Ultrapar Participacoes S.A. (NYSE:UGP)
Q3 2013 Earnings Conference Call
November 8, 2013 12:00 PM ET
André Covre – Head-Investor Relations Officer and Chief Financial Officer
Christian Audi – Santander Investment Securities, Inc.
Good afternoon ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar’s 3Q13 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar’s website at www.ultra.com.br/ri. 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 from 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 call over to Mr. Covre, who will present Ultrapar’s results in the quarter and discuss about perspectives. Sir, you may begin the conference.
Good afternoon to all of you. It’s a real pleasure to be here with you to again talk about our third quarter results. We as usually in this time of the year made our annual public meeting here in Sao Paulo and we have prepared a presentation that highlights not only the results, but also our strategy, values and recent results and outlook.
So for today’s meeting, the agenda is on Slide 3. We will begin with strategic governance, growth and value for Ultrapar as a whole. These items are together because we see then intrinsically linked and we planned them together while we are considering the development of Ultrapar.
Next, I will touch on the strategy of each one of the businesses under performance for the quarter, which is another good quarter for Ultra and also I will touch on the expectations for the fourth quarter in 2014 and I will end the presentation with some consideration about our priorities for the next few years and then transfer you to ask questions.
Some moving on to Slide 5, Ultrapar just completed 76 years with a successful trajectory. We have leading and outstanding positions in all our segments of operation.
Ipiranga we are Brazil’s second largest fuel distributor with 22% market share in a distribution network of over 6600 service stations as of September this year. Ultragaz we are countries largest LPG operator with 23% for the Brazilian market and about 4700 exclusive resellers. Oxiteno is Latin America’s largest producers of [indiscernible] and specialty chemicals, it’s a sole producer of ethylene oxide in Brazil and sole producer of chemicals in Latin America. Finally to Ultracargo, we are Brazil’s largest provider of storage for liquid bulk with nearly a third of the market. We have had a robust earnings progression since the IPO in 1999.
Average annual EBITDA and net income growth above 20%, well above economic growth and inflation. Significant growth over 14 years and that is placed in many different combination of macroeconomic and political scenarios.
During this 14 years, we have had series of strong growth, economic crises and high interest rates, lower interest rates, very strong riyal, very weak riyal, different political and international scenarios and so forth. And consistently we have improved our earnings by 20% plus. It’s not a coincidence that our shares have had a significant performance as well since the IPO.
The operational performance influenced the market value. Our total share holder return is 25% since the IPO through October 8, 2013 and in the same period the Bovespa average appreciation was 12% a year and local interest rates 14% a year.
Part of the success that I just mentioned in terms of operational growth and share holder returns has to do with certain common attributes that we had in our businesses. These attributes are present at sometime of the life of our businesses, they’re not necessarily all of them present at the same time in our businesses, but they indicate what kind of business is structure and business philosophy we have for Ultrapar. Our beliefs about what Ultrapar is today and should be in the future. Talking about a few of them, we believe that our businesses have a unique combination of businesses that grow, leverage on the economic growth, but also have a significant resilience of the economic instability.
We have influenced actively the formalization and consolidation processes of our markets. For example in the 90s, Ultragaz led the creation of self regulation code for the industry which evolve to the current regulation of the LPG. Market, at Ipiranga, you probably have followed reverse the process of the consolidation and formalization of the market in the last years, which was boosted in 2007 without entering the sector. We also have influenced the shape of the markets in which we operate, both in terms of scale and differentiation.
In Ultracargo we are the only operator of ports terminals present in more than three ports, in fact in six ports and we recognized by our customers or our customer service.
At Oxiteno, we have profound focus on specialty chemicals, trying to help of our customers to create products through innovation and technology. In all of our businesses, we have strong bands that have been widely recognized by our customers. Again these attributes in our way of acting with them have allowed us to have the consistent growth that I mentioned in the slide.
Ultra was built over many years to have those attributes and prior to use only one word to define the success of Ultra. That would be governance, and that’s why we have slide seven. We have for a long time believed that governance is a tool to build a better company.
