Ultrapar Holdings Inc Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's Fourth Quarter 2020 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. Rodrigo Pizzinatto, Chief Financial, Investor Relations Officer, together with 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 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 results of Ultrapar in the future and could cause results to differ materially from those expressed in such forward-looking statements.

Good morning, and welcome to our conference. Thank you for your participation. And let me kick off by saying that our fourth quarter was consistent with what we had projected, and it consolidated a very good year for Ultrapar, despite the effects of the pandemic on our businesses. Let me also highlight the competence and the dedication of our teams and our companies in managing their operations during the crisis. This is from both the point of view of the safety of our people and also the continuity of our operations. We did not have any interruption whatsoever, so we were able to keep a high level of service to our customers and our consumers. The lockdown and mobility restrictions had a particularly negative effect on Ipiranga's revenues and also on Extrafarma revenues. But Ultrapar as a whole managed to exceed BRL2.1 billion of cash generation after investments. This is an all-time record for the company, which is even more relevant, taking into account the challenges of last year. Three of our businesses, Ultragaz, Ultracargo, and Oxiteno, individually also had all-time record results. Extrafarma achieved its best performance in several recent years, including, for the first time since we acquired the company, reaching cash breakeven last year. These solid results led to an increase of 20 basis points in Ultrapar's EBITDA margin, measured as a percentage of revenues from 2019 to 2020. We also saw our net income grow, approaching BRL930 million, which represents a 17% increase compared to 2019. This is already an apples-to-apples comparison, excluding here the effect of the impairment that we had in 2019. So on a comparable basis, there's a 17% increase in our net profit. I must also remark about the liability management we performed during the year. We extended the average term of our debt with a small reduction in the cost. Additionally, we negotiated the elimination of the covenants in our debt. We had about 70% of our debt with some sort of covenants, which are no longer in place, so we have a totally covenant-free debt at this stage. These cash management efforts allowed us to keep our debt leverage unchanged throughout the year while maintaining a good level of dividend distribution.

Good morning, good afternoon, everyone. It's very good to be here again to talk about Ultrapar's results. Just before starting, I would like to mention a point regarding the report of our results. In 2020 and 2019, we had some nonrecurring impacts that affected our results that we highlighted throughout the year in our releases. You see in our explanations that we excluded some of these nonrecurring effects, both positive and negative, so we can analyze the recurring operational performance of our businesses at Ultrapar. Beginning with Ultrapar's consolidated results on Slide 4. Our EBITDA was BRL949 million in the fourth quarter of 2020, a growth of 163% over the same period of 2019. I should point out that in the fourth quarter of 2019, we had an impairment of BRL593 million of goodwill at Extrafarma and a write-off of BRL14 million of Oxiteno Andina assets. While in the fourth quarter of 2020, there was BRL85 million in nonrecurring tax credits for Oxiteno. Excluding these nonrecurring effects, we saw an 11% reduction of our EBITDA in 2020 due to lower EBITDA at Ipiranga and Ultragaz, despite the growth in results from Oxiteno, Ultracargo, and Extrafarma. The fourth-quarter results for Ultrapar were in line with what we had indicated in our last conference call regarding our third-quarter results. Some metrics were a bit above and others a bit below. Looking now at the results for the entire year of 2020, our EBITDA reached BRL3.479 billion, a growth of 24% compared to the previous year. Excluding the nonrecurring effects mentioned in the footnotes for both years, we had a 5% lower EBITDA due to the decline in results at Ipiranga, severely affected by the pandemic, but compensated for the most part by strong results in Oxiteno, Ultragaz, Ultracargo, and Extrafarma, which reinforces the resilience of our business portfolio. Moving now to the net income chart, we reported a profit of BRL132 million in the fourth quarter of 2020, an increase of BRL699 million compared to the fourth quarter of 2019. This was due to the improved financial result and the negative impact of the impairment at Extrafarma in Q4 2019. The net income for the year of 2020 reached BRL928 million, a growth of 130% compared with the preceding year for the same reasons I just mentioned.

What is your assessment in terms of this result, which I would say is under other businesses of the company, also under the main players in the market? The second question is about allocating capital. I would like to address two different standpoints. If you could make comments specifically on the refining process now that it's public that you're taking part in the refab. I would like to know the extent to which this latest news affects or does not affect the appealing aspect of the assets. The other point is to have you comment on the strategy to unlock some type of value through AmPm and the kilometers advantage program.

