André Covre - Chief Financial and IR Officer
Jose Manuel - Ipiranga
Julio Nogueira - Ultragaz
Ana Paula Santoro - Oxiteno
Joao Marcos - Ultracargo
Frank McGann - Bank of America/Merrill Lynch
Luiz Pinho - UBS
Ultrapar Participações S.A. (UGP) Q4 2012 Results Earnings Call February 22, 2013 10:30 AM ET
Good morning ladies and gentlemen. At this time we would like to welcome everyone to Ultrapar's Fourth Quarter 2012 Results Conference Call. There is also a simultaneous webcast that maybe accessed through Ultrapar's website at www.ultracom.br/ri where the presentation is available for download. Please feel free to put through the slides during the conference call.
Today with us we have Ms. André Covre, 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. (Operator Instructions)
We remind you that questions which will be answered during the Q&A session maybe 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, 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. Covre, who will begin Ultrapar's results in the quarter and discuss about perspectives. Mr. Covre, you may now begin the conference.
Good morning everyone. It's a great pleasure to be here with you again. Today we will discuss Ultrapar's performance in the fourth quarter as well the results of the year, which was once more a very good year for us. Herewith me to help answering any questions you have; I have, Jose Manuel from Ipiranga, Julio Nogueira from Ultragaz, Ana Paula Santoro from Oxiteno, and Joao Marcos from Ultracargo, Directors in each one of our businesses. I also have here with me Investor Relations team.
Before we continue, I want to remind you that this quarter we're presenting EBITDA numbers in accordance with a recent CVM Instruction is despite as defined, CVM Instruction and under this new method EBITDA now includes income from sale of assets and equity in earnings or losses of affiliates.
Starting with Slide 3, with an overview of the economic and operational environment that (Inaudible) our results. As you can see that the graph on the top left we had another year of low GDP growth in Brazil, but with a few signs of recovery during the second half of the year. The strength is mainly a result of some counter cyclical measures adopted by the Brazilian government during the year among which the reduction in interest rates and the reduction in federal taxes in the automotive sector.
This last one contributed to another good year for the automotive industry with 3.6 million new cars sold in Brazil. As a consequence the Brazilian fleet of light vehicles reached 35 million cars, another year with an 8% growth, which helped boosting Ipiranga sales of fuels. Inflation represented year back of consumer price index by [BCI] remained at high levels closing the year at 5.8%.
The impact of inflation on our cost and expenses especially on personal and freight represented constant challenge during the year. On the other hand we continue to observe the validation of the real, closing the year at a level above two reals per dollar. In Oxiteno the (Inaudible) operated its extended production capacity in a more product favorable exchange rate environment.
Turning to Slide 4, as you see later on in the presentation we have addressed another year of very good strong earnings growth. We attribute this positive evolution, the good investments made in the last years, consistently executing strategic initiatives in each one of our businesses. In the Slide 4, I want to highlight some investments that had a direct impact in the 2012 results.
At Ipiranga, following the acquisition and integration of Texaco and DNP in 2010, we intensified our investment and expansion of the distribution network and logistics infrastructure within a strategy of increasing our footprint in the modern part of Brazil and converting unbranded service stations into an Ipiranga gas station. We increased the level of Ipiranga service stations in 2011 and '12 by 14% and invested in 16 logistic facilities to serve the growing demand.
During this period also 740 new convenient stores branded am/pm and Jet Oil stores our lubricant chain service were also open to increase the convenience and service of Ipiranga stations, strengthening the differentiation of our network. Ultragaz we pursued and executed in 2011 recognition of the LNG operations in [natural] in Brazil. The acquisition recourse, Ultragaz positions in the bulk segment in which volumes growth is linked to the economic growth.
We also invested organically to capture new clients in the Ultra system our small bulk business. These investments positively contributed to the evolution in Ultragaz results which operated in 2011 and 2012 in the challenging environment of increasing costs and expenses mainly due to the high level of inflation.
In Oxiteno we completed an important production capacity expansion site in Brazil started in 2007. Investments we made added 35% to the capacity production of ethylene upside and 48% to the capacity production of specialty chemicals both since 2007.
In addition during the period we also built the only other chemicals plant in Latin America in our plant in Camaçari in the state (Inaudible). This increased production capacity was fundamental for Oxiteno to reach 15% volume growth this year even in a year of last dynamic economic environment. Finally we currently invested approximately 260 million reais in the last two years and I'll highlight in this case the acquisition facts – in the quarter this impact is which we integrated in our operations in August 2012.
Of equal importance we have extensions in the port Santos we operate in Aratu. All of these investments together added 24% with regards to capacity during the period. The implementation of these strategic initiatives through well planned and executed investments, contributed strong earnings projection in 2012 that's shown in Slide 5.
