Ultrapar Participacoes SA (UGP) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's 1Q 2017 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at www.ultra.com.br/ri and Engage-X platform. 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 from Ultrapar.

We would like 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 now begin the conference.

Thank you very much. Good morning, everyone. It's a pleasure to be here with you to discuss Ultrapar's first Q 2017 results. Here with me are officers from our businesses, as well as the investor relations team to help answering your questions.

Starting with slide number 3, I'd like to open our discussions today with an overview of the main developments at Ultra since our last call three months ago. The macroeconomic environment in the first quarter remained challenging. However, we are starting to see signs of a gradual recovery in the Brazilian economy, which benefits our segments more closely to the GDP performance. A more stable environment together with investments and the strategic initiatives we are implementing allow us to pursue a best of sustained growth at Ultra, both in 2017 in the long run.

In the first three months, we executed our CapEx plan by deploying BRL485 million in expanding our scale and the quality of operations, intensifying the initiatives of differentiation and mobilization. We continue to implement our plan of expanding Ipiranga stations, Ultragaz resellers and Extrafarma stores. Our project on Oxiteno's new ethoxylation plant in United States is also evolving. And in February, we obtained one of the approvals of Ultracargo's capacity expansion plant at the Itaqui port terminal. Overall, Ultrapar's CapEx plan for 2017 is BRL2.2 billion.

We have also been working on other sources of growth and value creation. One of them has recently taken a step forward by receiving a final approval from the antitrust authority, CADE, to create a new lubricants company in a joint venture between Ipiranga and Chevron. We are currently streamlining the integration plan in order to have a single company up and running, combining the lubricants businesses of both companies by the end of the year.

In addition, we have filed a request with CADE for the approval related to the acquisition of Liquigas and the transaction is currently under analysis, which is General Superintendence department.

CADE approval is a condition precedence for completing the transaction and until it takes place, Ultragaz and Liquigas will remain competitors, conducting their businesses in their normal course.

As for Ale, we are working towards a final decision from the CADE's administrative court, which is expected to happen in the next few months.

More recently, we announced the issuance of a tax incentive bond in the domestic market at a very favorable terms and costs. We successfully raised a BRL1 billion at an average cost of 94.6% of the CDI, which will at 0 days interest rate. We have five and seven-year maturities.

Consequently, this has reduced our average cost of debt and at the same time, lengthened our debt profile. And as I said, both organic and inorganic initiatives will strengthen our growth avenues, and we are confident of the benefits they will bring to both our businesses and the society as a whole.

Now, let's move on to slide number 4 and talk about Ipiranga. One of the key growth drivers in 2017 in Ipiranga is the accelerated expansion of the service station network, and we expect that its benefits will arise as the (inaudible) mature. The network moved by 6% year-on-year basis with a net addition of 407 units to the network in the last 12 months and 85 in the quarter itself. This quarterly growth is somewhat unusual for the first quarter of the year, which typically tends to be slower in both investments and service station additions. We closed 127 service stations in the past 12 months and seven in the quarter, within our historical average. At the end of March, we had a total of 7,648 service stations. Ipiranga's volume in the first quarter of 2017 was 6% lower year-on-year. It was an improvement compared to the 14% decline year-on-year in the fourth quarter of 2016 compared with the same quarter in 2015. Otto cycle volume was 3% down year-over-year, a reflection of the challenging economic scenario and further deterioration in the environment. However, the falling sales volumes have been reducing most of the month, while investments in the roll-out of new service stations will continue to drive our progressive recovering volumes. Diesel volume was 10% down compared with the first quarter in 2016, in line with the performance of the economy as a whole and lower market share in the large consumers and transport retailer segments. As a result, EBITDA reached BRL705 million in the first quarter of 2017, almost stable in relation to the first quarter of 2016, despite the lower volume and cost movements. It's important to highlight that Petrobras implemented one cost increase and two reductions in the diesel segment and two cost reductions in the gasoline throughout the first quarter of 2017. As to the current quarter, we expect the continuity of the trends seen in the first quarter, both in volumes progressively improving and also in EBITDA. We remain confident in a more consistent growth in the second semester, keeping our outlook for growth in the year as a whole.

Moving on now to Oxiteno in slide number 5, in the first quarter, volumes continued to recover with an improvement of 8% year-on-year. If we breakdown the number, volumes of specialty chemicals in Brazil had a 5% growth compared to the first quarter of 2016, the third consecutive quarter of year-on-year growth as a consequence of a gradual recovery in the Brazilian drugstore production chain. The highlights were volumes in the oil and gas and coating and automotive fluids segment. Growth in international market was 13%. This was a reflection of higher sales in the US due to the pre-marketing of our new approximation plant in Pasadena, Texas, focusing on the agrochemical market. Commodities volumes were also 10% up year-on-year, reflecting better demand for these products.

