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Executives

André Covre – Head-Investor Relations and Officer Chief Financial Officer

Analysts

Frank McGann – Bank of America Merrill Lynch

Ultrapar Participacoes S.A. (UGP) Q1 2013 Earnings Conference Call May 17, 2013 11:30 AM ET

Operator

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's First Quarter 2013 Results Conference Call. There is also a simultaneous webcast that maybe accessed through Ultrapar's website at www.ultra.com.br/ri where the presentation is available for download. Please feel free to go 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 will like to inform you that this event is being recorded and all participants will be in a 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 will 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 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 present Ultrapar's results in the quarter and discuss about perspectives. Mr. Covre, you may now begin your conference.

André Covre

Thank you. Good morning everyone. It's a real pleasure to be here with you again. Today we will discuss our first quarter results, which was another quarter of positive earnings projection. Here to help me answering your questions as usual, we have, Jose Manuel from Ipiranga, Julio Nogueira from Ultragaz, Ana Paula Santoro from Oxiteno, and Joao Marcos from Ultracargo, all of them are executive officers of the respective business field. I also have here with me the Investor Relations team.

Before I continue, I just like to draw your attention to slide number three, here we highlight some of the criteria adopted in this operational information. Note that we assume strict accounting standard or some changes to the company views in the first quarter of this year onwards in addition to the changes that we are already adopted at the beginning of the year largely changing the demand of the net earnings previously during the quarter.

We have disclosed, comparative tables in our earnings release and our financial statements and in our website for the year that is very (inaudible).

Beginning on slide four, we have the consolidated results of Ultrapar, which as I mentioned, once again a significant growth. Here we reached our 27th consecutive quarter of EBITDA growth, not mentioning government remarks of the quarter. This earnings growth is accrued in all our businesses as a result of the consistent planning and execution of our strategy.

In the recent years, we have made investments to increase our operating scale that has enabled us serve our market and increase volume. These include the capacity expansions in Oxiteno and Ultracargo, the expansion of the network in Ipiranga as well as expanding the infrastructure logistics in the Ipiranga. We have also worked to enhance sales mix to add value for our products and services as demonstrated in this quarter by the better sales mix of Ultragaz and Ipiranga.

Another driver of results is the increased operational efficiency as evidenced by the cost reductions in Ultragaz. Based on these elements we’ve reached a robust growth of 23% in EBITDA, and as a consequence net earnings increased by 29%.

Other highlight in the beginning of the year includes important international recognitions that we received. We were elected again in the survey conducted by the Fortune Magazine with executives and directors of the company, as well as Market Analysts one of the world’s most admired companies in the energy sector, one position above the one we had in 2012. We were ranked four in the 2013 ranking for the quality of our management corporate governance. We were also elected, The Business Group of the Year in Latin America by the European magazine.

Moving now to slide 5 to talk about Ipiranga, on volumes we had 2% growth in the first quarter of this year over first quarter of last year, influenced by the fewer business days in the period, three days less in this period in this quarter and the last year and we estimate that they had a reduction effect of 4%. This effect was more evidenced in the diesel volume which was 1% lower than the one in the first quarter last year.

Despite a normal reduction, our diesel volume sold to the service stations what we call the retail segment grew 6%, as a result of investments in expanding the network. The total volume of fuels for light vehicles which we call Otto cycle increased by 7% compared to the first quarter 2012 driven by the growth in the light vehicle fleet estimated at around 7% and investments in the network expansion.

Ipiranga’s EBITDA was R$432 million, up 23% over the first quarter last year when we had non-recurring expenses of R$14 million related to the conversation of the Texaco–branded service station into the Ipiranga brand in the Midwest, North East, and North regions of Brazil. The R$432 million EBITDA represents an EBITDA margin of R$78 per cubic meter in the quarter. The reserve growth what boosted by our strategy of differentiation and constant innovation in services and convenience and a strategy that generates increased customer satisfaction and loyalty.

Amongst other things, this allows us to deal positively with increases in fuel cost during the quarter. It also contributes together with investments in the extension of the network for growth in the resale segment leaving to an improved sales mix. The increased sale volume although lower this quarter due to the calendar effect also contributed to the earnings growth by providing increased operating leverage.

Looking into the Q1 quarter, in the second quarter of this year we expect volumes to grow more than it grew between the first quarters at around 5%. Our volume expectations is not higher only as a result of the influence of the economy on the diesel sales and lower gas sales of diesel.

On the profitability side, the effects of our strategy continues to materialize with investments in the network expansion and innovation initiatives in product and services that enable us to continually improve our profitability. Therefore, we estimate another tough margin for the second quarter between those that we had in the first quarter of this year and second quarter of last year, showing a continued margin evolution.

