Ultrapar Participações S.A. (NYSE:UGP) Q4 2023 Earnings Call Transcript

Ultrapar Participações S.A. (NYSE:UGP) Q4 2023 Earnings Call Transcript February 29, 2024

Ultrapar Participações S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Thanks for waiting. We would like to welcome everyone to the conference call of Ultrapar’s Fourth Quarter 2023 results. There is also a simultaneous webcast that may be accessed through the Ultrapar’s website at ri.ultra.com.br and MZiQ platform. This presentation will be made by Rodrigo Pizzinatto, Ultrapar’s Chief Financial Officer and Investor Relations Officer. During the Q&A session, we’ll have also have Mr. Marcos Lutz, Ultrapar’s CEO; the CEOs of Ultragaz and Ipiranga, Mr. Tabajara Bertelli and Mr. Leonardo Linden. And also the CFO of Ultracargo, Mr. Andre Zaia. We would like to let you know that this event is being recorded and all participants will be in listen-only mode during the company’s presentation.

After Ultrapar’s remarks, we will start our Q&A session. At that time, for the instructions will be given to you. We would like to remind you that all participants in the webcast may submit their questions through our website questions that will be answered during the Q&A session. The replay of this call will be available for seven days once it’s completed. Before moving on, we would like to let you know that forward-looking statements that are made during this conference are 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.

Therefore, they 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 can also affect the future results of Ultrapar and can cause results to differ materially from those expressed in such forward-looking statements. Let me now turn it over to Mr. Rodrigo Pizzinatto. He is going to start by giving us the presentation. So, please move on.

Rodrigo Pizzinatto: Good morning, everyone. It is a pleasure to be here once more to talk about Ultrapar results. I will start with a brief retrospective of 2023. Last year, we had significant improvements in the company even with an environment of volatility and uncertainties. Ipiranga, Ultragaz and Ultracargo, our three main businesses reached record results. The strong operating cash generation allowed the company to achieve the lowest financial leverage level of the last 15 years and contributed to the recovery of our investment-grade rating by Standard & Poor’s. We completed the acquisition of Stella and NEOgás by Ultragaz and the acquisitions of Opla and Rondonópolis by Ultracargo. We also announced the construction of the first liquid bulk terminal in this [Indiscernible] state.

Additionally, we obtained the approval of the antitrust authority for the partnership between Ultragaz and Supergasbras for sharing operating assets. And we also continue our ESG journey, making public commitments to the 2030 goals. I will now go through our earnings presentation for the fourth quarter and the year of 2023. And on the Slide number 2, I remind you that both the earnings release and this presentation consider Ultrapar’s data from continuing operations in 2023. As for 2022, the company’s data is presented in the pro forma view, considering the sum of continuing and discontinued operations unless otherwise indicated. Moving on to Slide 3 with Ultrapar’s consolidated results. As you can see in the chart in the upper left side, our recurring EBITDA from continuing operations totaled BRL1.66 billion in the fourth quarter of 2023, 122% higher year-over-year.

This increase is due to the higher EBITDA of the three main businesses, particularly Ipiranga results that I will detail in the next slides. Looking at the year’s results, our recurring EBITDA from continuing operations totaled BRL5,615 billion, a 55% growth over 2022 with record results registered at the Ipiranga, Ultragaz, and Ultracargo. Ultrapar’s net income was of BRL2.1 billion in 2023, 37% higher than that of 2022 due to the EBITDA growth and the lower level of net financial expenses. These effects were partially offset by the lower recognition of extraordinary tax credits, BRL108 million below the level of 2022. Our Board of Directors, as we have already announced, approved the additional distribution of BRL440 million in dividends, equivalent to BRL0.40 per share.

It will be paid as from March 15 in addition to the payment made in August last year, totally — totaling a distribution of BRL713 million in 2023. Investments from continuing operations totaled BRL1,949 billion in 2023, 11% above 2022 due to higher investment at Ipiranga, Ultragaz, and Ultracargo. We had a robust operating cash generation of BRL3.8 billion in 2023, BRL1.8 billion above the cash generation of 2022. This increase is due to the higher EBITDA and the lower investment in working capital due to the decreases in fuel prices throughout 2023. These effects were partially offset by the BRL1.6 billion reduction in the draft discount line. If we exclude this reduction, the operating cash generation in 2023 would have been of BRL5.5 billion.

