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Executives

André Covre – CFO and IR Officer

Analysts

Frank McGann – Bank of America Merrill Lynch

Paula Kovarsky – Itaú BBA

Luiz Carvalho – HSBC

Gustavo Gattass – BTG Pactual

Christian Audi – Santander

Ultrapar Participacoes S.A. (UGP) Q2 2013 Earnings Call August 2, 2013 11:30 AM ET

Operator

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar’s Second Quarter 2013 Results Conference Call. There is also a simultaneous webcast that may be 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 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 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 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 begin the conference.

André Covre

Thank you. Good morning to some of you, good afternoon to some of you. It’s a great pleasure to be here with you once again. Today we’d like to discuss Ultrapar’s performance in the second quarter of this year, quarter of earnings projection. And here with me to help answering your questions, José 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 businesses. I also have Investor Relations team here with us.

Before we continue, I’d like to draw your attention to slide number two that highlights the criteria adopted for the information in this presentation and information as enclosed regarding the second quarter.

I’ll start our discussion with the consolidation results on slide number three. As presented in the second quarter, volumes and results growth in all of our businesses, even in the more volatile macroeconomic environment. As a consequence, we’ve reached the market seven years for 28th consecutive quarters of EBITDA growth. That is a result of the consistent planning and execution of our strategy, which I will talk a little bit more about at the last slide.

EBITDA and net income grew by approximately 20% this quarter, reinforcing our earnings progressing trend since the IPO 14 years ago. The continued growth in results and consequent cash generation has allowed us to pay increasing dividends. Together with the quarter’s earnings release, we announced the payment of R$354 million in dividends related to the first half of the year. This amount is 30% higher than the dividend of the same period of 2012.

At the same time, Ultrapar’s financial leverage has among all around 1.5 times net debt to EBITDA, more importantly 1.4 times this quarter. Together this demonstrates the company’s ability to invest in profitable growth and at the same time to increasing dividends without affecting our sound solid financial position. The cash flow generation capacity and the financial soundness were actually highlighted by Moody’s when they raised our credit rating this quarter.

I’d like also to highlight that our shares was included in the Index IBrX-50 as a result of increased liquidity in the last 12 months. Finally in this slide, I’d like to note the certain recognitions that we received in the last few months for which we feel very honored and thank all of them with their trust with us.

Moving to slide 4, comments on the performance of Ipiranga. In this quarter, Ipiranga continued to reap the benefits and the positive evolution of the market, from its network expansion and differentiation strategy. As shown in the top left chart, we have continued to expand Ipiranga service station network. It had been the industry significant investments in opening and re-branding world-class service stations, focused from the northern regions of Brazil to regions in higher sales and growth.

Investments has allowed the company to reach growth above that of the market and to achieve the improved volume mix, as increasing share of sales made to the service stations as shown in the top central part of this slide. Ultra now has the reseller segment, it is a segment where we have found the highest control with our differentiation strategies, with constantly maintaining policies and beliefs and increasing traffic in the service stations, consumer satisfaction and loyalty.

The top left chart shows one of the assets that strengthens this strategy, the opening up 400 new am/pm and Jet Oil stores in the last 12 months. Furthermore, in the second quarter, we reached the number of 181 bakeries inside am/pm stores and we launched ConectCar in São Paulo which is a variable taken the service station network.

Our strategy of expanding the network and strengthening our differentiation is being implemented in the growing market, which continues to perform well at the consequence of the costly fuel. In addition, the market has been going through a fermentation process holding the assets to the consumers, resellers and the company in addition to increase tax revenues to the government.

One evidence of this normalization trend is increased share of outstanding shares by the company’s members in relation to the trading market volume. This share was R$57 one year ago and reached R$64 in the second quarter. So against this background, our volumes moved by 7% this quarter. The volume materials for light vehicles or Otto Cycle increased by 10% compared to last year, driven by the growth of the fleet and by investments in increasing Ipiranga’s network.

The volume of diesel increased by 6% mainly due to an 8% increase in the sales volume in the service station segment. This volume was also influenced by the extraordinary impact of two additional business days in the second quarter of 2013 compared to the second quarter of 2012. The volume growth together with the depreciation strategy of increase normalization contributed to the 28% growth in EBITDA for the second quarter last year. EBITDA totaled R$480 million which is equivalent to an EBITDA margin of R$78 per cubic million.