We have a corporate governance structure that is based on alignment of interests and it’s being on to making for more than 30 years. It started in the 80s with what was probably the first deferred stock ownership program in the country when the owner of the business Mr. [indiscernible] gave stock to his main executives in exchange for 20 year contract. In other word, they invited his executives to be his partners for life. And that was the beginning of the journey of Ultra on alignment of interests.
The gentlemen that received stock at that time together with others executives that joined that program have led Ultra since then particularly under the leadership of [indiscernible] which was the CEO for about 25 years and it’s been since 2007, the Chairman of Board. In the early 2000s, we implemented variable compensation based on EVA growth targets which further strengthen the alignment of interest philosophy and sense of ownership, expanding the concept to the ranking five employees of Ultra.
A second important element of our corporate governance is high standards of controls and transparency. We think that that allows for better decisions. We think that a culture of discussing and sharing paves the way for better decisions. We have a very streamlined management structure, we are a company of over 50 billion Real in revenue and our executive board is made of only six individuals, since to the seven, with the CEO of the recently joined [indiscernible]. There is active board of each business in turn is composed by three to five officers. In other words, the senior team of Ultra is composed by 25 people in most.
Solid financial position has been also a part of our culture, our comfort zone on the log term of investments 1 to 2.5 times net debt to EBITDA and that income realization would occur at the restricts of our business particularly the growth and resilience has allowed Ultrapar to have very good credit ratings by Moody’s and S&P.
While these four elements allow me the interest, high standards for controls and transparency, simple management structures, the solid financial positions allow our teams to work with a high degree of validation, because they will live with the consequences of their decisions, each person is encouraged to make the best decision for the company and not for themselves, Ultra is our company it’s not the place we work at every step of the way we all ask is this is good for the company.
These four elements of governance also allow for very agile decision making processes which we think is the differentiating element in management and in our actions in the markets, all of this creates a very favorable environment, the prospect analyze and execute given conditions in investments, in prospecting we have a combination of readiness and patience in analysis, we always conduct a process of identifying, dimensioning and if possible mitigating risks finally on execution we always conduct a very detailed execution plan.
Amongst other things we have teams with great experience in integrating acquisitions, and make investments, experienced built with a 17 transactions that we completed over the last few years, this is a continuous process that takes place into different levels of the organization and project scope. For minor efficiency improvements the major strategic steps but in summary our corporate governance is structured to create a more solid, profitable and enduring company.
Moving to Slide 8, I’ve spoken moment ago about our ability to execute Slide number 8 brings some color to the strategic planning and execution capabilities. Specifically in specialized distribution and retail business, we have a large experience in implementing accelerated rollouts.
The last two years, we have opened or rebranded nearly an average of 450 Ipiranga stations a year. This means roughly few service stations or working day without hoping an average of 186 convenience stores in the period AM/PM convenience stores and that Ultragaz in the last 12 months we have opened 380 LPG reseller shops. We have in our 17 acquisitions that we mentioned done significant integration steps our philosophy to their integration needs to happen very quickly after the transaction and you have listed on the slide some of the success cases that we are proud to show.
Moving now to Extrafarma, when I spoke about governance and our management philosophy these were the things that led us to identify and execute the association with Extrafarma. So on Slide 9 we go through the logic of our entry into the retail pharmacy sector. That’s really based on our history of prospecting, analyzing and making acquisitions with the purpose of building an increasingly solid profitable and enduring company. This was the case for example for the acquisition of Ipiranga in 2007. The proven planning and execution capacity I just mention provided us with the support for the development of this new value creation venue.
Amongst all the characteristics there are some that are very common to the other businesses. First it’s a very relevant market as it is the market for LPH and as it is the market for fuels, chemical. It’s a market that grows with a combination of the economy influence and resilience. Drug stores total revenues in Brazil were BRL60 billion last years with a rate of growth for more than 10% in real terms.
Per capita consumption is low in comparison to other countries, four of them are trading significant grow – for continued growth. Amongst the factors that allow for this growth one of them is the aging Brazilian population, individual over 60 years old represent only about 10% of the Brazilian population 20 million people, but account for the more than half of the consumption of medicines.
In according to official statics by 2030 this group will reach above 40 million individual representing the poor and an average rate of growth 4% of year. Some other growth into market is related to the revolution of the economy increase income and employment allows for greater access to health insurance and health insurance leads to more doctor visit and more medicines sold.