In the first quarter, the average real-dollar rate appreciated by 20%, same trends seen in the past quarters, while material cost continued to increase, especially prices of palm kernel oil, 48% higher compared with the first quarter in 2016.

Oxiteno's EBITDA was BRL62 million, a year-on-year decline of 69%, largely linked to a BRL0.77 cents appreciation in the exchange rate compared to the first quarter of 2016, as well as to the higher cost of certain raw materials. We also reported a one-off event in this quarter. We reversed a provision of BRL49 million related to the exclusion of the ICMS sales tax from the calculation base for the PIS and COFINS taxes, resulting in a reported EBITDA of BRL112 million for Oxiteno. This reversion was based on a Supreme Court ruling which decided that the inclusion of the ICMS in the calculation was unconstitutional and is backed by the opinion of our legal counsel.

As we mentioned last year June 2017, we will be preparing Oxiteno's structure for the expansion in the United States. Over the past few months, we progressed on the construction of the new plant. The reactor component is being built in Thailand and will be shipped in module to the US for assembling, which is expected to be concluded in late 2017, early 2018. So this year, we have some pre-operating expenses with the plants, and this will initially impact our EBITDA. We expect further growth in specialty chemical sales to the domestic market for the current quarter. However, raw material price volatility and the exchange rate will continue to compress margins with an additional effect of inventory loss due to significant drop in the palm kernel oil prices by the end of this quarter.

Now, moving on to slide number 6 and talking about Ultragaz. Ultragaz has continued to outperform the market by reporting growing volumes in spite of the weakness in the economy. In the first quarter of 2017, consolidated sales volume was 414,000 tons and 2% growth year-on-year. As in previous quarters, this growth reflects investments in new resellers in the bottled segment and in attracting new clients in the bulk segment, especially in the industrial and residential condominium segments. Both bulk and bottled segments presented volume growth of 2% in the period.

Ultragaz adopted a strategy of creating new market niches in the bulk businesses and diversifying solutions in LPG utilization in the asphalt plants where we saw significant year-on-year growth. In addition, to the capture of new clients and resellers, Ultragaz initiatives also included increasing differentiation in the market by offering consumers greater convenience, best and greater quality and value to our business.

Due to the initiatives for expansion and differentiation, Ultragaz EBITDA increased by 11% year-on-year. For the current quarter, the growth pace in the bulk segment tends to decline, driven by a relatively high comparable base in the second quarter of 2016 and sales in the industrial segment were particularly strong. As for the EBITDA, we expect the growth trends seen in the first quarter of 2017 to be maintained.

Let's now move on to slide number 7 and talk about Ultracargo, our liquid bulk storage business. Ultracargo's total average storage increased by 6% compared with the first quarter of 2016, largely due to the greater fuel handling activity at the Suape and Aratu port terminals. The average capacity utilization in the first quarter was 89%, even considering the non-operating area in the Santos terminal.

Ultracargo posted an EBITDA of BRL22 million in the first quarter, equivalent to a drop of 32% year-on-year, mainly due to a BRL30 million advance on insurance claims in the first quarter of last year, which strengthened the comparison base. On the same comparison and excluding expenses and insurance related to the fire at Santos terminal, which are shown in the graph on the right hand side, EBITDA increased by 48%. This reflects both weighted average storage as well as higher average tariffs. For the current quarter, we continue to see the same trends with strong levels of fuel handling in EBITDA compared with the previous quarter. As a reminder, it's important to highlight that in the second quarter of 2016, we also received a BRL30 million of (inaudible) on insurance claims, which will again affect year-on year comparisons with EBITDA in the next quarter.

Moving on to slide number 8 with Extrafarma. Extrafarma ended the fourth quarter with 321 drug stores and that's an increase of 60 stores compared with the end of the first quarter of 2016. During the first quarter of 2017, we added 12 new stores and closed 6. Gross revenue at Extrafarma rose by 28% compared with the first quarter of 2016, mainly due to the greater average number of stores and the 24% growth in the same-store sales. On the same comparison, overall revenues in the market were 9%, according to Abrafarma information.

First quarter EBITDA at Extrafarma amounted to BRL4 million, which is BRL1 million below the first quarter of last year. The impact here was largely due to non-recurring expenses of BRL11 million related to the indemnity payment and to the transfer of the distribution center from Belem to the neighboring city of Benevides with more modern installation and better logistics conditions. If you exclude these expenses, EBITDA would have been BRL50 million, well above the BRL5 million posted in the first quarter of 2016.