You can also see in the chart in the lower right side, the recovery of the company’s profitability in the last five years measured by ROIC. And moving now to Slide 4 to talk about our liability management. We ended the year with a net debt of BRL6.1 billion, a reduction of nearly BRL1 billion in relation to September 2023. This reduction was a consequence of the greater operating cash generation despite the concentration of investments in the fourth quarter last year and the reduction of BRL135 million net debt dress discount balance in the quarter. Our financial leverage was reduced in the last 12 months and went from 1.7 times to 1.1 times in December 2023, the lowest level in the last 15 years, as I have already mentioned. The decrease is due to the higher EBITDA with cash generation and consequent reduction in the net debt.

And I’d like to point out that the numbers of net debt for the fourth quarter still do not include paying receivables of BRL924 million related to the sales of Oxiteno and Extrafarma. You can also see at the bottom of this slide, a table with the total amount of trade discount and vendor lines as well as pending receivables from the sales of Oxiteno and Extrafarma. The net debt of December 2023, adding the dress discount vendor and divestment receivables would be BRL6.5 billion, which is BRL2.2 billion lower than the balance of December 2022. And moving now to Slide number 5 to talk about another excellent quarter for Ultragaz. The volume of LPG sold in the fourth quarter was 2% lower year-over-year due to the 5% reduction in the bottled segment on the back of lower market demand, attenuated by an increase of 3% in the bulk segment, mainly reflecting higher sales to industries.

In 2023, the volume mobility sold was 2% higher year-over-year as a result of the 6% growth in the bulk segment due to greater sales to industry, while the bottle segment remained stable. Ultragaz SG&A in the fourth quarter was 3% lower than that of the fourth quarter of 2022 due to lower expenses with personnel and with the expansion and productivity projects. Ultragaz EBITDA totaled BRL106 million in the quarter, 11% above the fourth quarter of 2022. If we look for the year, Ultragaz EBITDA was BRL1.648 billion in 2023, a growth of 41% over 2022. Both annual and quarterly growth are explained by the initiatives to increase efficiency and productivity implemented in the last quarters by better sales mix and by inflation pass-through. And for this first quarter, we expect the continuity of the good results with profitability levels similar to those seen in the fourth quarter of 2023.

And moving now to Slide 6 to talk about another great quarter of Ultracargo. The company’s average installed capacity was 1.067 million cubic meters in the first quarter of 2023, a growth of 12% over the fourth quarter of 2022 due to the capacity additions coming from Opla, Vila do Conde, and Rondonópolis throughout the third quarter of 2023. These capacity additions still had no mature impact on this quarter’s results and should begin to gradually contribute in the upcoming months as operations ramp up. The cubic meters sold grew by 16% year-over-year, mainly due to greater handling of use in Santos, Vila do Conde, and Itaqui and the start-up of operations in Opla and Rondonópolis. Ultracargo’s net revenues was BRL257 million in the fourth quarter of 202, 13% higher than that of the fourth quarter of 2022.

In 2023, Ultracargo’s net revenues was BRL1.016 billion, a 17% growth over 2022. The growth in both compressors reflects their higher cubic meters sold and spot sales. Combined costs and expenses were 6% above that of the fourth quarter of 2022 as a consequence of two main factors; higher personnel expenses, mainly collective bargaining agreement and variable compensation in line with the results progression and higher depreciation costs due to the capacity additions. Ultracargo’s EBITDA totaled BRL155 million in the quarter, 19% higher than that of the fourth quarter of 2022 due to greater capacity of occupancy with profitability gains, through spot sales and productivity and efficiency gains, despite higher expenses. EBITDA margin was 60% in the fourth quarter of 2023, 3 percentage points above that of the fourth quarter of 2022.

For the year 2023, Ultracargo’s EBITDA totaled BRL631 million, a 24% growth over 2022 for the same reasons that I just mentioned. EBITDA margin was 62%, 3 percentage points above that of 2022. And for the first quarter, we expect Ultracargo’s good operating performance to continue with levels close to those seen in the first quarter of 2022. And moving now to Slide 10, let’s talk about Ipiranga’s results. Volumes sold in the quarter increased by 1% over the fourth quarter of 2022, with a 1% growth in both Otto cycle and diesel. For the year 2023, Ipiranga sales volume remained stable year-over-year with an increase of 2% in the Otto cycle and a drop of 1% in diesel. We ended the fourth quarter of 2023 with a network of 5,877 service stations, 61 more than in September 2026.

