Earnings Call Transcript - UGP Q3 2022

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Ultrapar’s third-quarter 2022 earnings presentation. We are streaming this event online, which can be accessed at ri.ultra.com.br. The presentation will be led by Mr. Rodrigo Pizzinatto, Ultrapar’s Chief Financial and Investor Relations Officer. In the Q&A session, we will also be joined by Mr. Marcos Lutz, Ultrapar’s CEO, as well as the CEOs of our various businesses, Mr. Tabajara Bertelli, Decio Amaral, and Leonardo Linden. Please note that this event is being recorded, and all participants will be in listen-only mode during the company’s presentation. After Ultrapar’s comments, we will have a Q&A session, and further instructions will be provided. A replay of this call will be available for seven days. Before we begin, I would like to mention that forward-looking statements will be made in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act of 1996. These statements are based on the beliefs and assumptions of Ultrapar management and on current information available to the company. They involve risks, uncertainties, and assumptions, as they pertain to future events and depend on circumstances that may or may not happen. Investors should keep in mind that general economic conditions, industry conditions, and other operational factors could impact Ultrapar’s future results and lead to outcomes differing significantly from those in these forward-looking statements. Now, I will turn the conference over to Mr. Rodrigo Pizzinatto to begin. Mr. Pizzinatto, the floor is yours.