Ultrapar's EBITDA reached 2.4 million reais in the year an 18% increase over 2011. As a result net earnings exceeded for the first time a 1 billion reais, a significant growth of 19% over 2011. Return on equity went from 16% in 2011 to 18% in 2012. In the capital markets Ultrapar's shares represented once more an appreciation well above that of Ibovespa. We believe if we attract the recognition by the capital markets not only for the evolution of our corporate governance and excellent results, but also continued sequential revolution in the next years to come.
In addition, the payment of 354 million reais in dividends was approved equivalent to 0.66 reais per share, which was enabled by the strong cash generation and the traditional sound financial position on the company. This distribution added to the anticipated dividends distributed in August 2012 totaled 627 million reais in dividends in the year, this pushed off the 62% of their earnings for 2012, (Inaudible) of 3%, overall average share price last year.
Turning now to Slide 6, to talk in more detail about the performance of our core businesses and starting with Ipiranga. As you can see on the left hand chart volume continued to grow showing a 9% growth in the fourth quarter of this year comparing to the fourth quarter last year. The Otto cycle with positive progression is boosted by the expansion in the light vehicle fleet. And in diesel it was boosted by the growth of some segments in the economy, such as agro business at retail with increased transportation that (Inaudible) needs.
In addition volume grew as a result of investments made to expand distribution network such investments also allow an increase in the share of service stations and overall sale of diesel leading to an improved sales mix.
EBITDA, moving non-recurring items totaled 491 million reais, 34% increase over fourth quarter last year. This growth was a result of four factors first higher sales volume which provides increased operating leverage, second improved sales mix, record share of gasoline and our diesel sales to service stations. Third, evolution of diesel and ethanol costs. And fourth, constant innovation in services and convenience at the gas station creating an increased customer satisfaction and loyal.
We ended 2012 with a 8% growth in volumes and EBITDA excluding now return (Inaudible) of the 6.27 billion reais, 24% above 2011, EBITDA margin was 70 per cubic meter higher than 60 reais ahead in 2011.
Looking ahead this positive trends presented in 2012 continues into the year in 2013. Before we can expect for the first quarter of the year volume and EBITDA growth similar to those we had in the full year a flat 2012.
I want to however, emphasize that we have in the first quarter of this year a calendar impact. During the first quarter of 2013 we have two business days lost than in the first quarter of 2012, which leads to an estimated nominal increase in sales for this quarter at a level of 5%.
Moving now to Ultragaz, in the fourth quarter we presented stable volumes in comparison to fourth quarter last year. The growth trend in the bulk segment we had in September 2012 was interrupted in the fourth quarter by two factors. First, a strike in the LPG distributors and the status on [par low] and second lower consumption, larger and large customers. The strike in the [status and power replenished] in December and the result was a 6% collected annual wage agreement, which was in line with inflation of the proceeding 12 months.
EBITDA in the fourth quarter amounted to 52 million reais, 5% higher than fourth quarter 2011. Excluding, the nonrecurring items, which are -- strike that I mentioned in the fourth quarter of this 2012 and integrate the cost of integration of (Inaudible) and certain positions in the fourth quarter of last year we would have had an EBITDA of 57 billion reais in the fourth quarter 2012 or an 11% reduction in relation to previous year.
Such reduction is a consequence of the facts that inflation on costs and expenses. However, note that the reduction in the quarter is lower than the 30% reduction observed throughout the year. As a consequence of the cost and expense reduction initiatives taken by the company which slight cost and expenses increased in low inflation in 2012.
In terms of volume in 2012 we finished nearly a 2% growth in relation to the previous year with the deposition of rest of our LPG operation in Brazil and the capturing of new clients in bulk segments. As I mentioned EBITDA declined by 13% in 2012, but this reduction was progressively smaller over the courses of the year.
For the current quarter we expect stable volumes, who carried to the first quarter of last year, due to the facts of the signal business days that I already mentioned in Ipiranga. All the results incurring and currently we expect EBITDA to be closed to the one we have in the first quarter last year with the earnings recovery process that we conducted in the recent quarters showing its factor.
On Slide 8, sales volume in the quarter was below the one of our initial forecast, which was an expectation of growth of about 10% over the four quarter of 2011. This was due to the non-schedule stoppage in the Camaçari by the petrochemical complex. As a consequence of the energy blackout in the northeastern region of Brazil in October?
As a result we had a temporarily restriction of these costs in our largest plant. Despite that Oxiteno sales volume grew by 4% mainly due to the execution of Uruguayan specialty chemicals plant in nearby in November and a 5% growth in the sales specialty chemicals in Brazil especially in the hydro, chemical, automotive, and cooking segments.
