Ultrapar Participacoes S.A. (NYSE:UGP)
Q4 2013 Earnings Conference Call
February 21, 2014 10:30 AM ET
André Covre – CFO and IR
Marcus Sequeira – Deutsche Bank
Felipe Dos Santos – JP Morgan
Tom Aspee [ph] – BKA [ph]
Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar’s 4Q13 and 2013 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 flip through the slides during the conference call.
Today with us, we have Mr. 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 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 question-and-answer 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’d like to turn the conference call over to Mr. Covre, who will present Ultrapar’s results in the quarter and discuss about perspectives. Mr. Covre, you may now begin the conference.
Thank you very much. Good morning everyone. Good afternoon, I guess to the people in Europe. It’s a great pleasure to be here with you again. Today, I will discuss Ultrapar’s performance in the fourth quarter and full year of 2013 which was another great year for us.
To help me here answering any questions you have, I have the officers from all the businesses and the investor relations team. Before continuing, I’d like to draw your attention to Slide #2, where the criteria adopted for information in this presentation is highlighted, as well as full information that we published in the last few days.
Starting now the discussion on Ultrapar’s consolidated results on Slide #3. We presented in the fourth quarter our 30th consecutive quarter of EBITDA growth. The main thing for such performance is the strong and consistent investment over the last several years. As an example, in the last five years, we invested R$7 billion in our businesses. These investments allows increased geographical footprint of the Ipiranga’s and Ultragaz distribution networks with increasing quality of the resellers and differentiation to clients.
The logistics infrastructure was also expanded and now has nationwide reach in increasing capital margins. At Oxiteno, we strengthened the focus on specialty chemicals with greater differentiation and stronger scale. At Ultracargo, we significantly expanded our storage facilities with expanded terminals and wider geographical coverage.
For the year 2013, EBITDA grew 21% and net income grew by 20%. With these numbers, we have now reached 15 years of above 20% average annual growth in results. The earnings growth was accompanied by an increase in profitability. As you can see in the graph on the top right, our return on equity increased from 18% in 2012 to 20% in 2013.
In spite of the strong investments carried out in the last several years, investments designed to keep the company’s growth trends that I mentioned, the earnings growth and the cash generation of our businesses allowed us not only to maintain but also to strengthen our solid financial position.
Financial leverage fell from 1.3x net debt to EBITDA to 1.2x at the end of 2013. Cash generation by our businesses have also allowed us to pay increasing dividends. The total of R$744 million in relation to the 2013 earnings, a 19% increase over 2012.
These facts demonstrate the company’s ability to invest in its path to growth and pay increasing dividends without jeopardizing our sound financial position.
This combination of growth with profitability and solid financial position also contributed to generate good returns to our shareholders. In 2013, Ultrapar shares appreciated by 21%, well above the market indices.
In addition to that, the dividends declared represented a 3% dividend yield over the average price in 2013, thus maintaining the level of recent years.
To better understand how we have reached these consolidated results, let’s dive into the performance of our businesses, starting with Ipiranga on the next slide.
The demand for fuel continues to grow, mainly due to the growth of the Brazilian light vehicle fleets, as shown in the bottom left of the chart. Even without any growth in car sales in 2013, the fleet is estimated to have reached 37 million cars, a 7% growth, boosting sales of fuels for light vehicles mainly gasoline, ethanol and natural gas for vehicles.
On other side, we continued to expand Ipiranga’s service station network. We’ve been doing this through significant investments in opening new service stations and converting unbranded service stations with a geographical focus on the Midwest, Northeast and North regions of Brazil, the fastest growing regions.
We ended the year with 6,725 stations, up 4% over 2012. These investments have allowed the company to grow above the market and obtain and include sales mix with increasing sales of – the increasing share of sales to service stations also known as the reseller segment.
And it is exactly in the reseller segment where we find the highest potential for our strategy of differentiation through constant innovation and services and convenience, helping to increase the flow at the service station, customer satisfaction and loyalty.
This philosophy of convenience and service has become well-known in Brazil to some marketing and advertising campaigns. The most famous ones are; Ipiranga, a complete place waiting for you, and ask there at the Ipiranga service station. Both of them summarize our value proposition to our clients.
Finally, improvement in reducing the grey market extraction in ethanol took place in 2013, bringing benefits to consumer, retailers and the company itself in vision to greater tax revenues for the government.
A demonstration of this trend was increased share in ethanol sales by the Sindicom companies as compared to the total market. This share increased from 62% a year ago to 69% in the fourth quarter in 2013, as seen in the charts in the bottom right. This progression went hand-in-hand with major initiatives occurred in the grey market, such as concentration, the collection of PIS/Cofins taxes or formal federal VAT in Brazil for the whole ethanol chain on the production level.