As you probably are aware, we have margin seasonality in Ipiranga and the second quarter margins tend to be lower than the first quarter margins. And therefore, the number between the second quarter last year and the first quarter of this year is a very positive margin evolution.

Now moving to the distribution of LPG; in the first quarter, Ultragaz sales volume was 2% lower than first quarter of last year, mainly due to the lower number of working days in the first quarter of this year that I already mentioned and lower consumption by some large industrial clients. These effects were partially offset by the growth in the small bulk segment, which primarily serves residential condominiums, commercial and small industrial customers.

Ultragaz EBITDA totaled R$63 million, 6% growth year-over-year, reversing the reductions that we saw in the previous quarter. This recovery is mainly as a result of the commercial and cost reductions initiatives implemented over the past few quarters among which I highlight different type of hiring freight and increased automation in our bottling facility and adjustments to the structure of the company as a consequence of a revised business model with substitution of some company owned stores to retailer around. Looking now through the short-term perspectives, these commercial programs and the initiatives to reduce cost and expenses continue to bear fruits, and we continue to develop them before allowing us to expand any deferrals in the second quarter, not only through EBITDA growth in the second quarter that will be higher than the growth that we had in the first quarter. Moving now to Oxiteno; sales volume grew by 6% compared to last year, overall sales volume. Sales volume in Brazil grew by 5% or 7000 tons, notably in glycols and specialties for home and personal care segment. Sales volume outside of Brazil increased by 9% due to the acquisition in Uruguay. Reported EBITDA of R$81 million represents a 21% growth over first quarter last year as a result of the higher sales volumes and the 13% weaker Real. These effects were partially offset by increased ethylene costs and by expenses related to the start-up of the company’s operations in the United States and Uruguay. Consequently, with all these things considered, represented an EBITDA margin of R$204 per ton in the quarter. For the second quarter, we expect volume growth to be similar to that between the first quarter. In terms of profitability, we expect EBITDA to be approaching the one we had on the second quarter last year. Note that in the second quarter last year we had an accelerated depreciation of the Real, which strongly benefited Oxiteno results in that quarter. Talking now about our liquid bulk storage business, Ultracargo. Ultracargo reported an average storage 11% higher than first quarter 2012. This growth was primarily due to the acquisition of Temmar, integrated in August of last year and increased handling in the Saupe terminal. This volume growth was partially offset by lower handling of ethanol in the terminal centers. I’ll remind you that in the fourth quarter of last year, we had significant volumes of ethanol imports handled in our Santos terminal, which did not occur in the same way this quarter. Regarding results, the company continued to present an evolution of its EBITDA and EBITDA margin. In the first quarter EBITDA reached R$36 million, 12% above fourth quarter last mainly as a result of volume growth which was partially offset by higher maintenance expense. We continued to see similar trends in the second quarter and therefore we expect similar progressions in volume and in results for the second quarter this year that we had between fourth quarter.

And now our last slide, slide 9 as usual I’ll give you some of our priority and outlook going forward in the leading quarter. I’d like to highlight our good positioning, which has already allowed us to grow. It has allowed us to grow both during periods of booming economy as well as during more challenging environment. This is possible because we have good businesses, we have leadership positions in each one of the segments, businesses that are as both time – at the same time resilient and leveraged on the Brazilian economic growth, which allow us to regularly make profitable investments in volume and earnings growth.

Our trend we can see to invest and expansion of the distribution network, am/pm and Jet Oil stores focusing on the Midwest, northeast and north regions of the country. Over the last 12 months we added 351 service stations to our network, a 6% increase. In the same comparison, we opened 394 new am/pm and Jet Oil stores, a 19% increase compared to March 2012. This strengthened the strategy of continuing and depreciation of the company. Our investments also include the expansion of logistic infrastructure to meet the growing demand for fuel in the country.

At Ultragaz, we continue our commercial initiatives and our cost reduction initiatives earning at more significant results for us. Additionally, we will continue investing in the expansion of UltraSystem, our small bulk delivery system.

At Oxiteno, we remain focused on capturing the benefits of the completion and maturation of our investments in Brazil. In parallel, we are working on implementation of our business plans in United States, Mexico and Uruguay.

Ultracargo in first we should reap the benefits from the completion of an important cycle capacity expansion in our terminals and from the acquisition of Temmar.

Lastly our innovative corporate structure governance structure designed to endure company’s growth and value creation, allow us to source, pursue, select and implement good investment opportunities and helps us to prepare the new cycles of growth. Thank you very much for your presence. This is all we have prepared for you. We will open to any questions you may have.

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from Frank McGann with Bank of America Merrill Lynch. Please go ahead.

