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Ultrapar Participacoes SA (NYSE: UGP) Call for the purposes of the quarter of 2020 August 13, 2020, 11:30 a.m. ET
Operator
Good morning, girls and gentlemen. At this time, I would like to welcome everyone to the call for the Ultrapar 2Q ’20 effects convention. There is also a simultaneous webcast available through the Ultrapar online page on ri.ultra.com.br and the MZiQ platform. Feel free to browse the convention slides.
Today we have Mr. Frederico Curado, Director General; and Mr. Andre Pires, Director of Finance and Investor Relations, as well as other Ultrapar executives. [Operator Instructions] You will have a repeat of this call for one week.
Before proceeding, let me mention that forward-looking statements are made under the Security and Securities Litigation Reform Act of 1996. Forward-looking statements are based on the ideals and assumptions of Ultrapar’s control and the data that the Company has of late. . They involve risks, uncertainties and assumptions because they relate to long-term occasions and therefore have cases that would possibly happen or would not happen in the long run. Investors deserve to perceive that general economic situations, industry situations and other operational points may also be the long-term effects of Ultrapar and may also cause the effects to differ materially from those expressed in these forward-looking statements.
Now I’ll cede the ground to Mr. Curado. Mr. Curado, you can start the conference.
Frederico Curado – CEO
Thank you and welcome our quarterly call. This quarter, of course, we feel the direct effect of the COVID-19 pandemic. But in retrospect, we believe that our ability to manage our operations during this crisis is quite effective. And we were able to go through the three difficult months more than we expected.
So now, since the end of March, we have set two priorities, the first is the protection of our other people and the time is the continuity of our operations. Please note that all of our five businesses were considered essential to the public. And we have a legal responsibility to serve our consumers and consumers regardless of the challenges.
So, as far as our staff is concerned, we’ve had about 500 instances shown so far, which equates to about 3% of our team. Of those 500 instances, approximately 450 have already been recovered and re-operational. The other 50, they’re 40 years old. But thank God, nobody really is, everyone’s home. Nobody’s even in the hospitals. So, if the maximum of our staff were in the field, obviously I can say that our symptom identification protocols for testing, selective isolation and monitoring of this protocol have been very effective. Of course, we also have staff in the house office. We started returning to the offices last Monday, in fact on August 3rd, on Monday last week. And this comeback is gradual. It’s very fluid and it’s going pretty well so far.
I think the vast majority of companies have realized, in fact we have realized that the main workplace was working extremely well, much more than we would have expected [indecipherable] before the crisis. Therefore, we do not know when or how: what the new general of paintings will look like in the workplace, what it will look like in the future. But we certainly don’t believe that one hundred percent of our painters will go to the workplace every day. We think it’s, there’s going to be a transition, adjustments to that. And next month’s party, several months, I think, will tell us where we’ll land in terms of the balance between the workplace and after the presence in the workplace. So it was a very attractive learning pleasure in that period.
Now, as regards the priority moment, which is operational continuity, we have controlled all our operations well without any interruption, despite the situations of demand for logistical mobility that we find in Brazil, in Sao Paulo in particular, [Indecipherable]. But we didn’t have a singles-free day, which is great. Then it’s nothing. I think we need to recognize the quality and tenacity of our teams, also of our leaders. They will have made an extra effort in those difficult times and have ensured the protection of our other people and the respect of ours – our commitments.
Now, before I communicate the results, let me address two other issues about the crisis, one, helping our distributors, and second, social movements to help in combating the pandemic. In short, we are very proactive. We have been agile and flexible with our suppliers, with our customers, with our partners, with our distributors, in order to maintain the integrity, not only of our operations, but also of their operations and, in the end, to keep the facilities to the public. . As a result, we have been proactive in renegotiating contractual obligations and have been proactive in implementing some capital relief measures for our partners. In the end, we ensure the continuity of the price chain or price chains, but also the stability of the defect point in our balance sheet, which did not accumulate the quarter. So that’s another vital result.