Also the investments that we have made in other branded companies we made in converting unbranded service stations had helped formalizing the markets.
These four factors are key drivers to the evolution of our results. As you can see on the top left chart, our sales volume increased by 7% in the fourth quarter, maintaining the growth level of 2013, which was 6%. EBITDA totaled R$624 million, a 20% growth year-over-year.
Excluding some extraordinary effects, that is on the EBITDA chart, we saw a growth of 14%. For the full year, Ipiranga’s EBITDA exceeded for the first time, R$2 billion, up 23% over 2012.
Looking ahead, the market trends and our strategy remain the same. And therefore you can expect more of the same in terms of results. Specifically for the first quarter, we expect an evolution of volumes slightly better between fourth quarters and as a result, EBITDA growth slightly higher as well. And here I am talking – referring to the evolution of EBITDA between fourth quarters excluding the one-off effects.
Moving onto Ultragaz on Slide 5. In the fourth quarter, we saw sales volume grew by 2% over fourth quarter of last year. The growth is concentrated in the bulk segment, which increased by 3% year-over-year, as a result of investments in new clients mainly in the residential buildings and small and medium size companies. These segments provide for an improved sales mix.
EBITDA followed the trajectory of growth this quarter with increase of 16% year-over-year and ended the year with 14% growth over 2012. In addition to the increased bulk volumes with improved mix, this growth was mainly result of commercial and cost reduction initiatives implemented over the last 18 months.
Such initiatives include; the conversion of some company-owned stores into resellers, increased automation in the bottling facility and some changes in freight contracts. In addition, in the fourth quarter, we had the requalification of a larger number of LPG bottles, offsetting part of this growth that we have anticipated in the third quarter conference call.
The larger requalification results from an analysis that showed that, at this moment, it’s better to do the requalification of existing LPG bottles, thus reducing the need to invest in the acquisition of new LPG bottles in the future.
For the current quarter, we have seen here in Brazil exceptional and hot weather for our summer, as opposed to the freezing weather in the northern hemisphere. And hot weather impacts LPG demands negatively. In addition, the level of costs with the requalification program is expected to continue in the first quarter. And as a result of these two elements, we expect as an exception, no growth in the EBITDA for the first quarter.
Now into Oxiteno. Sales volumes totaled 179,000 tonnes in the fourth quarter, a 6% year-over-year growth in specialty chemicals, which is the central part of the strategy in keeping its profitability. The performance of Oxiteno in specialty chemicals is based on the development of new technologies and innovations, ensuring greater profitability, lower volatility and great proximity to customers.
The volume in specialty chemicals in the domestic market grew 5%, a multiple of the past 2x to estimated GDP growth for the year in Brazil. This growth was made possible by the presence of Oxiteno in segments of high-growth demand such as cosmetics and detergents, coatings and agrochemicals and also by the conclusion of an important capacity expansion cycle in 2011.
In the foreign market, the growth in specialty chemicals was 8% due to the acquisition of a plant in Uruguay in November last year. The element of growth in specialty chemicals was offset by lower glycol sales with the scheduled stoppage at the Camaçari petrochemical complex. As a consequence, Oxiteno’s consolidated sales volume in the fourth quarter was 4% lower year-on-year, but however with a much richer sales mix.
During 2013, total sales volume increased by 2%, with the growth in specialties partially offset by the lower sales of glycols in the second half of the year due to the mentioned stoppage at the Camaçari petrochemical complex.
Oxiteno’s EBITDA in the fourth quarter grew 47% closing the year with a 25% increase over 2012. Relevant drivers for such growth were the weaker Real and the richer sales mix with a larger share of specialties. These attacks were partially offset by expenditures related to the start of operations in United States and Uruguay.
Looking ahead, we see in this quarter, the same trend that we saw in the fourth quarter, and therefore we expect specialties volume and EBITDA to grow at a similar pace to the one we saw in the fourth quarter.
Moving to Slide 7. Ultracargo’s effective storage grew 9% in the quarter and 13% in the year. This trend is primarily due to the acquisition of the Itaqui terminal in August of 2012, and through investments in expansions that resulted in increased handling products in Suape and Aratu.
EBITDA grew 6% in the quarter and 10% in the year, mainly as a result of increased deployments. This was partially offset by expenses mostly related to some strategic and growth projects.
