Ultrapar Participações S A : 1Q21 Transcription conference call

Local Conference Call

Ultrapar Participações S.A. (UGPA3)

1Q21 Results

6 May 2021

Operator: Good morning ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's 1Q21 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.

Today with us we have Mr. Frederico Curado, Chief Executive Officer and Mr. Rodrigo Pizzinatto, 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.

Should any participant need assistance during this call, please press *0 to reach the operator. 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, we would like to clarify that any statements that may be made during this conference call, relating to Ultrapar's business prospects, forecasts and operational and financial goals, constitute beliefs and assumptions of the Company's management, as well as information currently available. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions, as they refer to future events and, therefore, depend on circumstances that may or may not occur.

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. Frederico Curado.

Mr. Curado, you may now begin the conference.

Frederico Curado: Good morning everyone, welcome to our conference, thank you for your attendance. I would like to begin by mentioning that our first quarter was better than the first quarter of 2020 and also slightly better than our expectations, which is a great start to 2021 for Ultrapar.

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There is no other way to start this call but to once again highlight the competence that our teams have been demonstrating throughout these 15 months of the pandemic, both from the perspective of personnel safety and the continuity of our operations, which suffered no interruptions and maintained an excellent level of services to our clients, to our consumers.

Well, all of our businesses had excellent operational and financial performance at the beginning of 2021. Ultragaz continues on its path of innovation and productivity gains with great balance in another quarter, by the way, this is the best first quarter of its history, so another quarter with great balance between healthy margins and market share. Ultracargo, as well, had an excellent quarter and Oxiteno continues to take advantage of opportunities resulting from a favorable exchange rate and from import substitution. Ipiranga also had a great quarter and is beginning to reap the fruits of the investments in trading competence and operational improvements.

And as you may have seen, by the way, Ipiranga is restructuring its commercial area with the creation of a commercial vice-presidency dedicated to managing both the network and business customers, and for this position we are engaging Leonardo Linden. Linden is an industry senior, he was the CEO of our joint venture with Chevron on lubricants, ICONIC, and Linden therefore leaves our JV and assumes this newly created vice-presidency from May 1st.

Finally, with regard to Extrafarma, it showed another in-line result, part of the company's network was impacted by the second wave of the pandemic with stores in shopping centers closed or with great restrictions. Notwithstanding, it had a good inline result.

All of this has caused Ultrapar's EBITDA to reach almost R$1 billion and its revenue to be very close to that of 2020's first quarter, which means an expansion of our margin. Our net income has suffered a negative impact from the financial cost associated with the mark-to-market of the currency hedges of debts denominated in dollars, but it remained within our expectations thanks to our solid operating performance.

In this quarter we had a very significant dividend payment, dividends related to last year, 2020, and just to remind you that we had not made any advance payments last year, therefore, 100% of the dividend amount was disbursed now in March, but even so, we kept our debt leverage at the same level as last year.

By the way, we expect gradual reduction of this leverage over 2021 so that, throughout 2021 and 2022, we can be in the range that we aim for, which is somewhere between 2 and 2.5 times the value of the EBITDA of the last 12 months.

Moving on to the issue of the strategic agenda, we also expect to have progressed lots in the rationalization of our company portfolio by the end of the year. Negotiations with Petrobras for the acquisition of Refap continue normally, with no interruption and no change due to the transition in Petrobras' direction. We expect to be able to execute the purchase and sale agreement in the coming months and, besides such agreement, the several other complementary agreements associated therewith.

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In summary, therefore, we continue to execute the strategy designed in 2018 with the expectation that, in 2021, we will keep on reaping the fruits planted the last 3 years.

Before concluding, I would like to emphasize our focus on Grupo Ultra's ESG agenda, an agenda that will gain even more strength and objectivity this year, by the end of the year we will have defined and disclosed our goals for 2030, of course these goals are aligned with our strategy and are not just aspirational goals, but action plans and intermediate goals that will help us to achieve these results by the end of the decade.

So, I would like to thank you all for your attention, I would like to pass the microphone to Rodrigo, Rodrigo will detail this quarter's results. Thank you very much.

Rodrigo Pizzinatto: Thank you, Fred, and good morning everyone. It's a pleasure to be here with you once more to talk about Ultrapar's quarterly results.

Well, let's begin in slide number 4, with Ultrapar's consolidated results, on slide 4. As Fred has already pointed out, we started the year with positive news, despite the worsening of the pandemic in Brazil and the more volatile economic environment. Our EBITDA reached R$ 996 million in this first quarter, representing a 13% increase over the EBITDA we reported in the 1Q of 2020. As you may recall, in the first quarter of last year we had R$ 71 million of non-recurring tax credits from Oxiteno. If we exclude this effect, recurring EBITDA grew 23%, demonstrating the resilience of our portfolio, with growing results across all businesses segments.

Despite the EBITDA growth, net income was 19% below to that of the 1Q of 2020, due mainly to two factors. We had R$ 149 million of non-recurring tax credits in the 1Q of 2020, of which R$ 71 million positively affected EBITDA, as I already mentioned, and R$ 78 million benefited financial results. The other factor refers to the negative mark- to-market effect of FX hedging instruments, which negatively impacted our financial results.

In this first quarter, the more turbulent economic environment affected the mark-to- market of long-term hedging instruments contracted to protect our bonds that mature in 2026 and 2029. As we intend to hold these instruments to maturity, these effects are only temporary, as mark-to-market gains or losses will be neutralized over time.

I remind you that in the fourth quarter and in the first quarter of 2020, the mark-to- market effect was positive, given the better economic environment in those quarters.