We expect strong growth to continue in both revenues and EBITDA. It is important to highlight, however, that revenues will reduce its growth rates due to the lower price increases in pharmaceutical drugs announced by the regulator agency at 4% in 2017, which was below the 12% increase announced in April of 2016.

Moving now to the final slide, slide number 9, and to close this presentation today, I would like to outline the strategy and priorities that base our expectations for the year as a whole. As we have seen over the last few quarters, there has been a gradual improvement in our operational environment, indicating recovery volumes for those segments that are more weak to the economic performance. Our investments, our ability to see the opportunities and our discipline in the need of capital has brought us to where we are now living as well prepared and stronger to take advantage of the recovery. We are confident in the performance of Ultra's businesses and sustained growth in 2017. Such growth might come from the accelerated expansion in Ipiranga's service station network, the focus on specialty chemicals innovation and international expansion of Oxiteno, the continued strategy of differentiation at Ultragaz, the resumption of Ultracargo's activities at the Santos terminal and a further acceleration in Extrafarma's expansion.

With this, I conclude our presentation for today. And I'd like to thank you for your attention and welcome you to any Q&A you may have. Thank you very much.

(Operator Instructions) (inaudible) Yang, HFBB.

Could you give us a little bit of color on how you see the fuel demand distribution in a competitive environment? Your margins, of course, they're a little bit up versus first quarter and down versus fourth quarter, but how do you see that going forward? You mentioned in the press release giving a little bit macro share in the resellers business. Can you also talk about it? Thanks.

Thanks for your question. Basically when you look at our margins measured by EBITDA (inaudible), we saw an increase of 6% in the first quarter of 2017 versus the first quarter of 2016. Obviously, from a seasonality point of view, normally, the fourth quarter has always a much higher EBITDA opportunity type of indicator, which happened obviously in the end of last year as well. What we have been telling our investors and the market in general is that we should concentrate and focus on the absolute EBITDA that Ipiranga generated obviously in 2016, in the first quarter of 2017, and our expectations for the absolute EBITDA for the year of 2017 as a whole. We are assuming performance in terms of EBITDA growth, which is very similar to what we had in 2016, but different drivers. While in 2016, this performance came exclusively from margins; in 2017, we are seeing a combination of better volumes and also the continuation of margin improvements at a slower pace than 2016, but a growth, nevertheless. So that is talking about EBITDA. Regarding, let's say, the competitive environment and market share changes, what we can say is that with accelerated expansion of our network -- of Ipiranga's network, which started to accelerate more intensively in the third and the fourth quarter of 2016 and obviously also in the first quarter of 2017, these expansions bore the fruits -- are starting to bear fruits as much as the network that is being been added starts to become more mature. So these fluctuations are in line with our strategy that is based in accelerating the expansion of our service stations network.

Just for me to understand a bit, yes, margins are still -- they are improving very slowly, they should improve going further, but I also see that your CapEx investments are growing and your working capital current financing is growing as well, so how can I think about this CapEx cycle because if I really well like the ROIC or ROEs of this year and maybe next year will still be lower than when you compare versus the prior, maybe, three years, and if you think then only within two years from now, the returns -- ROICs will be going back to the levels of three years ago or if you think it's going to be faster rate?

Well, when we talk about CapEx, our CapEx in a comparison with the first quarter of 2016 was higher, and it was higher because we -- if you look at Ipiranga's expansion last year, the curve was very much inclined towards the end of the year. So, we accelerated our CapEx in the third and fourth quarter of last year. For this year, we are expecting a more, let's say, more equilibrium in the distribution of our topics throughout the year should be more accretive. So you should see a CapEx expense which you made at the same levels throughout the four quarters of 2017. Obviously, our CapEx spend, as I explained in the call, for 2017 is higher than 2016. We have a CapEx budget of BRL2.2 billion in addition to the accelerated expansion of the P&L. We have also some other important projects this year, such as the construction -- the final part of the construction of the ethoxylation plant of Oxiteno in Pasadena, Texas, and also the expansion of our port terminal in Itaqui for Ultracargo. But on and on, this should not impact significantly our ROE. Our ROE should be maintained at the same levels where we see the ROEs, even with this increase in our CapEx. So you should not see a difference in our -- because of the accelerated CapEx at this point in time.

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

Well, thank you, everyone. I hope to see you all again on our next call in August. Thanks very much. Bye-bye.

Thank you. This concludes today's Ultrapar's 1Q 2017 results conference call. You may disconnect your lines at this time.