A total of 147 new service stations were added to the network with an average volume contribution of 301 cubic meters per month. On the other hand, 86 service stations were closed with an average volume contribution of 143 cubic meters per month. We concluded in September the legacy management process of service stations that in the last two years registered a net service station closing of 1,227 service stations. At the end of this process, we have now a more robust and healthier method. And besides that, we ended the quarter with 1,540 AmPm stores with same-store sales growth of 8% in the fourth quarter of 2013. I take this opportunity to draw your attention to a partnership that AmPm and Krispy Kreme has just established. We will have exclusivity to sell Krispy Kreme products in our convenience stores in Brazil, which is aligned with the strategy of associating AmPm with iconic brands.

Ipiranga’s SG&A increased by 36% over the fourth quarter of 2022 due to four main factors; higher personnel expenses, mainly collected by gaining agreement and variable compensation, in line with the results progression; one-off expenses related to the conclusion of the service station closing process of the legacy network; higher marketing expenses; and the one-off positive net back of credits and provisions of BRL69 million registered in the fourth quarter of 2022. The other operating results line totaled a negative BRL131 million in the quarter, or worsening of BRL22 million over the fourth quarter of 2022. As a result of higher costs with carbon tax credits, attenuated by the higher constitution of extemporaneous tax credits. The line of results from disposal of assets totaled BRL40 million due to the sale of six real estate assets.

Ipiranga’s EBITDA totaled BRL1.767 billion in the quarter. The recurring EBITDA totaled BRL1.170 billion in the quarter, 270% above that year-over-year. The higher EBITDA mainly reflects the continued normalization of the commercial environment in the fourth quarter of 2023 compared to the higher supply of products and inventory losses in the fourth quarter of 2022. These effects were partially offset by higher expenses in the fourth quarter of 2022. For the year 2023, Ipiranga’s EBITDA totaled BRL4.354 billion. Recurring EBITDA totaled BRL3.6 billion, a growth of 68% over 2022, reflecting the normalization of the commercial environment, partially offset by higher expenses. For the first quarter, with the continuation of the normalized commercial environment, we expect profitability levels higher than those of the first quarter last year.

However, given the current scenario of higher inventory levels, we expect profitability levels getting close to the ones we saw in 2023. And to conclude this presentation, moving on to Slide number 8, let’s talk about the investment plan we just released yesterday. In 2023, the main variation in relation to the plan was Ipiranga, the greater allocation to expansion with higher investments made to brand service station and to increase our logistics infrastructure was more than offset by divestments, such as the Rondonópolis base and the sale of assets besides the postponement of some investments. The investment plan for 2024 totaled BRL2.670 billion, which is more than BRL700 million above the investment plan in 2023. The allocation of investments to expansion is the main highlight of growth, 47% above that of 2023.

At Ipiranga, investments will be mainly directed towards branding stations and expanding logistics infrastructure. At Ultragaz, the investment focus mainly on new customers in the box segment of revitalizing an opening point of sale, on optimizing operations due to the consortium with Supergasbras and on expanding into new energy solutions following the acquisitions of NEOgás and Stella. At Ultracargo, investments will be mainly focused on the construction of the railway branch at Opla on increasing the store capacity of Itaqui, Santos and Rondonópolis and on building the Palmer terminal in the state of [Indiscernible]. The portion of the investments from maintenance will be directed to sustaining the businesses and mean includes investments in assets, maintenance, renewal of service stations and points of sale, operational safety, and information technology.

And with that, I now conclude my presentation. I appreciate most more your interest and attention, and let’s now move on to the Q&A session in which we are available to answer your questions. Thank you very much.

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Q&A Session

Operator: Thank you. We are going to start now the question-and-answer session, and it’s open for investors and analysts only. [Operator Instructions] The first question comes from Monique Greco, Itau BBA. Please unmute your microphone.

