Ultrapar Participações S A : Second Quarter 2020 Earnings Results

Local Conference Call

Ultrapar Participações S/A

Second Quarter 2020 Earnings Results

August 13th, 2020

Operator: Good morning ladies and gentlemen. At this time we would like to welcome everyone to Ultrapar's second quarter 20 results conference call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br,and the 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 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, 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's 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 now begin the conference.

Mr. Fred Curado: 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 was quite efficient and we were actually able to go through these 3 challenging months better than we expected.

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So since the end of March, we established 2 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 5 businesses were considered essential to the population and we had 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 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 thanks God, everybody is at home, nobody is even in hospitals.

If we consider that most of our staff works in the field activities I clearly can say that there are protocols for symptom identification, for testing, selective isolation and monitoring. Those protocols they have been very efficient.

Of course, also we have staff in home office. We began to return to offices last Monday, actually, on August 3rd, Monday of last week, and this return is gradual, is very smooth and it's going on quite well so far.

I believe that the vast majority of companies have realized (we certainly have ourselves) that home office has been working extraordinary well, far beyond what market expected and imagined before the crisis.

So we don't know when or how will be the new normal of office work, how it will look like in the future, but surely, we don't think we will have 100% of our people driving back and forth every day to office. We think there will be some changes to that and the experience of the next months, several months, I think will tell us where we are going to land as far as balancing home office and actual presence in the office. So it's been very interesting learning in this whole period.

Now, regarding to the second priority, which is operation continuity, we actually managed to maintain all of our operations without any interruption whatsoever despite the logistic and mobility challenges that we experienced here in Brazil, in São Paulo in particular, lockdown and etc., but we didn't have a single day of interruption, which is great.

So, it's no small thing, and actually I think we have to recognize the quality and the tenacity of our teams, also of our leaders, they really have gone the extra mile in this period of hardship and they kept our people safe and engaged with our commitments.

Before talking about the results, let me just touch on 2 other points about the crisis: one, support for our resellers; and two, essential actions in supporting to fight against pandemic.

So in short, we took a very proactive attitude, we were agile and we were flexible with our suppliers, with our customers, our partners and our resellers in an attempt to

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preserve the integrity not only of our operations, but their operations as well and ultimately keep the services to the population.

So we were proactive in renegotiating contractual obligations, we were proactive in working in some capital relief measures for our partners, and in the end, we did ensure the continuity of the value chains, but also the stability of the level of default in our balance sheet, which did not grow in the quarter. So that's another important result.

And one last word on the crisis regarding social support, we destined about R$ 20 million mainly to the construction of hospitals, always in partnership with private hospital operators and completely overcome this well, as it was the case in Rio and Porto Alegre, for example. We also donated LPG, donated medical equipment, meals for truck drivers, we granted field discounts for the health professionals, among several other actions.

Okay, so let's move now to the financial results. Well, the impact of the crisis was concentrated in Ipiranga as you probably read in our release, and that, of course, that impact was a result of the combined effects of: one, significant reduction in demand, mainly gasoline and ethanol; and two, the sharp decline in oil prices, of course, it generated a huge loss in inventory value, which, of course, we'll recovery over the time.

So, the other businesses, on the other hand, they showed enormous resilience to the crisis, including Extrafarma, which went through the quarter with about 7% of its stores closed, stores which are located in shopping malls, which were shut down.

Commenting briefly on other businesses, Ultragaz had a very good quarter, we did experience some reduction in volume for the bulk customers (these are small and medium-sized enterprises), but we saw a growth in the household consumption and we were able to sustain good margins in both segments, bulk and in household.

Shifting to Ultracargo, also great quarter despite a small reduction in movement of cargo, but the storage commitments remained very firm and the margins also remained firm. So it's a good quarter for Ultracargo.

And finally, Oxiteno we had some reduction in volumes for some segments, such as coatings and paintings, oil & gas, obviously, an automotive. But, on the other hand, the agribusiness and the HPC sectors they exceeded our expectations. In addition to that, Oxiteno has benefited from the devalued exchange rates, a weaker real, and also in the drop of the cost of ethylene in the last quarter.

So in short, we had a difficult second quarter for sure, but, you know, that tested the resilience and agility of our company and our portfolio with results that we deem it very satisfactory given the uncertainties and the volatility that we all experienced.

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So, we anticipate a second half of continuous recovery in economic activity in Brazil and, of course, Ipiranga along with that recovery. So, we really believe that the greatest difficulties are behind us already.

So, the next several months will be also important for the implementation of the Abastece Aí as our new business, announced a few weeks ago. That business we believe there is implicit value and we really hope to materialize that in coming years. So, that's the startup phase of the new business.

A word in our strategic agenda and our strategic vision: they remain unchanged. On one hand, of course, we will continue to pursue improvements of results in all of the businesses. On the other hand, also a lot of discipline and focus on cash management, and also, of course, in capital allocation. And undoubtedly, I have to mention that all of that has to be supported by a continuous development through a pipeline of talents and also of what we call entrepreneurial leaders.