Rodrigo Pizzinatto, CFO

Good morning, everyone. It’s a pleasure to be here again to discuss Ultrapar’s results. To begin, I want to emphasize an important aspect of the earnings report related to our divestments. After signing the sale agreements for Oxiteno and Extrafarma, we have classified the results from these companies as discontinued operations in our financial statements since the end of 2021. Following the sale of Oxiteno on April 1st and Extrafarma on August 1st, their results are no longer included in Ultrapar’s financials from those closing dates onward. In this quarter, Ultrapar’s discontinued operations reflect only Extrafarma’s results for July. From the fourth quarter onwards, we will only report continuing operations. Presently, both the earnings release and this presentation feature the company's pro forma consolidated information, which includes the sum of continuing and discontinued operations. Now, let’s move on to Ultrapar’s consolidated results for the third quarter of 2022. As indicated in the chart on the upper left side, our recurring EBITDA from continuing operations reached R$890 million in the third quarter of 2022, representing a 50% increase compared to the same quarter last year, primarily due to improved performance across all three business segments. Ultrapar’s net income for the third quarter was R$83 million, down R$292 million from the previous year’s third quarter, mainly due to one-time factors impacting both periods. In the third quarter of 2021, we experienced a positive effect from income tax reversion related to a monetary adjustment for tax credits amounting to R$196 million, which resulted from a favorable ruling by the Brazilian Supreme Court. In the third quarter of 2022, we faced two negative adjustments: the first related to the closing adjustments from the sales of Oxiteno and Extrafarma totaling R$75 million, and the second concerning the mark-to-market value of hedges amounting to R$40 million. These were partially countered by the increased EBITDA from continuing operations. Investments from continuing operations reached R$524 million in the third quarter of 2022, a 23% rise compared to the same period in 2021, largely driven by increased investments in Ipiranga. I would also like to mention that the Board of Directors has authorized an additional R$265 million investment for Ipiranga this year, on top of the already disclosed 2022 investment plan, mainly to take advantage of new opportunities for establishing service stations. This quarter, we generated R$1.3 billion in cash from operations, compared to R$604 million in the third quarter of 2021. This rise in cash generation stems from a release in working capital due to fuel price reductions during this third quarter and effective inventory management, despite the lower EBITDA, as last year’s third quarter included results from Oxiteno and Extrafarma. Now, addressing our liability management, we concluded the quarter with a net debt of R$7.4 billion, representing a reduction of R$725 million from June 2022. This decline is primarily attributed to the sale of Extrafarma in August, which resulted in R$372 million from the first installment, alongside the outflow of leasing obligations totaling R$380 million that were included in our net debt, in addition to the earlier mentioned working capital release. These two factors were somewhat offset by the payment of interest on equity in August. Our leverage ratio decreased from 2.2 times in June 2022 to 1.9 times in September 2022 due to the net debt reduction and EBITDA growth from continuing operations. It’s important to note that the net debt figures for the third quarter of 2022 do not account for pending receivables of R$1.1 billion connected to the sales of Oxiteno and Extrafarma; should these be included, our leverage would stand at 1.6 times net debt-to-EBITDA for the third quarter of 2022. The average cost of our debt decreased from CDI plus 1.3% in the first nine months of 2021 to CDI plus 0.5% in 2022 as a result of our comprehensive review of our debt and financial investments over the past two years. Next, let’s discuss Ultragaz’s performance, which had another strong quarter. The LPG volume sold in the third quarter was 1% lower year-over-year, primarily influenced by a 3% reduction in demand for bottled gas. Conversely, the bulk segment saw a 5% increase, driven by higher sales of special gases in the commercial and service sectors. Ultragaz's SG&A expenses rose by 20% compared to the third quarter of 2021, largely due to increased personnel costs from collective bargaining agreements and variable compensations aligned with performance progressions, as well as higher sales commission expenses. Ultragaz’s EBITDA reached a record R$332 million, reflecting a 51% growth year-over-year, largely owing to better margins from efficiency and productivity initiatives implemented recently, as well as the inflation pass-through effect, despite higher costs. For the next quarter, we anticipate results similar to those of the third quarter, although typically with lower seasonal volumes. Moving on to Ultracargo, we experienced another quarter of record results. The average installed capacity was 955,000 cubic meters in the third quarter of 2022, representing a 9% year-over-year growth fueled by the start-up of the Vila do Conde terminal in December 2021 and tank capacity expansions at the Itaqui terminal during the past 12 months. Ultracargo’s net revenues amounted to R$225 million in the third quarter of 2022, a 26% increase year-over-year, driven by contractual adjustments and higher volumes sold due to capacity expansions. Combined costs and expenses rose by 18% compared to the third quarter of 2021, primarily affected by costs from the Vila do Conde terminal, which began operations in December 2021, accounting for approximately 60% of this increase, along with higher depreciation costs related to capacity expansions and investments made over the past year, and inflation impacts on personnel and inputs. These increases were somewhat mitigated by productivity and efficiency gains achieved over the past year. Ultracargo's EBITDA reached a new record of R$136 million in the quarter, a 34% year-over-year increase due to capacity expansions with profitability improvements, contractual adjustments, as well as productivity and efficiency enhancements. The EBITDA margin also hit a record high of 61% in the third quarter of 2022, marking a 3 percentage point improvement from the same quarter last year. For this current quarter, we expect Ultracargo's strong operating performance to persist, with results comparable to those seen in recent quarters. Finally, I will discuss Ipiranga’s results. The volume sold increased by 3% compared to the third quarter of 2021, with diesel volumes growing by 4% and the automotive cycle increasing by 2%. As predicted in our last conference call, Ipiranga’s margins faced more pressure in the third quarter of 2022 relative to the first half of this year. This was mainly due to inventory losses linked to the price cuts announced by Petrobras and the reduction in the ICMS tax rate. Along with the decreasing costs, the market experienced a larger volume of imports and improved product availability, which put additional pressure on commercial margins. Despite these margin pressures, we observed a significant working capital release this quarter due to falling fuel prices and effective inventory management. This led to an improvement in our return on invested capital, which has reached the highest level in the past two years, although it remains below its potential. I’d like to note that from this quarter, we have started publishing a new financial spreadsheet on our Investor Relations website showing the evolution of the return on invested capital for our primary businesses. By the end of the third quarter, we operated a network of 6,940 service stations, a decrease of 70 stations from the previous quarter, in line with our strategy of managing low-potential legacy stations, as previously mentioned during our Investor Day. We opened 84 new service stations, contributing an average of 275 cubic meters per month, while 154 stations were closed with an average contribution of 32 cubic meters per month. Despite the loss of service stations, the net volume impact was positive, reinforcing our strategy of enhancing density and quality in our service station network. Additionally, we concluded the third quarter with 1,672 AmPm stores, achieving same-store sales growth of 17% year-over-year. Ipiranga’s SG&A expenses were 8% higher for the quarter due to increased freight costs stemming from rising diesel prices and higher sales volumes, alongside higher personnel expenses related to collective bargaining agreements and variable compensations in line with performance outcomes, and additional costs due to the expansion of AmPm stores, which grew from 149 to 255 units year-over-year. These increases were partially offset by higher reversals of provisions for doubtful accounts. The other operating results recorded a loss of R$176 million in the third quarter of 2022, down R$181 million compared to the same quarter last year, mainly due to increased expenses from carbon tax credits and one-time tax credits recorded last year. The assets disposal line showed a value of R$49 million in the quarter from the sale of equipment and eight real estate assets. Ipiranga's EBITDA reached R$533 million in the quarter, reflecting a 34% increase from the third quarter of 2021. The recurring EBITDA was R$483 million, exhibiting a 41% growth year-over-year driven by improved margins and heightened sales volume, despite rising expenses and costs associated with carbon tax credits. Looking ahead to the first quarter, we continue to face a high degree of uncertainty regarding domestic gasoline and diesel prices, along with potential disruptions on roads. With that context, we anticipate profitability levels in the fourth quarter to be similar to those reported in the third quarter. That concludes my presentation. I appreciate your time and attention, and now we can move on to the Q&A session. The CEOs of our three primary businesses, along with Marcos and myself, are here to answer your questions. Thank you very much.