Income also boost the sales of our men personal care products and other factor that’s been increasing our access to population is the sale of the generic drug, which are cheaper than the branded equivalent. The sales of generics have grown more than 30% a year for the last eight year.
Moving on to Slide 10 in addition to the positive volume growth scenario of the pervious slides other factors that increased attractiveness of the sector or the current earning stage of consolidation and a process of formalization. As you can see on this some important measures have been taken to formalize the market already particularly to reduce tax evasion. We’ll have in 2014 a another boost on increasing the formalization as there will be a legal requirement for this so called vial equivalent tests for the similar drugs.
In addition to that the drug store chains have been making significantly investments in new store opening and the drug stores chains tend to offer a more attractive assortment convenience service to customers leading to afford to not only formalization of the mark but consolidation. As I mention consolidation is doing very early stages, the top five drug stores chains in Brazil account for about 30% of overall sales which is less than half the United States and it compared favorably to Mexico and Chile is to pick here Latin American mix.
Talking of our [indiscernible], once we were convinced that this is a market that was very attractive and also that fit with the attribute that define Ultrapar, our entry door was one that should have a fit with the governments and business philosophy of Ultra and that should be the case of Extrafarma.
Extrafarma is one of the top ten drug store chains in the country. It’s a high quality company with the leadership position in its region, and it has conducted a process a revision of its governance and making management professional.
As a result of this they have implemented management tools and certain plans, they are very well designed for earnings growth and value creation. It’s a company with an experience of renouncing in the pharmaceutical sector and they will stay with us and start a journey of faster growth with Ultra. The current CEO will continue to be the CEO of Extrafarma within Ultra. And you can see on this map, the geographical footprint was a 186 stores.
On the next two slides, we have put some pictures of Extrafarma for you to have a feel of the quality of the network in the stores. You see Slide 12, a very standardized and attractive external image, it’s a image that conducts the quality of the stores and invite customers to come in. It is also an image that repeats itself for garlands of pipe of thee type of neighborhood. That this the pharmacy installed, so we have in this starts to well the case a bigger picture, it is in the high end neighborhood the top right is in the shopping mall, the middle one on the strip on the right side is in a low income neighborhood and the one at the bottom is an average middle class type of neighborhood.
Regardless, of the type of neighborhood area standardized type of external image that invites customers in.
On the next Slide 13, we show some of the interior of the shops and here the larger picture is a very large store. Just below it in the middle picture, we have a very small store and a shopping mall. So there is a wide range of types of shops. All of them are well organized, invite customers to buy and have assortments that are adapted to the local needs of each one of the customers.
Moving now to Slide 14. Having talked about the attractiveness of the market and our new partner, Slide 14 highlights what we intend to do together. Obviously, Extrafarma bring us the initial scale, brings us a strong brand in where they operate, brings us a very good network and brings us a very good management in pharmacy retail.
What we add is investment capacity; our experience in accelerated expansions, our experience in acquisitions, corporate governance. We have 10,000 points of sale between Ipiranga service stations and Ultragaz reseller points. One of the most important bottlenecks were a very quick expansion of the pharmacy network is indeed attractive real estate and we have 10,000 to choose from.
Finally, because we have Ipiranga and Ultragaz on the future, we’ll be able to have an integrated look to the customer with coordinated marketing initiatives, which I believe will be unique in the market. We’ll be one of the few companies that will be able to look the customer from different points and designed services and products, wage or payment that will be more attractive to the customer that probably what we have in the markets today.
Moving now to the results, business strategy – business unit strategy and the results, on Slide 16. on a consolidated basis, we achieved our 29th consecutive quarter of EBITDA growth and in order to reach that level we invested BRL11 billion during this period, BRL6 billion organic investments, BRL5 billion in acquisitions.
EBITDA has grown 17% on the quarter, 21% on the year, net income is up 13% on the quarter, 20% on the year. Due to the EBITDA growth and the stable level of investments cash flow grew from BRL190 million in the third quarter last year to BRL468 million on the third quarter of this year.