For the current quarter, we expect continuity and therefore to present growth in volumes similar to the ones we have between second quarters, and EBITDA margins at the same levels of the one we had in the first half of the year, which results in a development growth compared to the third quarter of last year.

Moving now to slide 5, and talking about Ultragaz. In the second quarter of this year, sales volume grew by 1%. The growth was concentrated in the bulk segments which reached 7% year-over-year as a result of capturing the material investment in new clients in addition to the increased number of working days that I just mentioned. In the second quarter, Ultragaz has shown significant evolution in its results recovery process, with a 17% increase in EBITDA after resilient growth in the first quarter of the year.

As we have indicated for some quarters, Ultragaz is being developed in several commercial and expand control initiatives from initiatives listed in the slide 5. These initiatives are contributed to the evolution of SG&A to the low inflation and below increasing for costs, contributing therefore the earnings recovery from this quarter as you can see on the middle graph the SG&A increased by only 4% while inflation in Brazil is somewhere between 6% and 7%.

For third quarter, we expect increase in volumes and EBITDA at same levels of the second quarter, with the actions and trends that allowed the projection – progression of the second quarter continue to present that.

Moving to Oxiteno in slide 6, Sales volume was up by 12%, due to investments made in production capacity expansions and acquisitions. In the Brazilian market, sales volume increased by 7% with higher volumes in almost all segments, notably in the home and personal care, paints and coating segments. In international market, sales volumes grew by 23% mainly due to the acquisition of the specialty chemicals plant in Uruguay.

EBITDA in the second quarter grew by 8% compared to the second quarter of 2012, as a result of the growth in sales volumes and the 5% weaker Real. These effects were partially offset by higher unit expenses in logistics and costs related to the company’s initial operations in the United States and Uruguay. As all of this, represents of an EBITDA of US$250 per ton in the second quarter.

Now in the third quarter, we will prepare the company for amount scheduled stoppage at the Northeast Petrochemical Complex which won’t happen in the fourth quarter. This stoppage will affect earnings in the second quarter – in the third quarter, as we will temporarily reduce commodity sales to increase the inventories of specialty chemicals. And as a consequence, we expect a small growth of total volumes in the third quarter.

With this volume growth, the improvement in sales mix as we will be selling more specialty chemicals in the quarter, and a more favorable exchange rate scenario, we expect to have a significant growth in EBITDA and EBITDA margin in dollars term could be even higher than that of the third quarter of last year.

Moving to Ultracargo in slide 7. Average storage was 20% higher than last year. This growth is a result of acquisition of Temmar integrated into almost last year, increased handling in terminals, in the terminals of Santos and Suape and the start-up of an expanded operation in the Aratu terminal. Ultracargo’s EBITDA reached to R$43 million, a growth of 18% and EBITDA margin by 49%.

The earnings growth is mainly a result of the higher volumes related to the acquisition of Temmar and increasing handling in the terminals. On the other hand, the earnings this quarter from extraordinary expenses were partially offset the growth.

For the third quarter, we expect EBITDA growth to be at a slower pace than the recent one as a result of a stronger basis of comparison of third quarter last year when we had lower expenses especially with variable compensation.

Operator

Ladies and gentlemen, I believe we may have lost connection with the speakers. Speakers are you still there?

André Covre

Yes, we are back. Sorry about that.

Operator

No problem.

André Covre

Moving now to slide – last slide. To discuss a little bit about the outlook for the future. I would like to really go back in time to examine our evolution during 28 consecutive quarters of EBITDA growth.

When we started this stuff seven years ago, we had annual EBITDA of about R$500 million. During this period we invested R$11 billion in acquisition and expenditures, which allowed us to reach an annual EBITDA of R$2.7 billion in this second quarter. This growth in earnings displays together with an improvement in return on equity, as you can see in the chart, our return on equity increased from 13% in 2006 to 18% currently.

In addition to the acquisition of Ipiranga itself in 2007, these R$11 billion allowed to increase geographical footprint of Ipiranga’s and Ultragaz distribution network was increasing relative networks and differentiation aspects. The logistics infrastructure and secondly storage facilities we have expanded and now have nationwide reach and increased capital allowances [ph].

At Oxiteno, we moved from a company highly standard on the sales of commodities to a company focused on specialty chemicals, which raised our differentiation, our scale in more businesses.

