especially for white flags. But with -- based on what we have, we have basically seen that your sales per service station has actually been decreasing for the last five years a bit. I know this is not a particular objective you have in terms of the volumes per station. But I just wanted to understand, if this result is basically a consequence of your strategy of branding stations that basically have a lower volume than Ipiranga's average stations in the region and if this might revert at some point in the future when after branding these service stations start to sell more as a consequence of the branding process? Thank you.

Andre, let me try to address your points here. Starting with diesel, basically we continue to have the conviction that the correlation that we have for diesel volumes is related to GDP growth. Obviously, you have some specific effects in the short-term, that do not necessarily follow these trends, but over the long-term, this is what we should continue to observe. If we look the first quarter of 2016, we outperformed the market in general, because we don't sell to the thermal electric plants. And as you know, the thermal electric plants have shut down most of them. They are not operating due to the fact that, demand of electricity in Brazil is relatively very low and [hydroelectric pleasing] quite in a way have been solved at least for the short-term. But if you exclude those one off effect, the trends over the future continues to be a correlation towards the GDP growth.

As for the branding strategy, if I understood correctly your point, sometimes if you look at the comparison, which should be similar to same-store sales, you could see eventually some volumes, especially recently dropping. And the reason for that is, obviously expansion of our network and the fact that, when you add a new service station, when you brand unbranded service stations, it takes some time. There is a ramp-up for the volumes to start migrating towards and more extended (inaudible). And even when you open a new one, obviously there is a ramp-up phase for that.

So it is in a way a consequence of the expansion strategy that we have been having, obviously in the more let's say, shorter-term the impact of the overall economic activity. But the strategy to brand unbranded service stations remains especially if it's possible in the Northeast, North and Midwest. It's important to remember that if you take unbranded service station, they represent around 25% of the market. So there is still a large opportunity for us and for others as well to grow and led this piece of the market.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I would like to turn the floor back over to Mr. Pires for any closing remarks.

Thank you. Thank you everyone. Thanks for participating in the call and I hope to see you all again back during our call for the second quarter of 2016 in August. Thank you very much.

Thank you. This concludes today's Ultrapar's first quarter 2016 results conference call. You may now disconnect your lines at this time.