And one last word on the slide of: relating to social support. Then [indecipherable] discounts of about two hundred million BRL – sorry, 20 million BRL – basically to the structure of hospitals, in association with personal hospitals and then compared to our existing effects as was the case of Rio and Porto Alegre, for example. We also donate LPG, deliver medical appliances and food to truckers. We have offered great discounts to fitness care professionals, among many other actions.
Everything is fine. Let’s move on to the monetary results. The effect of the crisis has focused on Ipiranga, as you’ll probably read in our press release. And this, of course – what had an effect was the result of the combined effort – the combined effect of: first, a significant relief in demand, basically gas and ethanol; and second, the sharp fall in the value of oil. And, of course, we have generated a massive loss of stock value, which, of course, will recover over time.
Thus, other companies, on the other hand, showed great resistance to the crisis, adding Extrafarma, which crossed the quarter with about 7% [Phonetic] of their closed outlets, outlets that were – that are in grocery shopping centers. that have been closed.
Then, briefly commenting on the other activities, Ultragaz had a very clever quarter. We have noticed some volume relief for wholesale customers. These are small and medium-sized enterprises. But we’ve noticed an expansion in family consumption. And we were able to get smart margins in both segments, volume and cleanliness.
The switch to Ultracargo, also a smart quarter there, despite a slight relief in cargo movements, however, garage commitments remain very firm and so have the margins. So it’s a smart quarter for Ultra charge.
And finally, Oxitene, we’ve had some volume relief for certain segments like coatings, paints, oil and gas, obviously, and automotive. But, on the other hand, agribusiness and HPC exceeded our expectations. In addition, Oxitene benefited from genuine [phonetic] exchange rates, lowered genuine ethylene prices and declined in the following quarter.
In short, we had a smart quarter, that’s for sure. But it tested the resilience of our – and the agility of our business and portfolio with effects that we consider very satisfying, given the uncertainties and volatility we have all experienced. Therefore, we expect a continuous recovery of economic activity in Brazil at this time of year and, of course, Ipiranga with this recovery. So we, in fact, the biggest difficulties have already been left behind.
That is why we hope that the next few months will also be vital for the implementation of the ai supply, our new activity announced a few weeks ago. We, this company, have [indecipherable] value and, in fact, we expect it to take place in the coming years. This is the start-up phase of this new company.
A few words about our strategic agenda, our strategic vision, remain unchanged. On the one hand, of course, we continue to look for effects on all our activities. On the other hand, also a lot of field and concentration in money management, and also, of course, in the reallocation of capital. And I couldn’t either. I have to mention that all of this has to be backed up through the continuous progression of a skill pipeline and also what we call business leaders.
Let me make one last comment before I cede the ground to André. We have not been able to [Indecipherable] advance dividends this semester, however the Company maintains – surely maintained its commitment to pay the main dividend equivalent to 50% of our annual net income, which, by the way, is in the Company’s statutes. So we made the decision not to make this six-monthly breakthrough as has been our practice over the years. This will be done in the context of the preservation of the treasury, in the context of a still dubious and volatile economic situation. So obviously, as usual, the dividend proposal was for fiscal year 2020. This is for approval as well as next year’s monetary statements in our AGM. So, there’s no replacement. The only substitution is that we don’t have a complex dividend at this stage.
So, with that, for you, Andre. Thank you.
Andre Pires de Oliveira Dias – Director of Financial Relations and Investors
Thank you, Fred, and hello, everybody. Starting with Ultragaz on slide number 5. Ultragaz’s sales volume at the time of the 2020 quarter increased to 3% annually, in line with the market. In the bottle segment, volume above 8%, driven by the upper residential demand for LPG, reflecting position constraints due to the pandemic. On the other hand, bulk sales volume declined by 9% with a drop in sales to industry, industry and services, also impacted by the pandemic. This relief was offset by the expansion of sales of condominiums and special fuels.
SG-A decreased 11% compared to the 2019 quarter, thanks to measures taken to control expenses with declining payroll, business and event expenses. On the other hand, there has been an increase in transport costs due to higher volumes and increased spending on donations and protective equipment to combat the pandemic.
As a result, Ultragaz’s EBITDA reached R$206 million, 69% more than in the same quarter last year due to the construction of higher sales volume, improved operating power, and control of charges and expenses.