In the year sales was up by 15% driven by expenses completed in 2011 and by the growth almost in all segments. Oxiteno's EBITDA was 71 million reais in the quarter, 11% lower than fourth quarter 2011. Reduction would have been 5% if we were to exclude the effects of CVM Instruction for . Nevertheless, the reduction is mainly due to stoppage in the Camaçari complex, the cost and expenses related to the startup of our operations in United states and the increased cost of ethylene during the quarter. Through all this we reported an EBITDA margin of a 187 reais per ton in the quarter.
In the year Oxiteno's EBITDA totaled 350 million reais, robust growth of 34% as result of the increase in sales volume and the 17% weaker real. This corresponds to an EBITDA margin, of 235 million reais for the year per ton, which we consider to be a new sustainable level.
For the first quarter, we expect volumes to regroup, resume the growth at a pace of 10% after the feedstock restriction we've had in the fourth quarter. It cannot remain at the same levels of the first quarter last year due to the temporary effects of the increasing ethylene cost that we had in the fourth quarter and that we are also experiencing for the first quarter.
Talking about Ultracargo on slide 9. It presented an average storage 6% higher in quarter compares to the fourth quarter last year. Mainly due to the acquisition of Temmar in August, this was partially offset by the lower flow of ethanol in our terminals, particularly Santos and Aratu.
On the results, Ultracargo had a significant evolution in EBITDA and EBITDA margin, due to the operating leverage throughout (inaudible) expansions carried out over the past two years. The quarter EBITDA was 23% higher than fourth quarter of 2011, mainly due to the expansion of the Temmar and a good mix of handled products and contracts.
For the year, Ultracargo EBITDA amounting 145 million reais also a 23% growth over the year with an EBITDA margin of 48% coming from 44% on the preceding years and before the showing the benefits of operating leverage.
Looking ahead with expansions that I mentioned and the acquisition of Temmar Gas, which the full potential we expect earnings growth in the first quarter, similar to the one we had for the year of 2011, 2014, and for the fourth quarter.
Wrapping up on last slide, slide number 10, I'd like [talk to you] some elements that we feels confident that we can continue on the same path of consistent value creation. In December we announced our investment plan for 2013, hopefully 1,437 million reais which reflects our constant capture of new and great opportunities, growth and (Inaudible) in value creation.
(Inaudible) Ipiranga, of the total amount of 872 million reais budgeted for 2013, we (Inaudible) 360 million reais to continued expansion of the distribution network, am/pm stores and [Jet oil] stores. This will be focused on the modern part of Brazil and we had the plan to increase our penetration as it is a faster growing part of the country and we have a smaller market share.
Our plan signed contractors investments of 182 million reais in the continuation of expansion of our logistics infrastructure. Ultracargo, sorry in Ultragaz we will continue to invest in expansion of Ultra systems our opportunities in small bold system and the modernization and expansion of (Inaudible). At the same time, we will continue through our earnings recovery plan, we'll prevail to recover to resume EBITDA growth during the year.
At Oxiteno investment plan amounts to 278 million reais and is intended mainly to the expansion of the production capacity in United States and in Mexico, markets were highly competitive throughout mature supply. At Ultracargo in turn we plan to invest in further expand our terminals mainly we're considering an expansion in the (Inaudible) amount. We have businesses that are at the same time resilient and leverage from the Brazilian economic growth, having allowed us to grow both in terms of strong economy as well within years of modest economic growth as in 2012.
We also have a sound capital structure with investment capacity either through higher financial leverage or through the use of shares to bolder steps. An attention to company's proved planning and execution capability. And our corporate governance structures, aimed at enduring the company's growth in value creation, which reinforces our conviction that we will continue our sustained growth path. This is what we have prepared for today and thank you for your attention and I'm available here with the team for any questions you may have.
Thank you. (Operator Instructions) Your first question comes from Frank McGann of Bank of America/Merrill Lynch. Please go ahead.
Frank McGann - Bank of America/Merrill Lynch
Hi, good day. Just two things one, in terms of operations, and also gas (inaudible) were quite weak in the quarter and of course, you went through the reasons for that, Andre, it's to -- how do you think of those say over a two or three year period, what -- how much upside potential could you have in those businesses, particularly Oxiteno?
And then in terms of your expansions that you're planning in Oxiteno in the U.S. and Mexico, maybe you could just go through a little bit more of, if you can give us more detail on what you're doing right now and what the status of each of those projects is?
Frank, thank you very much for being with us and for the questions. We have a plan naturally for each one of the three businesses, that you mentioned. Talking of Oxiteno, but the more immediate terms the focus is to make the expansions we've made were to their fullest capacity.
(Inaudible) has two steps, first our priority is always to get the plant operating full capacity. That was one of the reasons we had 15% growth in volume in the year while the Brazilian economy was very weak. Naturally, a significant portion of that additional volume went to the export market some of that went to the glycol market which is very elastic market as you know.