Monique Greco: Hello. Good morning. First, congratulations on the results and everything that you’ve done throughout the year of 2023. I would like to ask you a question. I have two questions actually. First, for Ipiranga, we can clearly see through your data, the inflection point of that change from closing down stations to opening stations. There were nearly 60 — you reduced your units, you closed down units in 60%. So, tell us more about your strategy of branding, what kind of let’s say, response you’ve got from the point of sales? And how does it interact with the CapEx plan you have for 2024 because there was a reduction over the numbers from 2023. So, we’re really wondering how it’s all ordinated with your branding strategy for the year.

Secondly, a question to Ultragaz. How much of the EBITDA of Ultragaz in 2023 came from the other business? Stella, NEOgás, Biomethane, could you please tell us the breakdown of all these businesses in 2023? And what do you expect to get results from them in upcoming years? Thank you.

Leonardo Linden: Good morning. This is Linden speaking. Thank you for your question. Concerning the strategy of branding, it’s not changing. We cannot separate branding and closing down of stations. We are going to maintain the guidelines that we have been sharing with you for a while, making appropriate selective investments with quality, to improve the quality of our network at large, and we are going to maintain the investments in 2024, just adding businesses that we think make sense that can really add value. So it’s not going to change compared to previous years when we talk about branding specifically. About the question concerning ultra-gas, You’ve talked about all the different energy options for 2023. It’s negligible what it has added to the results of the company, but we wanted to keep on expanding in the upcoming years. Nothing very significant for 2024, but we just expect it to be much more relevant in upcoming years.

Monique Greco: Great. Thank you.

Operator: The next question comes from Thiago Duarte, BTG. Thiago, please unmute your microphone.

Thiago Duarte: Hello. Good morning. Thank you very much for the opportunity. I have two questions. First, could you please share with us the information about the expansion of Ultracargo? Rodrigo has provided some details about the CapEx and how it’s going to be used in 2024 and very much aligned with what you’ve discussed in the Ultra Day and your understanding as a holding. We can see an interiorization of the platform of the assets in Ultracargo and in private entities. But I understand that the dynamic of the business is somewhat different compared to the main basis of Ultracargo, which is storage by the shores, by the coasts. And the dynamic of profitability of these assets is somewhat different when we think about going more inland rather than being limited by the coasts.

So tell us a bit more about profitability and payback of the marginal investments you’ve made. Also competitively speaking, what is your reference to try to really have an improved profitability? I don’t know if you are using ROIC or TIER, what is exactly you are analyzing to think about generating growth at Ultracargo in line with the CapEx investments? Now, from a broader perspective and thinking about the holding and based on the retrospective, description that Rodrigo made, I think there has been an important element, which was margin expansion. So Ipiranga on the second half of the year, Ultragaz and Ultracargo, you’ve got margin expansion that impacted profit and all your results. So thinking about the beginning of 2024, the margins seem to be aligned with what you had experienced in 2023, but they don’t seem to be expanding as much as before.

So really thinking about growth from now on, would it make sense to anticipate growth of Ultrapar in your three business units resulting more from increased volume, each business, its own characteristics, of course, where do you expect to have an expansion of profit from now on, considering the very high level of margins that all the three units have already achieved? Thank you.

Marcos Lutz: This is Marcos speaking. I’m going to start by answering the second question. Ultra, our holding, cannot be simplified by giving you a simple direct answer. So we just don’t want margins, we just want volume. No, we have to see the businesses differently. Ultragaz has some segments where we can get expansion of volume, going into different regions with different results. The go-to market produces different margins. We have increased volume in areas where we could obtain also margin expansion. But there are some segments which tend to be more static. And we are also building paths towards new business lines where we can expand in volume. And we can see a potential ahead. In Ipiranga, there is improved margin, but maybe we can have a normalized margin, something that we’ve been saying for a while.

The margin in the industry, it’s not something that we think it’s fair. Something that really pays back the investments of investors. Therefore, we can see space and opportunity to expand further. Ultracargo would probably need to make investments to increase its capacity, its volume. And it’s starting to embedding technology, logistic knowledge, added services. We want to really offer a complete asset. We are not going to reproduce the model that we used to have at the coast operations. We want to offer more integrated service lines. Said it all, speaking of margins, this is a simplification, isn’t it? It’s an oversimplification. If you improve efficiency in a number of things, you improve margin. And there are a number of things that end up influencing it all.