At Ultracargo, we now have more than double our storage capacity with expanded terminals and increased geographical coverage. As you see, we have developed (inaudible). Our ability to cross-start, analyze in able to do the acquisitions and investments is fundamental to the company’s evolution during the last seven years. And it’s founded in our proper governance and alignment of interests in the respective decision making processes. We believe that these elements are some of the important pillars of the company’s evolution for the next few years.

That concludes what we have prepared for today. I thank you all for your attention and I make myself available to any questions you may have.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Please hold, while we poll for questions. The first question will come from Frank McGann of Bank of America Merrill Lynch. Please go ahead.

Frank McGann – Bank of America Merrill Lynch

Hi, yes, good afternoon and thank you. Just a couple of questions; one, in Ipiranga, if you could perhaps comment on the terms that you are seeing in terms of ethanol consumption and demand, and what you expect to see in the third quarter and potentially in the fourth quarter based on whatever the pricing they announced that you are looking at right now? And secondly, in terms of the number of service stations that you are planning to add between now and the end of the year and looking into 2014, how much upside do you see in terms of expanding the service station network? And within that, how many am/pm markets do you expect to see that also, if you could provide that, that’d be great.

André Covre

Frank thanks for being with us. Ethanol consumption, I would probably say no major news and have seasonally now more consumption of ethanol, but if we compare this time of the year with the last time of the year, there is a growth that is not disproportional to the growth of the overall market. So we don’t have any major trend changes in the third and fourth quarter in relation to ethanol. But we have had very positively in ethanol on the last few months is the reduction – the change in the review of the Federal VAT tax, PIS/COFINS, and that brings – there was a change in the regime of an entire value chain, this brings us an indirect benefit to achieve the deduction in tax evasion. Since we think if the tax is not there, you cannot evade it. And as a consequence, in this aspect is a more level playing field.

In terms of service station openings and am/pm, our expectation is to close the year with somewhere between 300 and 350 net adds, in other words total gas stations at the end of the year and like the total gas station at the beginning of the year, we should have somewhere between 300 to 350. Obviously that means that we have to open a bigger number probably around 400 to 450. Am/pm, we are opening at a rate of 15% to 20% more am/pm a year, with last year and we plan to maintain that this year.

Frank McGann – Bank of America Merrill Lynch

Okay. There is a follow-up in Oxiteno, fourth quarter volumes, you mentioned that the shutdown in the Northeast Petrochemical Complex would be in the fourth quarter, you prepare in the third quarter. Fourth quarter volumes, do you think those would be seriously affected?

André Covre

Not seriously affected, that’s exactly what the preparation is for, so that we can increase inventories during the third quarter, so that we can spend nearly amount without significant supply, possibly some mid-term affects, but we don’t expect it to be a major affect.

Frank McGann – Bank of America Merrill Lynch

Okay. So then you’re going to affected in both quarters, both third quarter and fourth quarter, although as you indicated the overall profitability should still stay quite higher, it would be higher?

André Covre

Yes, exactly. With the lower volumes in the third quarter and to the external factors in the fourth, results in glycols and the commodities which as you all know has lowered margins than the (inaudible). So the impact in EBITDA is not smaller than the impact on our volumes, and then we have other sales mix which is more specialty chemicals and we already had a much more favorable FX environment this year than we were last year which has (inaudible).

Frank McGann – Bank of America Merrill Lynch

Okay, great. Thank you.

Operator

The next question will come from Paula Kovarsky of Itaú BBA. Please go ahead.

Paula Kovarsky – Itaú BBA

Hi, good afternoon. I have a very specific question on Ipiranga. Looking at the breakdown of revenues, the other revenues line enjoyed the big increase in the quarter, about R$40 million, so I would like to understand what exactly happened there, and how recurring it is? And the other question would be in the numbers of this quarter, did we see already any impact of ConectCar? How should we forecast this impact going forward, and in which line do you guys expect it to show up?

André Covre

Hello Paula, I’m glad that you are with us. I am having a hard time finding your other revenue variation of R$40 million. In Ipiranga, other revenues in the second quarter was R$17.6, last year it’s been R$15.9 million.

Paula Kovarsky – Itaú BBA

Sorry, within the net revenues. You have R$98 million in the second quarter and R$57 million in the first quarter as part of the – that’s the breakdown of the net revenues?

