Ultrapar Holdings Inc Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to Ultrapar's 2Q '20 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br and MZiQ platform. Please feel free to flip through the slides during the conference call. Today with us, we have Mr. Frederico Curado, Chief Executive Officer; and Mr. André Pires, Chief Financial and Investor Relations Officer; together with the other executives of Ultrapar. We would like to inform you that this event is being recorded. A replay of this call will be available for 1 week. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor and 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. Curado. Mr. Curado, you may begin the conference.

Thank you and welcome everyone to our quarterly call. This quarter, of course, we felt the direct impact of the COVID-19 pandemic. But in retrospect, we believe that our ability to manage our operations during this crisis is quite efficient. And we were actually able to get through these three challenging months better than we expected. So now since the end of March, we established two priorities, first being the safety of our people and the second being the continuity of our operations. Let’s keep in mind that all of our five businesses were considered essential to the population. And we have an obligation to keep our customers and our consumers properly served regardless of the challenges. So as far as our people, we have had about 500 confirmed cases so far, which is equivalent to about 3% of our team. Of those 500 cases about 450 have already recovered and returned to work. The remaining around 50, they are fulfilling the quarantine. But thank God, everybody's at home. Nobody is even in the hospitals. So if we consider most of our staff was in the field, I can clearly say that our protocols for symptom identification, testing, selective isolation, and monitoring, they have been very efficient. Of course, we also have staff in home office. We began to return to offices last Monday, actually on August 3, Monday of last week. And this return is gradual, it’s very smooth, and it’s going on quite well so far. I believe that the vast majority of companies have realized what we certainly have. The home office has been working extraordinarily well, far beyond what one might expect before the crisis. So, we don’t know what the new normal of office work will look like in the future. But surely, we don’t think we will have 100% of our people commuting to the office every day. We think there will be some changes to that. And the experience of the next several months will tell us where we’re going to land concerning balancing home office and in-person office work. So, it’s been a very interesting learning experience throughout this period. Now with regard to the second priority, which is operational continuity, we actually managed to maintain all of our operations without any interruption whatsoever, despite the logistical mobility challenges that we experienced in Brazil, especially in São Paulo, but we didn’t have a single day of interruption, which is great. So, it’s no small accomplishment. I think we have to recognize the quality and capacity of our teams. Our leaders have gone the extra mile in the spirit of ownership and they kept our people safe and engaged with our commitments. Now before talking about the results, let me just touch on two other points about the crisis: one, support for our resellers through social actions and support to fight against the pandemic. So in short, we keep a very proactive attitude, and we are flexible with our suppliers, customers, partners, and resellers, in an attempt to preserve not only the integrity of our operations but of their operations as well, and ultimately keep the services to the population. So we were proactive in renegotiating contractual obligations and working on some capital relief measures for our partners. In the end, we ensured the continuity of the value chains, but also the stability of the level of deferrals on our balance sheet, which did not decrease in the quarter. So that’s another important result. And one last word on social support. We provided a reduction of R$20 million mainly for the construction of hospitals in partnership with private hospital operations, and compared with our current results, we also donated LPG, delivered medical equipment, meals for truck drivers, and granted significant discounts for health professionals among several other actions. Now, let’s move to the financial results. The impact of the credit was concentrated in Ipiranga, as you probably read in our release, and that, of course, was the result of the combined effect of one significant reduction in demand, mainly for gasoline and ethanol, and the sharp decline in oil pricing, which generated a huge amount in inventory value, which, of course, will recover over time. However, the other businesses demonstrated normal resilience to the crisis, including Extrafarma, which went through the quarter with about 70% of its stores closed. Commenting briefly on the other businesses, Ultrapar had a very good quarter. We did experience some reduction in volume for bulk customers, which are small and medium-sized enterprises. However, we saw growth in household consumption and we were able to sustain good margins in both segments, bulk and household. Shipping to Ultracargo also had a good quarter, despite a slight reduction in cargo movement, but the storage commitments remained very firm, and the margins also remained stable. Finally, in September, we had some reduction in volumes for some segments, such as coatings, paints, oil and gas, and automotive. However, on the other hand, the agribusiness and HPC sector exceeded our expectations. In addition to that, Oxiteno benefited from the weakened exchange rates, and also the drop in the cost of equity in the next quarter. So in short, we had a good second quarter for sure, but it tested the resilience and agility of our team and our portfolio with results that we deem very satisfactory given the uncertainties and the volatility we all experienced. We anticipate the second half to see continued recovery in community activity in Brazil and, of course, Ipiranga alone. We really believe that the greatest difficulties are behind us already. In the coming months, it is also important to implement our new business, named abastece aí, which we announced a few weeks ago. We believe this business will create value, and we hope to materialize that in the coming years. That is the startup phase of this new business. A word on our strategic agenda: our strategic vision remains unchanged. On one hand, we continue to pursue improvements in results in all of our businesses. On the other hand, we have a lot of discipline, focusing on cash management and capital reallocation. All this must be supported by the continued development of a pipeline of talent. Let me make one last comment before giving the floor to André. We could not advance dividends in this semester, but the company absolutely maintains its commitment to pay out the main dividend equivalent to 50% of our annual net income, which is mandated by our bylaws. We opted not to advance this for the semester as we have in the past due to the context of cash preservation and the uncertain and volatile economic scenario. As usual, the dividend proposal related to the 2020 fiscal year will get approval, along with the financial statements for next year in our AGM. So no change there apart from not advancing dividends at this stage. With that, over to you, André. Thank you.