The growth and the operating results in the order of magnitude 20% in EBITDA and net income for the first nine months of the year were reflected in the performance of our shares, Ultrapar shares depreciated 18% while the FBOVESPA has fallen by 14%. We also considered an order to receive market recommendations for our operating performance and for our company’s management and that increases our confidence while we are on the right path. Some other ones that we’ve received recently are highlighted on the bottom right of Page 16.
Moving on now to Slide 17, talk about market growth and our strategy to grow volumes. The outlook for the market continues to be very positive with good visibility for continued growth. The fleet of cars in the country has grown between 7% and 8% for the last few years and at the current level of car sales, the fleet will continue to grow at this level.
It helps that in spite of the growth for the last several years, penetration of cars in the country is still relatively low, less than 20%, which is below the penetration of countries like Argentina and Mexico, which are between 25% and 30%. The outlook is even more positive when we look to the region, which is the focus of our expansion, the North, Northeast and Midwest.
In that region, growth consumption, it’s growing as fast as much of the rest of the country. Between 2009 and 2012, we grew 10% while in the South and Southeast we grew 5%. Our penetration is even lower 9% in the target region versus 24% in the south and southeast. And finally, our market share is significantly lower in the target region, 13% while in the South and Southeast, it’s 26%.
In addition, we have seen and helped a process of reducing informality in the market. We try to track informality by measuring the percentage that the companies associated to SINDICOM, which is the trade association for large distributors represent in relation to the total market as published by the National Energy Association, ANP. As you can see on the top right, that percentage increased from 61% in the third quarter last year to 87% on this third quarter, which remains still significantly lower than the percentage of gasoline, which is a fewer informality has been largely controlled. This shows that in spite of improvement, we still have some work to do.
In this environment of visibility for continued growth and reduction of informality, there is a great potential for spending in our network, through opening new gas stations or doing the so-called flag switching, in which we convert a white flag on a Ipiranga branded gas station. The possibilities here are quite significant, again, now considering the percentage of Sindicom associates to the total market not only in ethanol, but all fuels, 23% are in the hands of companies that are not associated with Sindicom. 22% is basically the size of Ipiranga. So there is an entire Ipiranga of potential market to be captured.
Over this background, we have made significant investments in the last several years, expanding the network of gas stations and the backbone infrastructure logistics required to support it. This has allowed two things. First, it has allowed us to reach volume growth consistently above the market as the graph on the bottom right shows. Second, has allowed us to reach a better composition of volumes, a better mix with growing percentage of sales to the gas stations, which is a more profitable channel.
As we move to Slide 18, I would like to take now about our market strategy. How we position ourselves towards our customers. The basic strategy is differentiation, inconvenience and service. The genesis of that strategy starts with recognition that no one likes to go to a gas station. You go because you must, otherwise you run out of fuel. If you recognize that we thought that we could make the lives of our customers better and if the lives are simpler, they are more satisfied and they might be willing to give us some back in terms of pricing and margin. So the differentiation is based on constant innovation and services, trying to make the customer experience better in our gas stations. Second, it has an objective of increasing traffic and enhancing client loyalty; and third to create additional revenue sources for our resellers.
Slide 18, lists some of examples of the initiatives, I have had the opportunity of speaking with investment community about number of events. So I like to highlight only two AM/PM which is our convenient store network were the largest convenient store chain in the country, we have recently became also the largest bakery store network in the country with 224 units installed inside our AM/PM stores.
The other one I would like to highlight is kilometers of advantage that’s a loyalty program launched in 2009 and it has already 14 million individuals registered. So largest loyalty program in Brazil. There are a number of advertising films produced around the theme of convenient store services, the most famous one here in Brazil is one where whatever the information you need you can ask at any Ipiranga gas station.
The [indiscernible] logo now our advertising films is Ipiranga a complete place waiting for you. They both symbolize what our market strategy is.
Moving onto Slide 19 to talk about the recent performance of the year, we have continued strong volume growth over the year. On Slide 19, that comes from the growth of the Brazilian fleet and our continued investments in the market and expanding outer network and related infrastructure which enables us to have another quarter of above market growth.
We grew seven and a bit percent, the market grew 6%. EBITDA growth totaled 17% in the quarter, 24% in the nine-months as a consequence in addition to volume growth of increased share at the Reseller segment which results from increasing investments in the network, the strategy of constant innovation in products and services and the progress in market formalization.