We have not finished yet the process of making the plants work to their full capacity, so we expect to have another year of important volume growth this year. August 20, 2014, we're going to have the second wave of benefits of expansion, which is an improvement mix given that our focus market, our core market is the specialty chemicals in Brazil. And as the Brazilian market grows, we'll [re-shift] volumes from export markets and some from the glycol market to the higher value-added products of specialty chemicals in Brazil therefore getting a better mix.
We're all set for the next three years, which we think was the horizon you asked me, we have significant scope to increase our results in Ultragaz -- in Oxiteno, sorry, with investments made [for it]. In (inaudible), as you are well aware, we are developing international strategy, which has now come to put us in the United States on the back of this significant cost advantages of producing chemicals in the U.S.
We are investing in a relatively large plant, on the (Inaudible) which will together with the small plants we have, allow us to have about 100,000 ton of product capacity in the U.S. plus the product capacity that we have in Mexico, those two things will start putting Oxiteno in the map of the American market probably in 2015. So there is an upside in relation to the Brazilian business through that route.
In Ultragaz, we have had three years of significant cost pressures as a consequence of the persistent inflation this is not first time we've faced this, and probably will be not the last, but we know from past experience and we are able to change the level of a revenues of the company by adjusting our sales channels. And we're also able to also to find ways to do the same with less resources.
We are well through our recovery plan of results and as I mentioned we expect to resume EBITDA growth for this year. Looking at a perhaps longer term, perhaps even longer than the three years, they mentioned, it is possible for Brazil may have a supply [shock] of LPG. Coming from the various reserves or discovered in Brazil over last five years.
And typically the LPG market grows form the supply side and what I mean by that is that if have a significant supply of LPG in Brazil a number of the regulation restrictions for the use of LPG in the country might be lifted opening new applications for the LPG in the country.
Finally, Ultracargo, the prospective outlook is very good. It's very simple to understand we have as you know of significant lack of infrastructure logistics in the countries -- in the country, demand for storage facilities in the country has been growing at a pace between 1.5 and 2 times GDP. And as a consequence of that, we are almost constantly investing to expand our facilities.
The expansions tend to be in existing ports, in existing terminals, the [four] it's about having another two or three tanks in an existing tank farms, and as a consequence to operating leverage is quite significant, that's the reason for example, our EBITDA margins grew from 44% last year to 48%. So, as Ultracargo grows not only its volumes improved EBITDA, but you have to improve EBITDA margins, so it's a very accelerated pace of our earnings growth. So all things considered, and I thank you for this question, we can be very optimist not only in relation to our existing largest business Ipiranga than these three businesses as well for the next in three to five years.
Frank McGann - Bank of America/Merrill Lynch
Okay, thank you for a very complete answer.
The next question comes from the of Luiz Pinho of UBS. Please go ahead.
Luiz Pinho - UBS
Hi, good afternoon guys. I just noticed from the financial statements that you have this agreement to supply an agreement which is asking for a certain amount of ethylene, and back in 2012 you had like a minimal amount of 211,000 tons. And now for this year 2013, the number is a range between 205,000 tons and 220,000 tons. So just wonder if this news that as your output will grow like a double-digit, that you're going to supply the Brazilian market through I don't know the oil [play] and appliance or there is another effect here?
The second question is, you mentioned that in the fourth quarter the higher costs on that ethylene -- were of explanation for the lower EBITDA, right, but you also said that this is going to impact a little bit on first quarter too. So, I was expecting that you could pass through this final prices right in the first quarter. So just wondering how is your commercial strategy if you're on a maximize your capacity optimization, you should think this is not a good timing for increasing prices? Well, that would be it, thanks.
Luiz, thank you for your questions again. In relation to the data that you saw in our financial statements related to our contract with Braskem, I think the simpler way to think of it is, our ethylene upside capacity is working full capacity, but we're not working full capacity is the downstream part, in other words if the specialty chemicals and the glycols. So as we grow volumes, we're not going to need more ethylene that we have today, we just need to make products in the downstream segments that will result in volume growth.
In relation to costs, you are right that in one of circumstances, that if we have increasing costs in one quarter, we'll probably deal with it, in the following quarter. What's happening here is that we have an increasing cost in the fourth quarter and we also have increasing in the first quarter. So it will take a little more than just a one quarter to get it through.
Luiz Pinho - UBS
Thank you, André.
(Operator Instructions) This concludes the question and answer section. At this time I would like to turn the floor back to Mr. André Covre for any closing remarks.
Well, thank you very much for your attendance to our call. We appreciate the questions and we look forward to seeing you on the next conference call and throughout the year in our one-on-one meetings. Thanks a lot, have a good day.
Thank you. This concludes today's Ultrapar's fourth quarter 2012 results conference call. You may disconnect your lines at this time.
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