Frank McGann – Bank of America Merrill Lynch

Hi good afternoon. Just two things, if I could. One, putting a little bit of perhaps a longer term view in terms of Ipiranga and its profitability margins. As you look out in the second quarter the rest of this year and into next year perhaps and just how do you see the ethanol market developing and how that potentially can effect margins at Ipiranga? Also in Ipiranga, in terms of the growth that you’re seeing with Jet Oil and am/pm stores, it’s really, really restricted growth. Does that actually hurt margins when those stores open at the beginning and then you get better margins later on or how would you expect that to effect margins also as you move out and continue to expand that network? And then secondly, just looking at international and the moves you’ve been making, how do you see growth coming and profitability in the different options you have internationally?

Unidentified Company Representative

Thanks Frank, this is (inaudible). If you allow me, I’ll give you a bit of a bigger answer here on the first question that is talking only about ethanol and the effects of Jet Oil and am/pm. As you have followed in the last several years, EBITDA and EBITDA margin in particularly in Ipiranga has grown annually a few Reals per cubic meter and that really, five things behind us. First, well known, the growth of the market which allows for increased operating leverage. We are optimizing or potentializing that growth through the investments that we are making in the expansion of the network. This allows us two things, allows us to go factored into the markets, that’s my second element. And third, it allows us to grow factored in the market, the most important and profitable segment which is the retailer segment, the gas stations there.

Four, our strategy of differentiation and innovation in services and convenience provides for happier customers, which are willing to pay the gas station and the company for the services that they received. And expansion of Jet Oil and am\pm are important elements in that strategy of differentiation and innovation. The effect of opening a Jet Oil and am/pm in a gas station is immediate and is positive. Positive because the traffic improved the customer perception about the point of sale, and therefore leads to higher margin.

Keep in mind Frank that the business model of am/pm and Jet Oil are one of the franchise system. So in a direct way, we could under earn a franchise fee and a few other things related to this franchise system. On the indirect way, it happens what I just mentioned the gas station becomes a more valuable gas station.

My last element, fifth element, the sustained growth of EBITDA that you’ve seen in the last few years, is the formalization of the market and we are referring particularly to the decreasing degree of tax evasion, particularly in ethanol. And the recent measures enacted on (inaudible), which in practice eliminated (inaudible) things into the distribution segment is very positive towards reducing existing commodities, because which you don’t have to pay fee, you cannot avoid it, in other words you cannot – the tax evasion on effect that you don’t have anymore. These five elements have been with us for a few years now. They continue to be present and therefore they indicate continuity of the trend that we have had so far.

On your second question, our international operations today are fairly in opposite demo. We are now present with production facilities in Uruguay, Venezuela, Mexico and the United States. United States and Uruguay are listing the players in United States early last year, Uruguay late last year. They both are parts of a bigger game of making Oxiteno a company of the American continent. You have followed them in the last few years with a very strong position in Latin America, having production facilities in all countries that produce ethylene oxide, mainly Brazil, Mexico and Venezuela. We’ve strengthened our position late last year by the acquisition of a specialty chemical producer in Uruguay and the focus going forward will naturally be the United States which has become an excellent place to produce chemicals with the cost competitors advantages and in a country where we think we have a role to play with our consumers and clients that we have in Brazil, have in Mexico and are also present in the United States.

Frank McGann – Bank of America Merrill Lynch

Okay. Thank you very much.

Operator

(Operator Instructions) We have a follow-up question with Frank McGann. Please go ahead.

Frank McGann – Bank of America Merrill Lynch

Thanks. Just on the working capital, it was quite negative in the first quarter and the reasons I guess are fairly clear, but just looking at the second quarter trend, I was wondering if you are seeing or expect a significant improvement in working capital trends versus the first quarter?

Unidentified Company Representative

Frank, it is difficult to have working capital consumption in the first quarter. If you look at the last three years, that is between R$200 million and R$300 million. In the first quarter of this year, it was higher, mainly because we had the increase in the cost of diesel and gasoline in Brazil and therefore we’ve reached an investment more to between R$500 million. So order magnitude about [60%] of the investment is seasonal and typical for the first quarter. R$200 million is more permanent related to the increase in the cost and it is in any case a good investment given that the increase in cost always gives us an opportunity to manage margins and capture some benefits.

Operator

This concludes our question-and-answer session at this time. I would like to turn the floor back over to Mr. André Covre for any closing remarks.

André Covre

All right, well, thank you very much. Thanks for your questions, Frank. Look forward to having you back on the earnings results of the second quarter. Thanks a lot. Have a good weekend.

Operator

Thank you. This concludes today's Ultrapar's first quarter 2013 results conference call. You may now disconnect your lines.

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