André Covre

I am looking for it, but I cannot see it. Can we take it offline Paula?

Paula Kovarsky – Itaú BBA

Yes, no problem.

André Covre

So the other…

Paula Kovarsky – Itaú BBA

Yes, I just wanted to understand there, beyond the positive impact of better margins in diesel sales in the quarter which seems to be the explanation for such a fantastic margin despite seasonality. Is there more from one ConectCar to a higher number of convenient stores, I mean is there anything else that we should forecast going forward as part of a better margin prospect?

André Covre

Well both am/pm and ConectCar are part of a combination as you know. It is composing the market positioning or differentiations. And the effects of these differentiation actions take place overtime, and it’s not always very easy to forecast how much and at what rate they will create the benefits. So the increase in margins in this quarter are basically with the growing volumes and it’s really formalization but that is sales mix because there is more Otto Cycle, there is more diesel to the reseller channels, and fourth but not last and important in tax differentiation strategies, out of which opening more am/pm and ConectCar are elements as we basically install. One of them is of a different activities regarding stand-alone.

So it’s not ConectCar was a major responsible alone for improvement in our market, or more am/pm but them together creating more customer satisfaction for overtime allowed them to implement in markets.

Paula Kovarsky – Itaú BBA

Okay. Talking about diesel specifically, do you think the share of retailers among the total demand for diesel will likely continue in those levels or this is something that is more particular of this quarter?

André Covre

I think it will continue because it is the consequence of expanding the network again. So it’s a trend.

Paula Kovarsky – Itaú BBA

And how much of better margins perhaps can be attributable to the as safety or the – that lower sulfur diesel offers?

André Covre

Yes, very similar. I think the important difference in margin is between diesel sold and the gas sales coming from the diesel sold to other channel.

Paula Kovarsky – Itaú BBA

Okay.

André Covre

That is the relevant difference. That can be 30%, 40%, 50%.

Paula Kovarsky – Itaú BBA

Okay. Thank you. And just a quick follow-up in Oxiteno, you said that margins in the third quarter can be even higher in dollar terms. Does that account for the full impact – how much of that accounts for the full impact of lower PIS/COFINS ethylene acquisitions?

André Covre

In third quarter we’ll have a full impact. It is basically 8% over the ethylene cost. It helps the results in the quarter but it doesn’t change the trend if you have not presented.

Paula Kovarsky – Itaú BBA

Okay. Thank you so much.

Operator

The next question will come from Luiz Carvalho of HSBC. Please go ahead.

Luiz Carvalho – HSBC

Thank you. Just a quick follow-up, perhaps one other question. But we were obtained solid (inaudible) in the industry and is that the case the data that for June, the margins were much lower than let’s say April and May. Did you feel any specific movement in the last months of the quarter, I mean of course you did not open the data on this, but is there any issue that you see or any color that you can provide us in terms of June exactly, you are saying the margins were much lower than the other months or the EBITDA [ph] was not the case for Ipiranga or (inaudible) Ipiranga? Thank you.

André Covre

Hi Luiz. Now we (inaudible). Now regarding the three important trends, different than the ones we expected for the quarter. Having said that, that the changes is in a such a small in 11 months than have a lot of noise like the number of days in the month, temperature, store – inventories. As a consequence we thought we would pay attention to what happens in one month in the final trends or come to any conclusions.

In fact for some of the data, we then move on second quarter with a good implementation and as I have repeatedly told the investment community that in our quarter, or margin is an indication for the trend contributed to less growth in most of the markets. So we didn’t see anything different though we expected for the quarter. We don’t think a month can really indicate anything in particular as a trend.

Luiz Carvalho – HSBC

Okay, clear. Thank you.

Operator

The next question will come from Gustavo Gattass of BTG Pactual.

Gustavo Gattass – BTG Pactual

Hi André, actually my question was already asked. I just wanted to follow-up on what Paula had asked. Basically when you made the comment as far as Oxiteno goes for the next quarter, the indication was that we might see higher margins per ton than what we saw last year, correct?

André Covre

Correct.

Gustavo Gattass – BTG Pactual

Okay. And this figure is already including then all the benefits that you actually have from the lower PIS/COFINS implicitly bringing margins a little bit down, is that the idea or not?