Looking ahead the market trends and our operating strategy remains the same. And therefore we expect more of the same. In other words we expect the volume and EBITDA growth will be for the fourth quarter of 2013 and for the year and for the year of 2014 at similar pace as we just had in the third quarter.
Ultragaz this is another business with retail characteristics just like Ipiranga we are a strong brand and operating scale are key factors. Ultragaz is the strongest brand in the market and we are marketing it with 22% and therefore the biggest scale in the market.
The market is composed of two segments Bottled and Bulk. The Bottled segment is very resilient segment demand. Bottled LPG in Brazil use exclusively for cooking and is therefore an essential good. As you can see on the top left graph we have had times of significant profit increase, we had times of economic and financial crisis and in such periods the volume has remained virtually stable attesting the resilience of the demand of Bottled LPG, Bulk LPG is used in large condominium buildings, service business and small industries. And as a consequence it tends to follow the evolution of GDP growth and that can be clearly seen on the bottom left graph.
The main elements of our Ultragaz recent strategy include some commercial and cost reduction initiatives to increase profitability. First we are investing in expansion in retails of higher growth. For example we are building a new bottling facility in the Northern State of – we entered this market a few years ago, have had a rapid increase in sales volume and now have the critical mass to justify our local bottling facility.
Increasing the proximity to the customer, to monitor changes in its habits and be able to serve them better, is being another important part of our strategy, that might set we have launched a few years ago the ability to have individualized fields and residential buildings. And we are in process of accelerating the ramp up of that solution. We have also changed in the recent past our approach, to small, medium-sized businesses looking to them to provide energy solutions as opposed to selling LPG.
In our bottled business, our resellers or our sales channel and before a good reseller network will take away for a good evolution in volumes and prices, we've listed there two programs that we recently started, the vendor online means, reseller online and [indiscernible] Blue Management is an information system that supports the financial management of the resellers sort of a small ERP system for our resellers develop to the bank.
We done also a number of cost reduction initiatives on the freight area, freight management area on improving automation of our bottling facilities and also in some areas where we still operated with own stores, we converted that to resellers. With this we can move to Slides 21 and the results shown here are a direct consequence of the cost reduction initiatives and commercial initiatives that I mentioned. Growth in volume comes mainly from the Bulk segment where we have the residential condominiums and the approach the small, medium sized companies within Energy Solutions.
In addition to the EBITDA growth, in addition to the volume growth, EBITDA growth has grown as a consequence of the cost reduction and other commercial initiatives. If we consider the next quarter and 2014 the market outlook that we have had this year continues to be present and we continue to work on the same commercial and cost reduction initiatives.
As a consequence at this moment, we expect that in the fourth quarter at 2014, we will have sales volume and EBITDA growth similar to the ones we have on the first nine months of the year. I want to underline however, that in the fourth quarter, we will make a much bigger number of requalification of bottles and therefore we expect that the EBITDA to be reported after the requalification of bottles we have some lower growth than the number I just mentioned.
Moving now to Oxiteno on Slide 22. Oxiteno is a very unique chemical company. It has a unique combination of being the sole producer of ethylene oxide in Brazil and oil chemicals in Latin America on one side, and the other side, having a focus on specialty chemicals. That combination makes it very unique. It allows a very ample coverage of markets and applications. And this paves the way for flexibility and the mix of sales following the trends of demand in each one of its operating segments.
The main consequences of that is that Oxiteno is a lot less exposed to the typical chemical cycle, and it’s very little exposed to low growth of this specific segment. It’s been part of our strategy for many years to have a renewable sources of raw material in 2006, 9% of our raw materials was from renewable sources. It’s currently now 21%. That's important not only because of it’s obvious reasons, but because products are renewable raw materials have strong penetration in the industry of house and personal care, which is one of our main segments of operation.
ESA renewable resources is one of the aspects of our market strategy, which is based in technology and innovation. Oxiteno inspires to be a partner of its clients in the development of new products. 11% of our employees are dedicated to innovation of products, processes and new applications. And it's this strategy that has allowed a significant growth in the last two years in the agro business in house and personal care.