Operator, Operator

Our first question is from Luiz Carvalho, UBS Bank.

Luiz Carvalho, Analyst

Thank you for this opportunity. Can you hear me? I have two questions. The first one is for Marcos Lutz. Lutz, a good part of what we are discussing has been covered since your arrival, new capital allocation processes based on concepts. Yesterday, you mentioned a few best practices or new Board members, and I would like to know how you see this process? This, as you are in the other group as well, how do you see this process of Board renewal for next year? My second question is for Linden, we are analyzing free cash flow for Ipiranga and when we exclude impacts below the EBITDA line, exclusivity benefits, interests, leasing, etc., we see that cash generation has been decreasing since the end of 2021. Of course, the operational margin is okay, let’s say, given the scenario in the industry. But Ipiranga’s cash generation, let’s say, it’s suffering. I would like to understand how you are seeing this matter?

Marcos Lutz, CEO

Thank you for your question. We adjusted our policies to only accept legal restrictions. There are not many new things in policies. And the other question, it’s a little early to announce exact numbers. But we can say that the engagements of the Board mentioned a year ago are really yielding renewal, good transition, and the company is being prepared for the next 10 years in a very positive way. I am very happy with that, and I find what we are doing for long-term governance very adequate. Over the next three months, all this will be much clearer. We will see what we are deciding as a Board for next year. Things are working in the way I find the most adequate one.

Leonardo Linden, CEO, Ipiranga

Good morning, Luiz. First of all, on the investment question, we are investing more this year than we did last year. You have seen that we approved an additional investment fund because we have very positive network growth. We are following the profile we have designed. We have good sales levels and volume sales and the impact of higher prices consumed some capital throughout the year. However, this trimester has seen very positive capital performance, not only due to lower prices but also due to better inventory management, improving stock management from 16 days to 10 days. There are vectors that point to, on the one hand, a higher cash consumption, but on the other hand, consistency of our work. This is what I’d say.

Luiz Carvalho, Analyst

Thank you, Lutz, for your answer. Would it be reasonable to think that due to the investment by the company, we might expect an expansion of the margin and EBITDA per cubic meter in 2023 and 2024?

Marcos Lutz, CEO

There was an interruption in your question.

Luiz Carvalho, Analyst

My question is this one: would it be reasonable to think that due to the level of investment of the last few years, there will be a normalization or an expansion of EBITDA per cubic meter in 2023 and 2024 in Ipiranga?

Marcos Lutz, CEO

Well, from the investment point of view, this kind of number makes sense, and we hope this contributes to our company’s profitability.

Operator, Operator

Our next question is from Thiago Duarte, BTG Pactual Bank.

Thiago Duarte, Analyst

Thank you. Good morning to all of you. I’d like to discuss Ipiranga further with Linden in the context of the approval of this additional investment for this year. My question is, to what extent do you think this is a result of the new capacity Ipiranga has to improve the commercial response to retailers and to what extent it reflects not only what has been done over the last trimester, but also based on what we have seen last year? We have seen difficulties such as a restricted import window, and difficulty to compete with large players. So I would like to know how much of this positive scenario is due to one thing and how much comes from the general industry situation? My second question is, can you provide an indication of the investment volume for next year? It should not be a one-off opportunity. These would be my two first questions. And another one, from Rodrigo’s presentation, he pointed out the effects of expenses on Ipiranga’s margins, and he mentioned reversal of provisions. I don’t know whether you are able to say how much of this consolidated figure comes from Ipiranga. I would like to know that if possible?