Looking to the first quarter, the one-off expenses of the fourth quarter should not repeat, and therefore we expect the growth in EBITDA similar to the one we saw for the full year of 2013.
Moving onto Slide 8. Let’s talk a little bit about our plans and expectations for Extrafarma during this year. We concluded a transaction on January 31 as expected. In the shareholders’ meeting, we had three quarters of the capital represented and the transaction was approved by 99.8% of the capital.
Following that, we started executing the business plan that underlines the acquisition. It’s a plan focused on organic growth with accelerated pace of new store openings. Extrafarma opened some 40 stores in 2013, and we plan to open after the period of transition and preparation and meet the 130 stores per year, and as a consequence, to reach an EBITDA of approximately R$300 million in five years.
Under this plan, 2014 is a year of preparation as we have mentioned when we announced the transaction. This preparation is divided in two fronts. First, the operational integration to Ultra, which includes for example, centralizing the finance functions in São Paulo like we have for the other businesses and implementing EVA for variable compensation goals already in 2014.
Some activities that have actually been concluded already, for example, we are already closing the daily cash management of Extrafarma at our centralized treasury at São Paulo. And we expect to conclude all steps of the integration in the first half of this year.
The second front, which is already also underway, consists of adapting the structure of the company and redesigning its processes to allow for larger scale of store opening and therefore faster expansions. Among the initiatives implemented already in this front, are highlight the creation of a team exclusively dedicated to expansions of stores and business development.
This process of preparation for faster growth will impact 2014 results. Basically, to reach the EBITDA of R$300 million in five years, we will incur expenses that will bring 2014 EBITDA levels to lowered levels than 2013 as per provided for in our operational business lines.
In other words, in 2014, we will see a year of investments, the fruits of which will be seen in the coming years in an accelerated pace.
Separate from this, it’s our expectation to have relevant revenue growth in 2014 and typically for the first quarter, we expect a 15% revenue growth.
Moving now to the last slide on Page 9. I opened today’s presentation talking about investments that had driven our growth so far. I’d like to close talking about how investments should continue to pave the way for similar evolution in the future.
Our investment plan for 2014 totals R$1.5 billion. And large parts are making expansions. At Ipiranga, we plan to invest R$886 million, primarily in growing our distribution network and am/pm and JetOil franchises focusing on the Midwest, Northeast and North regions of Brazil. In addition, we will invest in expanding our logistics infrastructure to meet the growing demand in an efficient way.
At Ultragaz, investments in expansion will be concentrated in building a bottling base in São Luis, in the state of Maranhão, and also in expanding the UltraSystem, our LPG’s small bulk business with the deals capturing clients on the standard residential building segment and also on the small and medium company segments.
Oxiteno plans to invest primarily into a concluding the capacity expansion in Mexico, which will add 30,000 tonnes per year in capacity starting during this year. In addition, we have a potential expansion in the production capacity in the United States.
For Ultracargo, we plan to expand the Itaqui terminal also in Maranhão, and that should be operational next year.
And finally for Extrafarma, investment will focus on maintaining the pace of opening drugstores and potentially accelerating already at the end of the year and expanding the distribution infrastructure.
We expect these investments will allow increased scale and profitability, improved market positioning and differentiation. And as a result, keep us on our trajectory of the last 15 years.
I’ll conclude here what we have prepared for today. Thank you for your attention. And we are available to any questions you may have.
Ladies and gentlemen, thank you. The floor is now open for questions. (Operator Instructions) And our first question comes from Marcus Sequeira from Deutsche Bank. Please go ahead with your question.
Marcus Sequeira – Deutsche Bank
Hello, good morning everyone. Good morning, André. I have two questions. The first one, I’m just trying to kind of establish a relationship for market share gains in Ipiranga and how much points of EBITDA can you get only from kings of [ph] scale. So if you could help me with that? And then the second question is more general. How the economy has been performing since you last spoke about your EBITDA expectations for this year on a consolidated basis? I’m just wondering if, how the company has done, if that changes your plans to invest in Ipiranga, probably not, because you just reiterated that, but just how you’re expectations of EBITDA growth for 2014 if they have changed at all? Thanks.
Hi Marcus, thank you for your questions. On the first one, if you look at the last three years, we have grown between 1 and 2 percentage points, more on the markets. And that’s probably a pace that we will continue for some years given the opportunity of growing the network, especially in the target areas of the North, Northeast and Midwest.
The benefits of growing fast in the market go hand-in-hand with growing volumes overall. And that’s the benefit number one, providing operating leverage. I am sure you are familiar that contribution margins is around R$115 to R$120 in EBITDA margins, given around R$80 for the last 12 months and the difference between the two provides for operating leverage.