Luiz, thank you for the question. Let me start with the second one, then Rodrigo can get ready for answering the first one. It's important to talk about the full scenario we have. Our outlook in terms of the oil and gas downstream is long-term. There are some pillars that remain strictly in place and are valid. One is that Brazil is a market with a structural deficit of oil derivatives. What I'm saying is that the refining installed capacity, even if optimized, is still not enough to absorb the demand. This provides an important guarantee in terms of commercial risk for the volume in the refineries. The second crucial aspect is that the trend among the major oil companies is to focus on production. This trend is observed globally, and Petrobras has clearly been identifying that. This emphasis on production is not just the view of the current executive team; it's a global demand that the company is pursuing. Major companies like Shell and BP are also following this path, concentrating on the areas where they can generate the most value. There is the uncertainty and anxiety regarding any potential subsidies as observed in previous years, but we view this as very unlikely going forward. There can be short-term impacts due to political influences, but from a structural standpoint, we do not anticipate significant changes in the long term. The Petrobras bylaws prohibit state-owned companies from being used for political purposes, which aligns with our perspective. However, some might argue that these rules can be changed. That is true; however, the fiscal situation in the country would not likely support such practices. To summarize, we believe we are in a negotiation process, and we have received no signals from Petrobras indicating any change to our negotiations. We've engaged in very complex discussions that will take time, but we remain committed to the belief that privatizing the refining sector will enhance competitiveness and dynamics within the sector, and we want to be an active player in this new scenario. Regarding AmPm, yes, we have initiated work over the last two years with a new management approach, and we have a significant screening process for our stores. We have focused on implementing strategies informed by insights from our own operations and in partnership with resellers, which have proven to be beneficial. We have nearly 60 company-operated stores now, creating a win-win situation. In terms of digital innovation, we reported 2.3 million digital accounts, which is notable as it is tied to the kilometer advantage program. Last year, we recorded BRL3.5 billion in transactions via our app, totaling 35 million transactions with significant operational challenges. We have 3 million people with recurring transactions, reflecting the engagement we have in this trade.

Good morning, Luiz. Your question about Ipiranga, I'll start by responding with a comparison to the third quarter. We noticed an important effect on this comparison due to inventory gains and imports when comparing semester performance. The delta we have in relation to the quarters amounts to BRL100 million, translating to BRL17 per cubic meter. This difference plays an essential role in our strategy. In terms of the fourth quarter, we gained market share of approximately 3.5% for our branded offerings. While the non-branded products have not delivered volume growth, we believe the outlook provided with our guidance for 2021 indicates profitability for Ipiranga. This may show variations per quarter due to fluctuations in fuel costs, particularly regarding imports and inventory management.

The volatility is what stands out when we discuss margin and volume over the last few quarters. You gain market share but lose margin, and sometimes it's the other way around. It's challenging for us, on the outside, to fully grasp the company's strategy.

You are correct, Luiz. This situation is highly focused on the segment I mentioned concerning branded versus non-branded products. In the branded sector, we have maintained and gained market participation.

Frederico and Rodrigo, three questions. First, could you share the assumptions that led you to the guidance? When considering Oxiteno and Ipiranga, we observe varying outlooks, some quite distant. The macro assumptions are clear, and due to the uncertainty and volatility, it is important to understand what implications there are in terms of the baselines for these two segments. Secondly, regarding Ipiranga, I'd like to revisit your completion of 7,000 gas stations. Could you clarify how that works regarding the 7,107 service stations, particularly regarding losses and gains? Lastly, I'm interested in the changes brought about by the new model for AmPm convenience stores. What's the value proposition for both consumers and service station owners, and how do you envision the penetration of this model going forward?

Thiago, I’m sorry to interrupt, but there seems to be some issues with the audio. Could you please repeat that?

Sure. I was discussing AmPm stores and the new model's impact on the value proposition from both the service station owner's and the consumer's perspectives. Specifically, how do you anticipate the penetration of convenience stores evolving? Last year, it was over 30%, but it has decreased slightly since.

Thank you for the questions. Regarding the guidance for Ipiranga and Oxiteno, two primary factors impact the intervals we provided: the oscillation of fuel costs, particularly regarding ethanol, which has shifted significantly since before the pandemic, and the resulting margin fluctuations. At Oxiteno, we expect increased volume and margins in dollar terms due to changes in reference prices. Regarding service stations, we had 100 stations open and close in the fourth quarter, adjusting our focus towards larger, higher-quality stations, thus aiming to replace underperforming ones. It's crucial for these new stations to be 15% to 20% larger than the previous average. As for AmPm, our new model creates a more inviting atmosphere in our convenience stores, enhancing product display and encouraging sales of high-margin items such as fresh juice and baked goods. We've seen a positive impact, indicating growth of 10% in results within the new model, although few sales points are currently utilizing this approach. Additionally, we've started changing the management strategy at these stores, allowing Ipiranga to support its franchisees more effectively. Many service station owners prefer not to manage convenience stores, which presents a beneficial opportunity for us. Our goal is to increase AmPm store penetration in service stations, targeting a rise from 25% towards 40% or 45% over the coming years.