Talking about now geographies. In Brazil, a little less than three years ago, we finished a very important cycle expansion in capacities where the focus on specialty chemicals. Soon after that pension, we had a very important growth in volumes, with an increase in the exports. With these expansions coming closer to the full utilization, the trend will then be for Oxiteno to gradually migrate its production more to the specialties in the domestic market, leading to a more favorable sales mix.
The pace of that migration will be leveraged on the economy as typically the growth of specialty chemicals in Brazil rose between two and three times GDP. That market strategy based on technology and innovation has also allowed us to expand our operations geographically using also our multinational clients as an important anchor. Geographical expansion as name say allows us to have access to a broader market, it also allows us access to compare that raw materials balancing raw materials derived from naphtha which is the case mainly Brazil and natural gas as is the case in other countries that we now operate.
Further it allows the local presence allows faster growth in specialty chemicals as specialty chemicals are somewhat over serviced as well and the core customer proximity is very important.
Moving now to Slides 1 to 3 to talk about the results of the year, as we anticipated in our second quarter earnings call we had a scheduled stoppage in our study such a chemical complex in October, and as a consequence we had anticipated that we would have a sales warrant decline in the third quarter to allow us to build up specialty chemical inventories for the fourth quarter.
The way to build up inventory is to reduce the sale the commodities, the Glycols and therefore have a reduction in overall sales. Keep in mind that the sales of specialties even during the third quarter continue to grow. We reached significant growth in the year and in the quarter in terms of EBITDA in addition to the benefit of volumes for the nine months of the year, we had a weaker real both in the third quarter and on a year-to-date basis. We had a more favorable sales mix with higher share of specialties and these effects were partially offset by the expenses related to the startup of operations in the United States and in worldwide.
Looking to the future in terms of volume we expect to return to grow in the fourth quarter return to normality and that should be at a similar levels for the growth that we have in the nine months of the year.
That expectation also applies for the full year of 2014. With the higher volume and the current foreign exchange scenario, we reached in 2013 an EBITDA margin of $230, $250 to $260 and we expect that to repeat itself in 2014.
Having said that I remind you that – results are subject to short-term effects especially as a consequence of foreign exchange movements and changes in raw material prices and in fact on the fourth quarter we expect EBITDA margin to be a little less than the level that I just mentioned even the expenses that we have with the plant stoppage on the fourth quarter.
Turning now to Ultracargo, we have made significant investments over the last two years in the early part of the year the expanded terminals in Santos and Aratu came on stream and in the second half of last year we acquired a terminal in Northern part of Brazil in the state of [indiscernible].
For the combination of expansions the acquisition paved the way for 13% growth of volumes in the third quarter and 15% on a year-to-date basis.
The higher volumes have allowed us to increase our EBITDA for the year. Nine months of the year, EBITDA has growth 12%. Third quarter, the growth was only 6% as a result of some extraordinary effect on expenses.
Looking ahead, we’ll keep working in 2014 to expand our terminals. In particular, we’ll have the first expansion of the newly-acquired terminal in Itaqui and that will be operational in 2015. Therefore, in 2014 we will not have any added capacity, but we’ll be reaping the benefits of what we already invested.
In terms of EBITDA total interest is above for the fourth quarter and for the year of 2014. We expect growth in a higher level than we have had so far for the nine months of the year, given the extraordinary effects and expenses that I just spoke about.
Finally, before the last slide I want to have a brief mention to Extrafarma and our immediate and general outlook. Closing of the transaction is scheduled for January 31, 2014. Extrafarma’s expected EBITDA for 2013 is $77 million and it expands to end the year with approximately 200 stores. Through the next year we intent to work on integrating Extrafarma than on designing the faster expansion plan that underpinned the transaction. That organic store – more aggressive organic store opening plan is expected us to allow us to reach an EBITDA of about R$ 300 million in the five-year term. We also expect that to take place with an upward growth curve, which might be speeded up by acquisitions.
So coming to the last slide, we list some of our priorities for the last few years. What they have in common is that we see scope for us to invest in increasing volumes in all the businesses and increase our differentiation in each one of the businesses. And we will have as of beginning of next year Extrafarma as the new source of value creation, which will over the next few years, help us to continue to build a more solid and more profitable and an enduring company
Thank you very much. This is what we have prepared for today. We are here available for your questions.