Second, growing faster than the market allows us to improve our mix. We are growing and growing the percentage of sales done through the gas stations. And it’s in that segment where we have the bigger opportunities for differentiation. The growing factor in a market in summary allows for operating leverage, allows for better sales mix.
Finally, the investments in expansions help reduce the informality in the market, particularly in SML [ph]. And that’s a very difficult element quantified, but I think we can see the projection that we had this year on reducing the informality, and flag switching was one of the things that contributed to that.
As to the economy, our perception is that things have not changed. This year’s economy tends to be very similar to last year’s economy, which causes no changes in expectation. And I know you are familiar with the fact that the economy has a mild effect on our businesses. And therefore, even if we have an important change in economy, the impact in our business would be much smaller than in most other companies.
So the planned investment is maintained and the expectations for the year that we announced in November are also maintained.
Marcus Sequeira – Deutsche Bank
Thank you very much. Just one quick last question is, I know this is very early to talk about it, but there is some questions about [indiscernible] Act in Brazil this year. If that was the case, I would say that only Oxiteno will be the most affected, but while the rest would not be affected because they are all either not very electricity intense or they are also energy – renewed energy as well. So is that a correct assessment?
Electricity accounts for 2.5% of variable costs of Oxiteno. And therefore a shortage of electricity will probably generate initially higher costs, which has very small impact on us. We think that’s more serious than in the case of blackouts for example, than don’t have a direct impact in Oxiteno plant as we had in the past, unfortunately have had blackouts in the Northeast regions in the last few years.
And what that means is that the company was stopped [ph] for a period of time and it’s turned back when there is electricity and supply of raw materials again.
Marcus Sequeira – Deutsche Bank
Thank you very much.
Our next question comes from Felipe Dos Santos from JP Morgan. Please go ahead with your question.
Felipe Dos Santos – JP Morgan
Hi André. Hi all. Yes, in terms of just some questions. The first one is with regards to the Marcus question before. You have reached the CapEx level that you announced at the beginning of the year. Do you still feel that this CapEx for this year could be having the same thing? I mean the CapEx could be as big as [indiscernible] elections and etcetera?
Well, there are three reasons we didn’t spend the capital budget for last year. First, in Ipiranga, in three of the expansions of storage facilities, we are delayed to licensing. In Oxiteno, we delayed the potential expansion in Pasadena for this year. In Ultracargo, there was an investment to be made in Suape for vesting the terminal for a particular client and the client decided to do the investment themselves in our facility.
So these things explain the CapEx below last year. But this year, the expectation is to make the R$1.5 billion capital expenditure. We don’t have a reason to believe that we will have selected elements like last year not to spend it.
Now we are on 21st of February, CapEx budget is the living thing. It’s a limit approved by the board. We don’t have to expand it. And therefore we exercise our judgment over the year – that’s through [ph] the timing of the various things.
Felipe Dos Santos – JP Morgan
Great. And my second question is regarding the expansion of the Ipiranga to the white flag gas stations. Is there a limit of volume that you look in for each gas station or you look a location, I mean how is the company’s strategy forward for these conversions of the gas stations? I mean is there any further way to state this is too low that if don’t were to look at or do you don’t have this kind of concern?
Firstly, there are three elements to look for; location, size and quality of the reseller. And it’s through those three elements that would select our business partners. Given the number of white flags in Brazil and that they have today 23% of the market, I think that there is ample opportunity for many years to continue to do this.
Felipe Dos Santos – JP Morgan
Okay, that’s perfect. Thanks so much.
(Operator Instructions) And our next question comes from Tom Aspee [ph] from BKA [ph]. Please go ahead with your question.
Tom Aspee [ph] – BKA [ph]
Thank you. Could you comment further please on inflation expectations for 2014? And then a related question. Do you expect any increased use of hedging in 2014? Thank you.
The inflation that we have factored into our budgets for 2014 is very similar to the one that we saw in 2013. In terms of hedging, Oxiteno is in dollar life business, and as a consequence, we carry some debt in dollars matching therefore cash flows and that independent currency. And we don’t expect to change the level of that relationship.
(Operator Instructions) And at this time, we’re showing no additional questions. I would like to turn the conference call back over to Mr. Covre for any closing remarks.
All right. Well, thank you very much. This is good 2013. Happy 2014. We’ll talk with you in a few months when we talk about the first quarter. Thanks.
Thank you. This concludes today’s Ultrapar’s 4Q13 Results conference call. You may now disconnect your telephone lines.
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