With respect to Ultragaz’s business environment, we expect a slow recovery in the sales volume of the bulk segment, basically from industry, industry and services, and robust continuous functionality in the bottle segment. With this, the trend is for forged and consistent effects in the future.
Let’s move on to slide number 6, talking about Ultracargo. Ultracargo added 19% to its average capacity compared to last year’s quarter due to the expansion of the Santos and Itaqui terminals implemented over the more than 12 months. The cubic meter was sold upwards by 16%, mainly for higher fuel handling and increased capacity, as well as increased spot operations in Aratu.
Ultracargo reported sales of R$155 million in the quarter, 23% more than in the 2019 quarter, due to higher average rates, new consumers and a lot of money transactions.
In terms of general and administrative costs, we saw our combined accumulation of 4% due to the accumulation of wage expenses due to the expansion of the capacity of the Santos and Itaqui terminals and the additional expenses similar to coVID-19 and PPE donations. It should be noted that Ultracargo has reduced its opex consistent with the cubic meter sold by 10%, demonstrating improved productivity.
At the time of the 2020 quarter, Ultracargo’s effects benefited from R$12 million tax credits, while in the same quarter last year, we had a negative effect of R$53 million under the 2015 chimney settlement.
Ultracargo EBITDA reached R$92 million during the quarter. Excluding the single effect on the aforementioned, the expansion of year-on-year EBITDA was 35%, due to increased operations and the rationalization and dilution of prices and expenses. The EBITDA margin for the quarter was 59%.
Despite the effects of the pandemic, the prospect is to maintain the point of capacity use with a slow recovery in the management of the time part of the year. In addition to initiatives to improve productivity, EBITDA continues to grow year after year. Ultracargo continues to aim to expand its capacity by expanding its presence in the ports where it already operates, as well as expanding to new regions such as Vila do Conde, in the state of Pará.
Let’s move on to slide number 7, speaking of Oxitene, where the overall volume was minimized by 9% and the volume of special chemicals was minimized by 5% compared to the same quarter of 2019, due to a minimization in coatings, automotive and oil and gas. , despite the increase in the Crop And Personal-Home Care Solutions segments. The quarterly effects of Oxyteno benefited from higher dollar contribution margins consistent with the ton, driven by our richer sales mix and the effect of the BRL devaluation against the US dollar.
General and administrative expenses increased by 3% due to the effect of currency conversion on overseas operations and the accumulation of external freight expenses as a result of export accumulation. Oxiteno remains committed to reducing prices and expenses, and we have already noticed relief in this quarter’s spending with payroll, business travel and facilities in general, which has helped to maintain the effects of the period. For example, Oxyteno EBITDA amounted to R$162 million in the quarter, an accumulation of R$117 million compared to the current quarter of 2019, the result of higher unit margins in the US dollar and the devaluation of the BRL despite the decrease in sales volume. .
Oxitene’s outlook is at existing volume levels for the maximum resilience segments such as Home-Personal Care and Crop Solutions and slow recovery in the maximum segments affected by the pandemic, adding Coatings. In addition, the positive effect of exchange rate depreciation on Oxitene results, combined with the start-up of the Pasadena plant and higher unit margins, expectations of annual growth of EBITDA.
Let’s move on to slide number 8, which is about Ipiranga. Ipiranga experienced an 18% year-on-year drop in sales volume with a 28% minimisation in the Otto cycle and a 7% minimisation in diesel due to the significant effects of the pandemic on fuel intake in Brazil, basically in April, followed by a recovery in May and June. Ipiranga’s total sales volume in April fell 27% annually, up from 17% in May and 7% in June.
We ended the quarter of the moment with a network of 7,105 service stations, a gross addition of 94 and 95 dropouts during the period. The am/pm network closed the quarter with 2,345 stores, 17 of which are corporate, all located in Sao Paulo or Rio de Janeiro. The final results of the global economic pandemic, in addition to the value war in foreign markets, have affected the balance of origin and demand in the oil market, causing maximum volatility in fuel and diesel values. The value of the products fell sharply at the end of March and April, followed by a partial recovery in May and June, and the value of ethanol also fell by 25% in April. As a result, Ipiranga suffered significant stock losses during the quarter due to the remaining effects of the March value drop and also due to increased value discounts in the same quarter.