Thank you, Fred, and good morning, everyone. Starting now with Ultragaz on Slide number 5. Sales volume at Ultragaz in the second quarter of 2020 increased by 3% on a year-on-year basis, in line with the market. In the bottled segment, volume grew by 8%, influenced by stronger residential demand for LPG, reflecting the restrictions in place due to the pandemic. On the other hand, bulk sales volume fell by 9% with lower sales to industry, commerce, and services, which were also impacted by the pandemic. This reduction was offset by growth in sales to communities and special gases. SG&A fell by 11% versus the second quarter of 2019, thanks to steps taken to control expenses with lower expenditures on payroll, business travel, and events. In contrast, there was an increase in freight expenses due to higher volume and additional expenditures for donations and protective equipment to tackle the pandemic. As a result, Ultragaz EBITDA reached R$206 million, a 69% growth compared to the same quarter last year, driven by the increase in sales volume, improved operational efficiency, and a focus on cost and expense control. Looking ahead at Ultragaz's business environment, we expect to see a gradual recovery in sales volume for the bulk segment, mainly coming from industry and services, while maintaining robust performance in the bottled segment. With that, the trend is to maintain solid and consistent results going forward. Moving on to Slide number 6, talking about Ultracargo. Ultracargo added 19% in average capacity compared to the second quarter last year, due to the expansion at Santos and Itaqui terminals implemented over the past 12 months. The cubic meter sold increased by 16% mainly due to the greater handling of fuels and expanded capacity, alongside an increase in spot operations in Aratu. Ultracargo reported R$155 million of net revenues in the quarter, 23% above the second quarter of 2019 driven by higher average tariffs, new customers, and a large number of spot operations. Regarding costs and SG&A, we had a combined increase of 4% due to higher payroll expenditures as a consequence of the capacity expansion at Santos and Itaqui terminals and additional expenses due to donations and PPE related to COVID-19. It is important to highlight that Ultracargo reduced its OpEx per cubic meter sold by 10%, demonstrating improved productivity. In the second quarter of 2020, Ultracargo’s results benefited from tax credits of R$12 million, while in the same quarter of last year, we had a negative impact of R$53 million in connection with the settlement related to the foreign incident in 2015. Ultracargo's EBITDA reached R$92 million in the quarter; if we exclude the non-recurring impact already mentioned, the year-on-year EBITDA growth was 35%, driven by increased operations and rationalization of costs and expenses. The EBITDA margin in the quarter was 59%. Despite the impacts of the pandemic, the outlook is for monitoring the capacity utilization level with a gradual recovery in handling throughout the second half of the year. In addition to initiatives to increase productivity that indicate continued EBITDA growth year-over-year. Ultracargo remains focused on its capacity expansion by increasing its footprint in Eletrobrás, where it already operates, as well as expanding into new regions, such as Vila do Conde, in the state of Pará. Moving on to Slide number 7, discussing Oxiteno, where total volume decreased by 9%, and the volume of specialty chemicals fell by 5% compared to the same quarter in 2019 due to a drop in coatings, automotive, and oil and gas, despite increases in crop solutions and home and personal care segments. Oxiteno's quarterly results benefited from better contribution margins in dollars per ton, driven by a richer sales mix, and by the effect of the devaluation of the BRL against the U.S. dollar. SG&A rose by 3% due to the FX translation effect of overseas operations and increased international freight expenses, following the rise in exports. Oxiteno remains committed to reducing costs and expenses, and we have already noted a reduction in expenses with payroll, business travel, and general services, which contributed to preserving results for the period. With this, Oxiteno’s EBITDA was R$162 million in the quarter, a growth of R$117 million compared to the second quarter of 2019, resulting from better unitary margins in U.S. dollars and the BRL devaluation despite lower sales volume. Oxiteno’s outlook is to maintain current volume levels for the most resilient segments such as Home & Personal Care and Crop Solutions and a gradual recovery in the segments more impacted by the pandemic, notably Coatings. In addition, the positive effect of the exchange rate depreciation on external results, combined with the ramp-up at the Pasadena plant and better unitary margins, continue to maintain expectations for year-over-year growth in EBITDA. Moving now to Slide number 8, talking about Ipiranga. Ipiranga saw an 18% year-on-year drop in sales volume with a decrease of 28% in auto cycle and 7% in diesel due to the significant impacts of the pandemic on fuel consumption in Brazil, mainly in April, followed by a gradual recovery in May and June. Total sales volume at Ipiranga in April declined by 27% on a year-on-year basis, while it fell by 17% in May and by 7% in June. We ended the second quarter with a network of 7,105 service stations adding 94 and 95 in the period. The am/pm network ended the quarter with 2,345 stores, of which 17 are company-operated, all located in São Paulo or Rio de Janeiro. The outcome of the pandemic on the global economy, in addition to the price war in international markets, affected supply and demand balancing in the overall market, triggering sharp price volatility for gasoline and diesel. The prices for products fell dramatically in late March and April followed by partial recovery in May and June, besides the price of ethanol also fell by 25% in April. Consequently, Ipiranga incurred significant inventory losses in the quarter due to the remaining effects of the price drop in March and also due to additional price reductions