One last comment before I give the floor to André. We decided to not advance dividends this semester, but the company maintains (absolutely maintains) its commitment to pay the minimum dividend equivalent to 50% of our annual net income, which, by the way is, determined by our bylaws.

The decision not to make this half yearly advance, as has been our practice over the years, is in the context of cash preservation, in the context of an economic scenario which is extremely uncertain and volatile. So, obviously, as usual, the dividend proposal related to the 2020 fiscal year will be submitted for approval along its financial statements for next year in our AGM.

So, no change there. The only change is that we did not advanced the dividend distribution.

So with that, over to you, André. Thank you.

Mr. André Pires: 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 bottle segment, volumes 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, also impacted by the pandemic. This reduction was offset by a growth in sales to condominium and for special gases.

SG&A fell by 11% versus the second quarter of 2019 thanks to the 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 sales volume and

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additional expenditures with donations and for protective equipment in order to tackle the pandemic.

As a result, Ultragaz EBITDA reached R$ 206 million, a 69% growth compared to the same quarter of last year due to the increase in sales volume, improved operational efficiency and focus on cost and expenses control.

Looking ahead at Ultragaz business environment, we expect to see a gradual recovery in sales volume for the bulk segment, mainly coming from industry, commerce and services and a continued 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% to its average capacity compared to second quarter last year due to the expansion at the 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, in addition to the 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 the Santos and Itaqui terminals and additional expenses with donations and EPIs related to COVID-19. It is important to highlight that Ultracargo reduced its Opex per cubic meter sold by 10%, demonstrating an improved productivity.

In the second quarter of 2020, Ultracargo's results benefit 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 fire incident in 2015.

Ultracargo's EBITDA reached R$ 92 million in the quarter. If we exclude the nonrecurring impacts already mentioned, the year on year EBITDA growth was 35% due to increased operations and the rationalization and dilution of costs and expenses. The EBITDA margin in the quarter was 59%.

Despite the impacts of the pandemic, the outlook is for maintaining the capacity utilization level with a gradual recovery in handling throughout the second half of the year, in addition to initiatives to increase productivity, indicating continued EBITDA growth year over year. Ultracargo remains focused on its capacity expansion by increasing its footprint in the ports where it already operates, as well as expanding towards new regions, such as in Vila do Conde, state of Pará.

Moving on to slide 7, talking about Oxiteno, where total volume decreased by 9% and the volume of specialty chemicals was down by 5% compared to the same quarter in

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2019 due to a drop in coatings, automotive and oil & gas, despite the increase in the crop solutions and home & 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 US Dollar.

SG&A rose by 3% due to the FX translation effect at the overseas operations and increased expenses with international freight, following the increase in exports. Oxiteno remains committed to reducing costs and expenses and we have already noticed in this quarter a reduction in expenses with payroll, business travel and services in general, which contributed to preserve the 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 19, resulting from better unitary margins in US Dollar and the BRL devaluation, despite lower sales volume.

Oxiteno's outlook is to maintain the current volume levels for the most resilient segments, such as Home & personal care and crop solutions, and a gradual recovery in segments more impacted by the pandemic, notably coatings. In addition, the positive effect of the exchange rate depreciation on Oxiteno's results combined with the ramp up at the Pasadena plant and better unitary margins maintain the expectations for a year on year growth in EBITDA.

Moving now to slide 8, talking about Ipiranga. Ipiranga saw an 18% year on year drop in sales volume with a decrease of 28% in Otto Cycle and 7% in diesel due to the significant impacts of the pandemic on fuel consumption in Brazil, mainly in April, followed by gradual recovery in May and June. Total sales volume at Ipiranga in April declined 27% on a year-over-year, while it fell by 17% in May and 7% in June.

We ended the second quarter with a network of 7,105 service stations, a gross addition of 94 and 95 churn in the period. The am/pm network ended the quarter with 2,345 stores, of which 17 are company-operated stores, all located either in São Paulo or Rio de Janeiro.

The outcome of the pandemic on the global economy, in addition to the price war in the international markets, affected the supply and demand balance in the oil market, triggering sharp price volatility for gasoline and diesel. The prices for products fell dramatically in late March and April followed by a partial recovery in May and June. Besides, the price of ethanol also fell 25% in April. Consequently, Ipiranga incurred significant inventory losses in the quarter due to remaining effects of the price drop in March and also due to additional prices reductions within the second quarter itself.

However, Ipiranga posted SG&A reduction of 32% compared to the second quarter of 2019. This was a consequence of the 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

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working capital that contributed to a 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 2019, mainly related to lower sales volume and the impact from the price drop mentioned, which were partially offset by reduced expenses. It is worth mentioning that the result for June represented an important evolution compared to the result for the rest of the quarter.

The trend is for a gradual recovery in volumes and results although still in levels below last year and also with lower volatility in fuels prices. We observed this evolution in June, and we continue to see the same evolution in 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 these units, 38% are still in the ramp-up phase compared to 53% in the same quarter last year, reflecting greater selectivity in the expansion and the 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 19 mainly due to the 5% lower number of stores and the temporary closing of 7% of the stores located at shopping malls due to the pandemic. However, the stores that remained in operations registered an increase of 4.6% in same store sales driven by the strengthening and expansion of home delivery operations, as well as through 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 the reduction in payroll expenses and the opening of a Distribution Center in São Paulo in the third quarter of 19.