However, Ipiranga recorded 32% relief in overhead and administrative expenses compared to the 2019 quarter. This is the result of projects to decrease spending on multiple fronts, adding payroll and marketing, as well as freight spending, which is related to Decrease sales volumes. In addition, we continued to optimize operating capital, which contributed to the expansion of operational money generation compared to the current quarter of 2019.
With this, EBITDA amounted to R$179 million, a 65% minimisation from the time of the 2019 quarter, basically by minimizing sales volume and the effect on the minimum value mentioned, which were partially offset by cost relief. It should be noted that the effects of June represented a significant replacement for the effects of the rest of the quarter. The trend is towards a slow recovery in volumes and effects, albeit still below last year’s level, as well as lower volatility in fuel value. We’ve noticed this: we looked at this progression in June and we’re still seeing the same progression at the beginning of the third trimester.
Now let’s get started on Extrafarma, move on to slide number 9. Extrafarma closed the quarter with 410 stores, virtually solid in the first quarter of 2020. Of these units, 38% are still in the ramp-up phase up to 53% in the same quarter last year, reflecting greater selectivity in the expansion and adoption of a more rigorous technique for low-performing stores.
Revenues for the quarter were R$515 million, 8% less than in the 2019 quarter, basically for a 5% minimisation in the number of outlets and the transitional closure of 7% of outlets located in pandemic buying centers. However, retailers that remained in the business recorded a 4.6% increase in sales in the same stores, driven by more powerful and expanded home delivery operations, as well as partnerships with delivery applications.
Gross profit reached R$141 million, a minimum of 7% year-on-year and a gross margin of 27.5%. General and administrative expenses minimized by 15% in the quarter, thanks to a relief in the number of points of sale and projects to improve productivity and optimize logistics, with the focus on reducing staff prices and opening the distribution center in Sao Paulo in the 3rd quarter. 2019.
With this, EBITDA reached R$14 million a quarter. Excluding BRL 16 million in non-recurring loans at the time of the 2019 quarter, EBITDA showed an improvement of BRL 12 million compared to the 2019 quarter date due to operational innovations in recent quarters and despite the effects of the pandemic. Currently, all outlets are in operation and sales of pharmaceutical products remain resilient despite declining visitor flow, i.e. in pharmacies located in shopping malls. We continue our projects similar to operational improvement, virtual progression and load reduction. And as a result, the perspective is for a continuous expansion of EBITDA on a recurring basis.
Moving from Ultrapar’s consolidated effects on slide 10, net sales were R$16 billion, 27% less than at the time of the 2019 quarter, due to the effect of the pandemic. EBITDA amounted to R$611 million during the quarter, a low of 10% compared to the same time in 2019. Excluding the unique effects that have already – which we have already mentioned – EBITDA amounted to R$ 599 million, a minimisation of 18% in the quarter, mainly by the sharp fall in Ipiranga’s EBITDA that has been impacted through social distance measures, offset by the accumulation of EBITDA from other activities.
We recorded net monetary expenses of R$80 million at the time of the quarter compared to R$92 million at the same time last year, a minimum of 13%, largely for the payment of the premium of the promissory note tender at the time of the 2019 quarter.Fix that higher interest prices last year. This effect was partially offset by the appreciation of the percentage value of ultrapar in the warrants issued during the acquisition of Extrafarma, which had a negative effect at the time of the 2020 quarter.
Net revenue source R $50 million, 59% less than at the time of quarter 2019, basically by decrease in EBITDA. During the quarter, the control chose not to pay the dividend fees for the existing year to maintain the Company’s money flow. As set out in our statutes, the mandatory minimum dividend will be paid after the disclosure of the annual results.