within the second quarter itself. However, Ipiranga posted a SG&A reduction of 32% compared to the second quarter of 2019. This was a consequence of initiatives deployed to cut expenses on several fronts, especially related to payroll and marketing, as well as freight expenditures, the latter linked to weaker sales volume. In addition, we kept our focus on optimizing working capital, which contributed to growth in operating cash generation compared to the second quarter of 2019. With that, EBITDA was R$179 million, a reduction of 65% compared to the second quarter of 2019, mainly related to the lower sales volume and the impact from the price drop mentioned, which were partially offset by expense reductions. It is worth mentioning that the results for June represented an important evolution compared to the results for the rest of the quarter. The trend is for gradual recovery of volumes and results, although still at levels lower than last year and also with lower volatility in fuel prices. We observed this evolution in June, and we continue to see the same evolution at the beginning of the third quarter. Talking now about Extrafarma, moving on to Slide number 9. Extrafarma ended the quarter with 410 stores, practically stable compared to the first quarter of 2020. Of this unit, 38% are still in the ramp-up phase compared to 53% in the same quarter last year, reflecting greater selectivity in expansion and adoption of a more rigorous approach to underperforming stores. Gross revenue in the quarter was R$515 million, 8% down compared to the second quarter of 2019, mainly due to the 5% lower number of stores and the temporary closure of 7% of the stores located at shopping malls due to the pandemic. However, the stores that remained operational registered an increase of 4.6% in same-store sales, driven by the strengthening and expansion of home delivery operations, as well as partnerships with delivery apps. Gross profit reached R$141 million, a 7% fall on a year-over-year basis and corresponding to a gross margin of 27.5%. SG&A expenses fell by 15% in the quarter, thanks to a smaller number of stores and initiatives to improve productivity and optimize logistics, with emphasis on payroll expense reduction and the opening of the distribution center in São Paulo in the third quarter of 2019. With this, EBITDA was R$14 million in the quarter, excluding the non-recurring credits of R$60 million recorded in the second quarter of 2019. The EBITDA showed R$12 million improvement compared to the second quarter of 2019, due to operational improvements made in previous quarters, despite the pandemic's impact. Currently, all stores are operating and pharma sales remain resilient, despite the lower flow of customers, especially in drug stores located in shopping malls. We are continuing our initiatives related to operational improvement, digital development, and cost reduction. Therefore, the outlook is for continued EBITDA growth on a recurring basis. Moving on to the consolidated results for Extrafarma on Slide number 10, net revenues were R$16 billion, 27% less than the second quarter of 2019, due to the impact of the pandemic. EBITDA was R$611 million in the quarter, a decline of 10% from the same period in 2019. If we exclude the non-recurring impacts, EBITDA was R$599 million, a decrease of 18% in the quarter, mainly due to the sharp decline in EBITDA in Ipiranga, which was impacted by social distancing measures, offset by increases in EBITDA from other businesses. We posted net financial expenses of R$80 million in the second quarter compared to R$92 million in the same period last year, a reduction of 13% largely due to the payment of the premium on the tender offer of notes in the second quarter of 2019, which increased interest expenses last year. This effect was partially offset by the appreciation of Ultrapar's stock price over the subscription warrants issued at the time of the acquisition of Extrafarma, which had a negative impact in the second quarter of 2020. Net income was R$50 million, 59% less than the second quarter of 2019, mainly as a result of lower EBITDA. In this quarter, management opted not to pay out the interim dividends for the current year in order to preserve the company’s cash. As stated in our bylaws, the minimum mandatory dividends will be paid out after the disclosure of the full year’s results. CapEx was R$351 million, an increase of 7% compared to the second quarter of 2019, largely due to higher investments at Ipiranga, maintaining the service station network, and Ultragaz for replacing and acquiring gas bottles. In April, we announced a reduction of up to 30% in our investment plan for 2020. In the second quarter, we implemented greater control over investments as a measure to preserve cash. The optimization of working capital contributed to operational cash generation of R$1.8 billion. If we discount net cash used for investment activities, excluding financial investment, cash generation was R$1.4 billion, an increase of 33% over the first half of 2019. Moving on to Slide number 11 and let’s discuss our debt profile. We ended the quarter with a leverage ratio of 3.2 times, measured by net debt to adjusted EBITDA for the last 12 months, slightly improved compared to the 3.3 times during the first quarter of this year. This was only possible thanks to the strong cash generation in the quarter, which more than offset the sharp drop in EBITDA. It is worth mentioning that from the first quarter of 2020, with the implementation of IFRS16, we began to include lease payables in our calculations of net debt, which contributed to an increase in leverage, despite these leases not being classified as bank debts. We ended the quarter with a cash position of R$8.4 billion boosted by the cash generation needed and new funding. In July, we announced the issuances of $350 million in notes with a 5.25% coupon per year to the reopening of the notes maturing in 2029. The proceeds will be used for paying down those with shorter maturities and maintaining that profile. With this, I conclude my presentation, and we can now move to the Q&A sessions. Thank you.