With this, EBITDA was R$ 14 million in the quarter. Excluding the non-recurring credits of R$ 16 million recorded in the second quarter of 19, the EBITDA showed a R$ 12 million improvement compared to second quarter of 19 due to operational improvements made in previous quarters and despite the impacts of the pandemic.

Currently, all stores are operating, and pharma sales remain resilient despite the lower flow of customers, especially in drugstores located in shopping malls. We are continuing with our initiatives related to operational improvement, digital development and cost reduction, and therefore, the outlook is for continued EBITDA growth on a recurring basis.

Moving on to the consolidated results for Ultrapar, 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 that we have already

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mentioned, EBITDA was R$ 599 million, a decrease of 18% in the quarter mainly due to the sharp decline in EBITDA at Ipiranga, that was impacted by the social distancing measures, offset by an increase 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 of 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 second quarter of 2019, which increased interest expenses last year.

This effect was partially offset by the appreciation in Ultrapar's stock price over the subscription warrants issued at the time of the acquisition of Extrafarma and that had a negative impact in the second quarter of 2020. Net income was R$ 50 million, 59% less than the second quarter of 19, mainly the result of lower EBITDA.

In this quarter, management opted for not paying 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, mainly in maintaining the service station network, and at Ultragaz for replacing and acquiring gas bottles. In early April, we announced a reduction of up to 30% in our investment plan for 2020 and, in the second quarter, we implemented a greater control over investments as a measure to preserve cash.

The optimization of working capital contributed to an operational cash generation of R$ 1.8 billion. If we discount net cash used in investment activities, excluding financial investments, cash generation was R$ 1.4 billion, an increase of 33% over the first half of 2019.

Moving on to slide 11 to talk about our debt profile, we ended the quarter with a leverage ratio of 3.2x measured by the net debt to adjusted EBITDA for the last 12 months, a slight reduction compared to the 3.3x for 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's worth mentioning that, as from the first quarter 2020 with the implementation of IFRS 16, we began to include leases payable in our calculation of net debt, which contributed to an increase in leverage despite these leases, as you know, not being classified as bank debts.

We ended the quarter with a cash position of R$ 8.4 billion boosted by the cash generation in the period and by new funding. In July, we announced the issuance of US$ 350 million in notes with a coupon and a yield of 5.25% per year, through the reopening of the notes maturing in 2029. The proceeds will be used for paying down debts with shorter maturities and for lengthening the debt profile.

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With this, I conclude my presentation. We can now move to the Q&A session. Thank you.

Question-and-Answer Session

Operator: Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this time or any. If at any point your question is answered, you may remove yourself from the queue by pressing star 2.

In case you are following the conference call via webcast, please click on "question to the host" to send your question. Questions will be taken in the order they are received. We do ask that when you pose your question, you pick up your handset to provide optimum sound quality.

Please hold while we poll for questions.

Our first question comes from Frank McGann, with BOA. Please, go ahead.

Mr. Frank McGann: Yes, thank you very much. Two questions if I might. One, you mentioned that you have seen some pickup, most probably in June, it seems posted sharper reductions in activity earlier in the second quarter. I was just wondering if you could just provide a little bit more information for the various segments as to how you actually saw July and August perform so far year, you know, year over year versus the prior year quarter.

And secondly, just in terms of the potential for refining investments, I was just wondering what your current thoughts are now on how you are seeing it, what type of participation you would have in any investment there and how you would see financing that.

Mr. André Pires: 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 the volumes that were, let's say, very clear to note every time that we see more flexibilization in terms of the social distancing measures.

Just to give an idea, right, if we were, let's say, in the end of the second quarter, we were seeing levels of consolidated volumes decline compared to, let's say, a year ago round 14%, today these levels are below 10%, they are like 8% less. So if you take the last week of June, for example… sorry, the last week of July as an example, the levels of decline in Otto Cycle are around 10% - and remember that during the second quarter they were closer to 20% -, diesel is already up, around 2% up compared to the same week a year ago, and the total volume is around 8% below a year ago if we take the last week of July.

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So 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 somewhat going back to a more normal life and moving around more frequently. So there is a very clear correlation.

As for refining and the participation, I mean, basically, looking at, let's say, 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, in our point of view, benefits not only for the fuel distribution companies, but also for the final consumer in the right, right. I mean, the players with more scale will be able to negotiate long-term contracts, volume discounts.

But this is going to take some time until it starts to, let's say, impact the market because the process is ongoing, it's going to take some time for it to be included.

Specifically about ourselves, I mean, since the process is ongoing, we cannot comment specifically on the situation on our end. But, I mean, conceptually, in general terms, we see this move of Petrobras privatizing 50% of its refining capacity as being something very positive for the market.

Mr. McGann: Okay, thank you very much.

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

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

Operator: Thank you. This concludes today's Ultrapar's 2Q20 results conference call. You may disconnect your lines at this time.

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