Capex amounted to R$351 million [phonetic], with an increase of 7% over the current quarter of 2019, mainly due to the construction of investments in Ipiranga, maintenance of the service station network and Ultragaz for the repositioning and acquisition of fuel cylinders. In April, we announced relief of up to 30% of our investment plan by 2020. And in the current quarter, we put investment construction in position to keep the flow of money. The optimization of working capital contributed to an operating money generation of R$1.8 billion. If the net money investment activities used, excluding monetary investments, were updated, the generation of money amounted to R$ 1.4 billion, an increase of 33% compared to the first part of 2019.
Go to slide number 11 and contact us about our debt profile. We ended the quarter with a debt rate of 3.2 times, measured through adjusted EBITDA of net debt for more than 12 months, slightly below 3.3 times in the first quarter of this year. This was only imaginable thanks to the strong generation of money of the quarter, which more than made up for the sharp fall in EBITDA. It should be noted that from the first quarter of 2020, with the implementation of IFRS 16, we began to include rents payable in our net debt calculations, which contributed to a debt accumulation, despite what is not classified in those contracts. As you know. like bank debts.
We ended the quarter with money of R$8.4 billion, driven by the generation of money consistent with the year and new financing. In July, we announced the issuance of $350 million in coupon notes and a 5.25% retracement consistent with the year thanks to the reopening of notes due in 2029. The product will be used to reduce short-term debt and further profile the debt.
With that, I finish my presentation and now we can move on to the answer sessions. Thank you.
Operator
[Operator Instructions] Our first comes from Frank McGann from BOA. Go ahead.
Frank McGann, Bank of America, analyst
Thanks a lot. Two questions if I can. First, he commented that he saw some recovery, that is, in June, apparently, after the biggest discounts on activity at the beginning of the quarter. I was wondering if you can provide a little more data on the other segments to find out how you’ve noticed the July and August functionality so far from year to year or compared to the previous quarter. And right now, just in terms of prospective investment refinement, I was wondering what you think now about how you see it, what kind of equity you’d have in any investment there, and how you’d finance it.
Andre Pires de Oliveira Dias – Director of Financial Relations and Investors
Everything is fine. Frank, thanks for the questions. Yes. We saw from the end of the quarter of the moment and also the beginning of the 3rd quarter, a recovery in terms of volumes that were, say, very transparent to notice each and every time we see a greater flexibility in social business measures. Just to give an idea, that’s fine, if we were, say, at the end of the quarter of the moment, we saw that the consolidated volume grades fell for a year, about 14%. Today, those grades are less than 10%. They’re probably 8% less. So, if you take the last week of June, for example, sorry, the last week of July as an example, otto’s degrees of decline are about 10%. And that at the time quarter, they were closer to 20%. Diesel has already gone up, about 2% compared to the same week last year. And the total volume is about 8% less a year ago if we take the last week of July. Therefore, it is an indication that there is a stable recovery in terms of volumes, and there is a strong correlation between the volumes of one and each and every time we see other people who return a little to a more general life and move more frequently. . So there’s a very transparent correlation.
With regard to refining and participation, this, essentially – looking, say, at what we consider to be a positive result of Petrobras promoting 50% of its refining capacity, we believe it will be positive for the market in general terms. We believe there will be benefits, not only for fuel distribution companies, but also for the finishing customer in the finish, right? Players with more scale will be able to negotiate long-term contracts, volume discounts. But it will take a while before it starts, say, to have an effect on the market because the procedure is ongoing. It’ll take time to get included. Specifically about ourselves, and since the procedure is ongoing, we cannot comment in particular on our side. But conceptually, broadly speaking, we see that this resolution of privatising Petrobras of 50% of its refining capacity was a very positive thing for the market.
Frank McGann, Bank of America, analyst
Everything is fine. Thanks a lot.
Operator
No more questions, this concludes our Q&A session. At this point, I would like to leave Mr Pires his final comments.
Andre Pires de Oliveira Dias – Director of Financial Relations and Investors
Well, thank you very much. Thank you all for the interest. And I look forward to seeing you all back when we publish our third-quarter results. Thank you and have a day. Good bye.
Operator
[Operator Closing Comments]
Running time: 34 minutes
Frederico Curado – CEO
Andre Pires de Oliveira Dias – Director of Financial Relations and Investors
Frank McGann, Bank of America, analyst
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