That’s clear, Rodrigo. Is there any change to your macro perspective regarding Ipiranga service stations due to this new model and the concept of convenience stores? How will it impact margins?

No, it does not change our overall perspective. The benefits of company-operated stores will exceed our previous expectations due to the results seen with these management changes. Thus, we are more optimistic about the overall performance of AmPm across the full network.

To complement what Rodrigo mentioned about the importance of convenience stores at service stations, we’re witnessing a global trend of increasing relevance. Our strategy will remain aligned, and we’re taking steps to enhance the significance of these stores in our operations.

Frederico and Rodrigo, can you hear me well?

Yes, we can hear you.

I have a question I would like you to elaborate on. Luiz also referred to the refinery situation. Given the recent volatility in the market, how do you foresee the progress of the negotiations regarding the refineries? More specifically, will Refab be sold, and are there uncertainties regarding other refineries? Could you elaborate on your strategic perspective for these assets and whether you're still pursuing opportunities?

Andre, this is Frederico. Thank you for your question. To clarify, our current situation is that we remain engaged in negotiations. We took a public stance immediately following the confusion surrounding the antitrust agency regarding Petrobras and its duty to maintain investment volumes. I can assure you that the contract has been signed, meaning that Refab negotiations are advancing. While it remains complex, we believe the worst-case scenario will continue with Refab alone. Although we might contemplate broader implications, it seems unlikely in the short term. In the long term, we may see gradual market openings, potentially allowing Petrobras to divest from the refining sector completely, similar to international trends. We believe that securing both Refab and Reland could result in capturing a significant percentage of our national market share, which would present a robust competitive environment. This situation remains fluid; we've engaged in negotiations for several months, and we'll adjust based on any changes.

As an additional question, hypothetically speaking, if you chose to withdraw from the acquisition, what penalties would be involved, and under what circumstances could the purchase effort be terminated?

Well, Andre, the process of negotiating contracts is not about canceling the purchase; it’s more about whether both sides can reach agreeable terms in a complex negotiation. We have not finalized anything yet, making it unlikely that we would terminate an arrangement at this stage. It's more a matter of ensuring revisions and adjustments are conducive for both companies. That's the status of our negotiations.

I have several topics I'd like to cover. First, regarding the fourth quarter EBITDA, could you discuss the reasons behind the lower margin? Was it due to specific dynamics, perhaps in imports or a competitive environment affecting margins? Furthermore, can you comment on whether the recent cybersecurity attack disrupted supply forecasts for diesel from Petrobras? Lastly, can you provide details on pump pricing at service stations, clarifying how costs are composed, potentially showing distributor and reseller margins? Additionally, regarding the new tax proposals, do you believe there's a chance this will become uniform across the states?

Thank you for your questions. I will start by comparing the gross margin for the fourth quarter. As I mentioned, there was a delta of gain from inventory and loss from imports—BRL100 million impacting this comparison. Gross margin was affected by this BRL7 per cubic meter. Regarding your second question about taxes, Fred will follow up here.

Yes, let me clarify if I understood your question correctly. You mentioned a potential supply issue with Petrobras. As far as I know, we don’t foresee any significant material impacts. I will defer to Rodrigo for further clarifications. However, regarding taxes, we view any potential changes favorably. Simplifying the tax system would streamline processes and could positively impact both consumers and the sector at large. We believe this approach would enhance efficiency without harming tax collection.

I understand that inventory gains and losses impacted the EBITDA margin. What considerations do you have for the first quarter, regarding the cybersecurity incident and its effect on supply delivery from Petrobras? Could this become a risk to performance in any respect?

I see. The threats of fuel supply disruptions might exist, but we have controlled our own volumes to mitigate risks. Therefore, the operational impact is low.

If the pricing remains high, that will contribute to lower results in the fourth quarter, correct?

Market conditions can lead to variability, and depending on the pricing window, it could either enhance or detract from the imported results. Ultimately, it’s contingent on market evolution throughout the quarter.

This concludes the questions and answers section. I would now like to turn the floor back to Mr. Rodrigo Pizzinatto for any closing remarks. Mr. Pizzinatto, the floor is yours.

Thank you all for your attention, and I will be with you in our next event, which will be the Ultracargo event in March. Thank you, everyone, and have a good day.

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