André Covre

Well, the way it works is we used 39.5% of PIS/COFINS and now we pay – the reduction is 8.25 over the cost of ethylene. It benefits. And what I was really saying in Paula’s question is that it is not a meaningless number, it doesn’t change (inaudible) extract that from the projections growth and the future results, we will not change the trend of having EBITDA margins in the third quarter above of the EBITDA margins than last year.

Gustavo Gattass – BTG Pactual

Perfect. That’s exactly what I wanted to understand. Thank you.

Operator

The next question will come from Christian Audi of Santander. Please go ahead.

Christian Audi – Santander

Thank you. Hi André, I wanted to focus my question on the outlook in the year, potential scenario of the decelerating economy. So whether if you could explain for second of four segments that you’re in, and this is just the follow points: number one, are you seeing through July any pressure in terms of a deceleration for this economic reasons; second, in that business, where do you see your cost slowdown of the economy; and then third, I mean taking specific steps to try to offset what could be a slowdown, so if could maybe just spend a second on Ipiranga, Ultracargo, Ultragaz and Oxideno, three points, are you saying any pressure right now based on the July numbers? Second, why do you folks are most worried about in the exposure? And third if you are building anything specifically to change the strategy to put there yourselves, so that potential outcome of a decelerating economy? Thank you.

André Covre

Thanks for the questions, Christian. Well first of all before answering the four core businesses, I know you are well aware that there are parts of our business – there are direction remains the evolution of the economy, but there are other significant costs into the business which have not linked to the economy or it is just the indirectly related to the economy. So naturally we tend to have abilities that (inaudible) the centers grow. And I think that’s (inaudible) as well the nature of the four businesses in particular and segments combined.

At Ipiranga about half of the volumes is linked to the GDP, but to give you caution, the other half is a lot very close trends to follow of the evolution we’ve seen so far. The evolution of fleet, at least they have a long determination to the economy but even (inaudible) is the very weak relation. So in Ipiranga, I would think that affected exactly from the economy is the diesel sales.

And we are not witnessing a significant change in the trend towards diesel than we had so far this year. That could be a practice by the case of adding new gas stations to our network and therefore building (inaudible) that we stating resulting in growth of GDP, in other words we are in process of actual expansion backwards increasing market share in diesel, and as a consequence probably our CapEx is now reflected just as factoring in the economy.

I can clearly say the same for Ultragaz. There is a difference (inaudible) is not affected by the economy in backward segment in which contributed 70% and São Paulo on the one third the growth of the population. Rather than 30% is the both segments where we are seeing growth around 12% just for the more additional working base in the second quarter. So finally, as a consequence of these investments that we are doing in that segments is having choosing a little bit of market care and (inaudible) data. So which show the evolution clearly on the economy?

Last, Oxiteno, that will depend lack of supply, positioning the market sales at specialty chemicals have shifted few times to GDP and is been growing specialty chemicals fairly in this year for the last two quarters somewhere around 6%. Even then we had recent affect which we see impacted that could be probably the urban market share in São Paulo as well.

So in summary, Christian, we had some drops to the business which are not directly affected by the economy. And in the part of the business where we are more affected by economy which we are the three we have done investments that are in process of into these investments which probably is allowing us to gain market share in an economic environment that is very volatile.

Christian Audi – Santander

Thanks for that. So this may be covered through July through end of the year, any specifics that would highlight a significant slowdown in your activities?

André Covre

We are not with the caveat that I made answering the previous questions which you find one month normally a period that is too short to have an indication strength. Well, I would say (inaudible) into a month, if we have a dramatic change in trends. We have not seen that in July.

Christian Audi – Santander

Okay, thank you.

Operator

(Operator Instructions) And we’ll pause just a moment to poll for those questions. I am seeing no further questions. This will conclude the question-and-answer session. At this time, I would like to turn the floor back to Mr. André Covre for any closing remarks.

André Covre

Thank you very much for your presence. We are all very honored seeing you with us and I’d like to thank all of you that have given us the honor of receiving some of the market awards last quarter, and particularly the team that is here in the conference call, congratulation to them and the splendid investor relations team, the executive directors of our business as they are helping us to give out good information. Thank you very much. I look forward to seeing you in November where we hopefully have our 29th quarter of results.

Operator

Ladies and gentlemen, thank you. This concludes today’s Ultrapar’s second quarter 2013 results conference call. You may disconnect your lines at this time.

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