It's worth mentioning the relevant investment in working capital we had this first quarter, as you can see in the bottom left graph. Typically, first quarters are seasonal cash consumers, since the year-end payments to suppliers undergo a natural increase as a result of the holidays in December. Besides that, in March we annually have a mandatory increase in anhydrous ethanol inventories. In addition to these effects, fuel and LPG prices rose significantly in the 1Q of 2021 which resulted in increased cash outflows, compared to price reductions in the 1Q of 2020.

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Another cash effect in this first quarter was the payment of dividends. Last year as you may remember we halted the dividend payment usually made in August, and we paid out all dividends from 2020 in a single installment in March this year. Even with a significant investment in working capital, we had a positive cash flow from operations in the 1Q of 2021 of R$ 128 million.

Moving now to slide 5, let's talk about liability management, we closed the quarter with a net debt of R$ 11.9 billion, an increase of R$ 1.4 billion over the net debt of December 2020. This increase is due to the aspects I just mentioned: working capital investment, dividends and negative mark-to-market from hedging instruments, and also to FX fluctuation over a portion of our bonds designated as hedge accounting. As a result, our leverage increased from 3.0 times net debt to ebitda in the 4Q of 2020 to 3.3 times in this 1Q, which we expect to be the peak leverage for 2021. The trend is a gradual leverage reduction starting in the next quarter.

It is also worth pointing out that, since the first quarter of 2020, we have been adding the leases payable line item to the net debt calculation, following the implementation of IFRS 16. This inclusion contributed to the increase in leverage, even though these leases are not financial debt. Still in the 1Q of 2021 we issued two infrastructure-linked debentures (or incentive bonds in Brazil) through Ultracargo, totaling R$ 460 million - both with a 7-year maturity and at a cost equivalent to 111% of the CDI rate.

Moving now to slide number 6, to talk about Ultragaz. Sales volume in the 1Q of 2021 was 4% lower than in the 1Q of 2020, with a 5% decrease in the bottled segment and 1% decrease in the bulk segment. The reduction in the bottled segment was mainly a result of the increase in demand for LPG bottles during March 2020, influenced by the social distancing effects at the beginning of the pandemic. The reduction in the bulk segment, on the other hand, is related to lower sales to commercial and services segments, the most affected by the restrictions imposed in response to the pandemic, partially offset by increased sales to industries.

Ultragaz SG&A expenses were 5% lower than that in the 1Q of 2020, due to lower expenses with provisions for doubtful accounts and to freight, as a result of logistics optimizations, in addition to initiatives to reduce expenses in several lines. Ultragaz EBITDA was R$ 150 million in the quarter, a 2% growth over the same quarter in 2020, as we predicted in the last earnings call.

Given the context, it was a very good quarter, especially considering the strong comparison base. This progression is due to expenses reduction and focus on efficiency, despite a lower sales volume and increased costs of LPG in the period. The prospects for the second quarter are of a slight growth in volumes and EBITDA over the 1Q of 2021, given the seasonally stronger second quarter. The 2Q21 performance, however, is likely to be lower than that of the 2Q of 2020, period that was the most benefited by the effects of social distancing, when we had unusually stronger demand in the bottled segment.

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Let's now move to Ultracargo, on slide 7. Average installed capacity reached 843 thousand cubic meters in the 1Q this year, a 3% growth year over year, a result of the tankage capacity expansions we implemented at Itaqui in the last 12 months. The cubic meter sold remained flat year over year, with increased handling in Itaqui due to the capacity expansions I just mentioned, offset by lower fuel handling in Suape, Santos and Aratu, as a result of lower import volumes.

Net revenues for Ultracargo totaled R$ 172 million in the 1Q of 2021, a 5% growth over the 1Q last year, due to the expansions, contract readjustments, and a greater number of spot operations. Combined costs and expenses increased 8% during the quarter, mainly on the back of increased expenses with leasing readjustments, depreciation - resulting from capacity expansions -, variable compensation, aligned with results progression, and IT related to initiatives for productivity gains.

It is worth mentioning that in the 1Q of 2020 we had a R$ 4 million gain from the refunding of a previous compulsory loan to Eletrobrás that was recorded as other operating results, a one-offnon-recurring effect. Still, we achieved a record level of EBITDA at Ultracargo of R$ 93 million in the quarter, 2% above that of the 1Q of 2020, as a result of higher sales revenues, partially offset by increased costs and expenses. Ultracargo continues to follow its expansion with profitability plan.

For this second quarter, we expect a higher-than-usual increase in operating costs due to concentrated maintenance and services at our terminals. Nevertheless, we project EBITDA growth in relation to the R$ 80 million recurring EBITDA of the 2Q of 2020, approaching the reported EBITDA of the 1Q this year.

I also wanted to highlight, as you can see in the slide, that in early April we won an auction bid for the concession of an additional area in the port of Itaqui, in line with our strategy of expansion with profitability. Such concession will allow us to expand our overall tankage capacity by another 9%, as well as to consolidate our position in the Itaqui terminal in a single continuous area, together with our existing operations there, generating scale and productivity gains.

Moving on to the next slide, number 8, to talk about another great quarter of Oxiteno. Sales volume in the 1Q this year was flat over the 1Q of 2020, but with an improved sales mix. The share of specialty chemicals grew from 82% to 90% year-over-year. The specialty chemicals volume was 9% higher than that of the 1Q of 2020, due to increased sales across all segments in Brazil, especially crop solutions and home and personal care, in addition to increased sales of our international units.

Oxiteno's US operation was impacted by the hard winter that hit Texas in February, when it remained closed for about 30 days. Even with the closing, we had a 5% growth in volumes. The volume of commodities, on the other hand, decreased by 42%, as we prioritized specialty chemicals, given that we are in a period of scheduled shutdowns. SG&A expenses increased 15% during the quarter, due to the exchange rate fluctuations of international units, to provisions for waste disposal at our plant in Uruguay, and to increased freight expenses.

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