Leonardo Linden, CEO, Ipiranga

Okay. If I forget something, you tell me. As to investments, we have the two factors. Of course, today the market in general values the supply capacity and infrastructure behind businesses. And so of course, we get closer to businesses leveraged by the value a company such as Ipiranga can offer. We have not only at the service station level, but in the financial market as well. There is a component of a better environment, of course. But, of course, Ipiranga has improved as well. If we see our investment history throughout the last few years, you can see that our rhythm is speeding up, and of course, there is a process of recognition that the company is following a good path. We still have a lot to do, but we have to say that those two factors are at play here. We are opening new service stations, and the level of activity is quite positive. In terms of investments for next year, we cannot disclose that now. We will say that at the right time, and regarding the effect of expenses, the impact of reversals of provisions for doubtful accounts is in the order of R$20 million, based on negotiations of debts and the recovery of a few cases that were being discussed. Throughout the year, this expense is quite neutral, not positive or negative for the year.

Rodrigo Pizzinatto, CFO

Thiago, we will disclose in December our investment plans for 2023 for Ultra.

Operator, Operator

Now Gabriel Barra from Citibank.

Gabriel Barra, Analyst

Hello. I’d like to focus on Ipiranga as well in a different way. The CapEx, well, Linden has commented on that. But I would like to understand that the CapEx increased; we have seen as a sector, not only your company’s, it’s interesting for new branding. However, I’d like to understand your focus in our region and how can you brand new service stations? I’d like to understand what the return is in terms of these new branded service stations, and what profitability for them is, so that we can calculate? Then, to the operation, if you take data for this year, we are discussing 430 service stations, what can you still do, and what should we expect? You mentioned an increase in average volume in service stations, but your focus here is to emphasize higher volume service stations, and we can see there is a decrease in volume here. Is this a result of new measures and what can we expect in terms of reduction of SG&A? My last question concerns cash generation; we have here this figure in working capital, and there was higher consumption. Please tell us what we can expect for the next trimester: a reduction in working capital or an improvement in return on invested capital with the CapEx increase.

Leonardo Linden, CEO, Ipiranga

Well, our activity is higher and the CapEx increased depending on the comparison term you get; one way or another. In 2020 and 2021, we slowed down due to the market slowdown. There is an increase relative to that, but our CapEx is not far from what Ipiranga used to invest historically. Our main focus is on qualified growth, particularly the expansion of our network. We are looking for larger service stations with higher average volume or higher volume to have a more efficient network. But we do make one-off investments in certain spots. We are looking for a real return above 15% and we are finding those investments. Regarding operations, there are no news here. I mentioned Ultra Day because we presented our four pillars, which we have mentioned throughout the last 12 months. We stated that we were looking to optimize service stations and do away with those that are not contributing. On the contrary, our volume increased 7% relative to the previous trimester. Based on that part of this exclusion of service stations is a natural aspect of the business. The other part is a result of speeding up this process. At SG&A, we benefited from the speed in reversal of provisions for doubtful accounts. Mentioning Ultra Day, I said it was very important to invest in our operational efficiency, hence, of course, we are looking for a more efficient SG&A, and there is space to improve our efficiency, which will benefit our audiences. In terms of cash generation, the bulk of this generation resulted from price reduction, which was strong at the beginning of the trimester. Additionally, there is a qualitative work we have been doing: better inventory management, enhanced discussions with our suppliers, and better deadlines; all this has positively impacted approximately R$900 million based on price reductions, but not only.

Gabriel Barra, Analyst

Thank you.

Operator, Operator

Our next question is from Regis Cardoso, Credit Suisse.

Regis Cardoso, Analyst

Thank you for this opportunity. I congratulate you on your results. Two main topics: the first one is discussing Ultragaz. You reported your return on invested capital in Ultragaz is over 25%. I would like to know how do you assess this level of return? Is it based on an old basis, or will this have an extraordinary effect on margin that is high? If the return is this high, do you see opportunities to keep on investing and achieving the same level of return looking forward? The other topic concerns turnaround, it concerns Ipiranga mainly. What are your expectations in terms of recurrent margins? We saw a very negative effect in Q3 in terms of inventory loss, etc., and I think that the recurrent margin level should be different? Could you please comment on examples of what has been done or what is to come, and I’d like to understand whether this turnaround process has passed halfway and what we should expect?