Thank you. The floor is now open for questions. (Operator Instructions) And we have a question from Christian Audi from Santander. Please go ahead with your question.
Christian Audi – Santander Investment Securities, Inc.
Thank you, Andre for the very detailed presentation. I was wondering if you could talk little bit more specifically about the trend with Ipiranga particularly from maybe that generation point of view, EBITDA margin point of view. Is the movement that we saw for example this quarter and with the margin for cubic meter down a little bit, is that something we should expect going forward? In other words this level of volatility to continue or was that a one off. If you could add any color? That will be very helpful. Thanks.
Chris, thanks for the question. I thought I had made everyone sleep with my long presentation. I apologize for the long presentation as we made it to the Brazilian public, we feel that we have an obligation to make it in English as well. To your question Christian, margins in Ipiranga have grown a few reals in real terms for now four or five years and our view is that what drives improvement in EBITDA and EBITDA margin is a combination of four factors.
First, the market growth and with it volumes and the four operating leverage; second, we are making significant investments to increase the network. Then we grow volumes factored in the market and in the most attractive segment, which is the resellers segment. Four, our strategy differentiation provides for more loyalty and satisfied customers and for the formalization of the market continues to take place.
Our view is that as long as these factors are present margins should continue to grow and they have. They have grown because of those four things and they should continue to grow because of the four things.
Specifically about the third quarter, I have said for a long time that quarter margins are to be understood with a lot of caution. Specifically sequential evolution is to be looked very, very carefully. If you are going to compare quarterly margins I think at least it’s better to compare with the same quarter of last year, because that takes away any seasonality effects. This completes these exact example since 2010 the evolution from the second to the third quarter we have now four years.
In 2010 from the second to the third quarter EBITDA margin fell. On 2011 it stayed stable. In 2012 we grew from the second to the third. And now 2013 it fell again. So you have all possibilities it’s not a clear trend and therefore we didn’t look too much change to it as a trend for the future.
Christian Audi – Santander Investment Securities, Inc.
Thank you, André and moving onto Oxiteno, sorry when you were giving the explanation I could not get the numbers, can you just repeat your expectations in terms of margin. You were mentioning that the level of margins dollar per term that you will reach this year will be the same or similar to next year, could you just go over that again please?
Sure. With the volume growth that we have had and the current scenario for foreign exchange, we reached this year a level of $250 to $260 per ton of EBITDA margin. And it’s current expectation that they will be maintained for next year and for the fourth quarter. In the fourth quarter, I made a caveat specifically to costs and expenses that we have with the stoppage of the plan. So it’ll be a little less than that, but if we put away or take away these temporary costs, we are on the same trend line of $250 to $260 per ton of EBITDA margin.
Christian Audi – Santander Investment Securities, Inc.
Great. And then last question moving to Extrafarma, when you look back at the several acquisitions you’ve made in the past in terms of getting into new businesses such as Ipiranga and et cetera. Do you feel with Extrafarma that you are now putting the actual execution or are you having to depend more on the know-how and execution of the existing management of Extrafarma there? And maybe in the past or in other words the dynamic of this acquisition in terms of how much you are bit lying on the management of the company that was acquired similar to previous acquisitions that you’ve made?
It depends on the acquisition. I think the one that was most similar to Extrafarma was Ipiranga in 2007, where just like now in Ipiranga, management stayed and it was an important part of the business plan. So I don’t think is different in Ipiranga and the important thing is to look for a good management team in combination with a good company. And if you have to rely on then as long as you have alignments of interest, alignments of use, then things are poised to work well as they did in Ipiranga.
Christian Audi – Santander Investment Securities, Inc.
Okay. Thank you.
And at this time we will conclude today’s question-and-answer section. I would like to turn the conference call back over to Mr. André Covre for any closing remarks.
Again, thank you very much for your presence. We felt that we needed to treat the international investors in the same as in Brazil. So I apologize for the long presentation. We look forward to have you next year with us when we talk about the fourth quarter results. Everything indicates from the outlook I gave you that it will be our 30th consecutive quarter of earnings growth, so big 30 to celebrate at the beginning of next year. Thanks a lot.
Ladies and gentlemen, that concludes today’s conference call. You may now disconnect your telephone lines.