Thank you very much. Two questions, if I may. One, you mentioned that you have seen some pickup, most notably in June it seems, post the sharper reductions in activity earlier in the second quarter. I was just wondering if you could provide a little more information for the various segments as to how you actually saw July and August perform so far year-over-year or versus the prior quarter. And secondly, just in terms of the potential for refining investment, I was just wondering what your current thoughts are now on how you're seeing it, what type of participation you would have in any investment there and how you would see financing that?

Okay. Frank, thanks for the questions. Yes, we’ve seen from the end of the second quarter and also beginning of the third quarter a recovery in terms of volumes that were very clear to note every time that we see more flexibilization in terms of the social business measures. Just to give an idea, if we look at the end of the second quarter, we were seeing levels of consolidated volumes decline compared to a year ago around 14%. Today, these levels are below 10%, probably around 8% less. If you take the last week of July, for example, the levels of decline in auto cycle are around 10%. And remember that during the second quarter, they were closer to 20%. Diesel is already up around 2% compared to the same week a year ago. The total volume is around 8% below a year ago if we take the last week of July. This is an indication that there is a consistent recovery in terms of volumes, and there is a strong correlation between those volumes and every time that we see people going back to a more normal life and moving around more frequently. So there’s a very clear correlation. As for refining and the participation, looking at what we see as a positive outcome of Petrobras selling 50% of its refining capacity, we believe that this is going to be positive for the market in general terms. There will be benefits, not only for fuel distribution companies but also for the final consumer in the end. The players with more scale will be able to negotiate long-term contracts, volume discounts. But this will take some time until it starts to impact the market as the process is ongoing. It’s going to take some time for it to be fully realized. Specifically about ourselves, since the process is ongoing, we cannot comment specifically on our situation. But conceptualized, we see this move of Petrobras privatizing 50% of its refining capacity as a very positive move for the market.

Okay. Thank you very much.

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

Well, thank you very much. Thanks everybody for the interest. And I hope to see you all again when we release our third quarter results. Thank you and have a good day. Bye-bye.

Thank you. This concludes today’s Ultrapar Q2 '20 results conference call. You may disconnect your lines at this time.