Tabajara Bertelli, CEO, Ultragaz

Thank you for your question. In terms of the results level, Ultragaz is a company that has been investing for a long time. In terms of this trimester performance, we can see an evolution relative to what we have discussed in previous meetings. In terms of implementing the strategy, it’s the same; it’s not different. This trimester, we have evolved in terms of commercial and operational efficiency and innovation. We have been capturing additional values, and our vision and our challenge is to keep up with this profitability level. We have seen that these levels have been achieved and they significantly contribute to the company’s profitability. Let me start from the end of your question. You asked, what has been done? Then we can tackle the part of what we expect. I will mention Ultra Day once more. We presented the four pillars for Ipiranga: pricing, logistic efficiency, trade, and renewing relationships. We have advanced in pricing and relationships, what I call engagement by enchanting. We have discussed pricing, everything that changed in smart processes, tools, and team tools; now our work is more consistent and transparent. This means pricing intelligently in a continental country with different markets. We have made a great deal of progress and we still have a lot to do, but we have advanced in relationships and it reflects in the new business we are doing. We have positive trends in NPF; many indicators show we have advanced, and we have made progress. In logistics and trading, we have made progress, but they are more structural and take time. In logistics, we see efficiency gains, and in trading, it will increase our execution capacity as we grow. We have internal factors that we expect will impact our margins. But when you mention margins, there are also external factors we cannot predict. We have supply levels in Brazil and many other factors that impact and arise from the external environment which we cannot control. At the internal level, we are opening different fronts that are generating efficiency. There is an important evolution, and I am pleased with all we have done on those four pillars, as they have consequences for our business, profitability, and ability to invest, as well as on the return on invested capital, whose trend is positive. We cannot say we have done everything; there is still a lot to do, but we are on the right path.

Leonardo Linden, CEO, Ipiranga

Regis, the roadmap you mentioned consists of a continuous process. How long will it take to implement all those measures and capture results? This is a process; it takes time. We have captured part of it, but there is still another part to be captured. We believe that a relevant part will come over the next two years, particularly in logistics. In terms of vision, this business must return to a 20% return on invested capital; I am not saying this will happen next year, but this is our outlook for how this business can generate returns.

Regis Cardoso, Analyst

Thank you. Thank you, Tabajara. Thank you, Linden.

Operator, Operator

Our next question comes from Leonardo Marcondes, Bank of America.

Leonardo Marcondes, Analyst

Good morning. Thank you for taking my questions. Let me follow up on Regis’ question regarding Ultragaz. I’d like to know how you see business margins for next year, more gain in efficiency and productivity. Where would these gains come from? My next question is on Ultracargo; the company is doing very well, but I’d like to know how the presidential elections affect the business plan. Petrobras might once again invest in refining and the country stops importing fuel in the long term.

Tabajara Bertelli, CEO, Ultragaz

Let me complement what I have said about Ultragaz. We believe that our strategy will evolve. We will continue from the level we achieved so far. We don’t believe it will be very different from what we have now. But we will keep implementing our strategic plan, moving forward and following our plan, and implementing innovations to capture efficiency, which will impact our results. We have achieved important levels, and we will move on from there.

Decio Amaral, CEO, Ultracargo

Thank you for your question. The fact that Petrobras might start refining in the mid-term does not change the fact that the north and northeast have a production deficit. When we invest, we study the logistical merits of the investment with transportation by coastal ships in the ethanol and fuel markets, and this is a product we will deal with at our terminals. We trust this investment and this activity and our business plan looking forward.

Operator, Operator

Our next question is from Bruno Montanari, Morgan Stanley.

Bruno Montanari, Analyst

Good morning. Thank you for taking my question. I have a few follow-ups. I know you will not give details on the effects on margin for Ipiranga. Over the course of the last two trimesters, what would be a good alternative to handle the effect of volatility? And for Tabajara, could you please tell us about the process of maturation regarding investment in new gas verticals? You mentioned you have new businesses, should we see an evolution of the new verticals in the next trimesters and over the next years?

Leonardo Linden, CEO, Ipiranga

Bruno, this is Leonardo. I think it’s too simplistic to base our perspectives on averages. If you have a good gain and a significant loss, let’s say, we have a good average. We have had different scenarios regarding supply, which impacts our business. A low offer in the market in 2022 has been the rule in Brazil, which affects how we operate.

Tabajara Bertelli, CEO, Ultragaz

It’s hard to hear, so we have discussed this at Ultra Day regarding Ultragaz' capillarity. We will engage when we see that the value is relevant. We will keep an eye on that.

Bruno Montanari, Analyst

Thank you.

Operator, Operator

As there are no more questions, I will give the floor back to Mr. Rodrigo Pizzinatto for his closing remarks. You have the floor.

Rodrigo Pizzinatto, CFO

Thank you all for your questions. The questions we were not able to answer will be addressed later on. We will contact you. Thank you very much. We will meet again in February.

Operator, Operator

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