Ultrapar Participacoes S A : 3Q23 Transcription conference call

International Conference Call

Ultrapar Participações S/A (UGPA3)

3Q23 Earnings Results

November 9th, 2023

Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Ultrapar's 3Q23 results conference call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br and MZiQ platform.

The presentation will be conducted by Mr. Rodrigo Pizzinatto, Ultrapar's Chief Financial and Investor Relations Officer, and in the Q&A session we will have the presence of Mr. Marcos Lutz, Ultrapar's CEO, and the CEOs of the businesses, Mr. Tabajara Bertelli, Décio Amaral, and Leonardo Linden as well.

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. Should any participant need assistance during this call, please press *0 to reach the operator. 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 seven days.

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.

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Now, I'll turn the conference over to Mr. Rodrigo Pizzinatto. Mr. Rodrigo, you may now begin the conference.

Rodrigo Pizzinatto: Good morning, everyone! It is a pleasure to be here once more to talk about Ultrapar's results.

And starting on 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, as disclosed throughout last year, unless otherwise stated.

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 R$ 1 billion and 992 million in the third quarter of 2023, 124% higher year-over-year. This increase is due to the higher EBITDA at all businesses, especially Ipiranga, results that I will go through in detail in the next slides.

Ultrapar's net income was R$ 891 million in the third quarter, compared to R$ 83 million in the 3Q of 22, mainly on the back of the higher EBITDA from continuing operations.

Investments from continuing operations totaled R$ 380 million in this 3Q, 27% lower than that of the 3Q of 22, due to lower investments at Ipiranga, partially offset by higher investments at Ultracargo.

We had in the third quarter an operating cash generation of R$ 1 billion and 901 million, R$ 609 million above that of the 3Q of 22. This increase is a result of the higher EBITDA, partially offset by the reduction in draft discount balance and the investment in working capital in the 3Q of 23, arising from the increase in fuel prices. I remind you that in the 3Q of 22, on the other hand, there was a release of working capital, as a consequence of the reduction in fuel prices in that period. If we exclude the reduction of R$ 294 million in the draft discount balance, the operating cash generation in this 3Q was R$ 2 billion and 195 million.

Moving now to slide 4, to talk about our liability management.

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We ended the third quarter with a net debt of R$ 7.1 billion, a reduction of R$ 924 million compared to June 23. This decrease resulted from greater operating cash generation, partially offset by the payment of dividends and the reduction of R$ 294 million in the draft discount balance this quarter. In addition to these effects, during this third quarter we received the second installment from the sale of Extrafarma in the amount of R$ 198 million, and we disbursed R$ 210 million for the acquisition of Opla.

Our leverage went from 2.1x in June 23 to 1.4x in September 23, the lowest level of the last 10 years, on the back of the higher LTM EBITDA from continuing operations, with cash generation and, consequently, the reduction in net debt that I've just mentioned. I'd like to point out that the numbers of net debt still do not include pending receivables of R$ 932 million related to the sales of Oxiteno and Extrafarma.

We've included at the bottom of this slide a table with the total amounts of draft discount and vendor lines, as well as pending receivables from the sales of Oxiteno and Extrafarma, all lines highlighted in our balance sheet. The net debt of September 23, adding draft discount, vendor and divestments receivables, would be R$ 7.7 billion, which is R$ 1 billion and 746 million lower than the balance of September 22, one year ago.

Moving on to slide number 5, to talk about another excellent quarter of Ultragaz.

The volume of LPG sold in this third quarter was 1% higher year-over-year, due to a 4% increase in the bulk segment, on the back of higher sales to industries. The bottled segment, in its turn, remained flat.

Ultragaz's SG&A in this 3Q was 15% higher than that of the 3Q of 22, due to two main factors: expenses with freight, due to higher sales volume, and higher expenses with personnel, mainly collective bargaining agreement and variable compensation, in line with the progression of results, and a larger headcount, due to the acquisitions of Stella and NEOgás.

Ultragaz's EBITDA totaled R$ 453 million, 36% higher year-over-year. This growth is mainly explained by efficiency and productivity initiatives implemented in the last quarters, by better sales mix and by inflation pass-through, despite higher expenses.

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For the fourth quarter, we expect a profitability, measured in EBITDA per ton, similar to that of the 3Q, despite seasonally lower volumes.

Moving now to slide 6, to talk about another great quarter of Ultracargo.

The company's average installed capacity was 1 million and 59 thousand cubic meters in the third quarter of 23, an 11% growth over the 3Q of 22. This increase results from three capacity additions carried out in recent months: 90 thousand cubic meters coming from the acquisition of the 50% stake in Opla as of July, 12 thousand cubic meters from the acquisition of the Rondonópolis base from Ipiranga in September and 10 thousand cubic meters relating to the expansion of the Vila do Conde terminal. These capacity additions had no material impact in this quarter's results and should begin to gradually contribute to the upcoming months, as operations ramp up.

The cubic meter sold increased by 26%, mainly due to higher handling of fuels in Itaqui, Santos and Suape and the start-up of operations in Opla.

Ultracargo's net revenues were R$ 264 million in this 3Q, 18% higher year-over-year, as a result of spot sales, higher cubic meter sold and higher tariffs.

Combined costs and expenses were 8% higher than those of the 3Q of 22, as a result of higher personnel expenses, mainly collective bargaining agreement and variable compensation, in line with the progression of results. We also had higher expenses with advisory and consulting services linked to expansion projects.

Ultracargo's EBITDA totaled R$ 173 million in the quarter, a growth of 27% year-over- year, due to higher capacity occupancy with profitability gains, spot sales, higher tariffs, and productivity and efficiency gains, despite higher expenses. EBITDA margin was 65% in this 3Q, 5 percentage points above that of the 3Q of 22.

For the current quarter, we expect Ultracargo to continue its good operating performance, but with fewer spot sales, marginally reducing its results.

And, to conclude this presentation, moving now to slide 7, let's talk about Ipiranga's results.

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Volume sold in the quarter decreased 2% year-over-year, with a 3% reduction in the Otto cycle and 1% reduction in diesel, mainly due to the strategy of lower sales to the spot market during this period.

We ended this 3Q with a network of 5,816 service stations, 465 stations less than that of June 23. In September, we concluded the process of managing the legacy of service stations started in 2022. A total of 70 new service stations were added to the network, with an average volume contribution of 288 cubic meters per month. On the other hand, 535 service stations were closed, with an average volume contribution of 57 cubic meters per month. The greater number of stations closed this quarter relates to the decision to also close service stations with commercial practices not aligned with business principles and in disagreement with contractual obligations. This increased level of closure of stations did not have a relevant impact on Ipiranga's market share or results.

In addition, we ended the quarter with 1,542 AmPm stores, with same store sales growth of 9% year-over-year.

Ipiranga's SG&A increased 27% in the quarter, due to four main factors: higher provisions for contingencies, higher provision for doubtful accounts, higher marketing expenses and higher personnel expenses, mainly collective bargaining agreement and variable compensation, in line with the progression of results.

The "other operating results" line totaled negative R$ 178 million in the quarter, in line with the 3Q of 22. The "disposal of assets" line totaled R$ 68 million, mainly due to the capital gain relating to the sale of the Rondonópolis base to Ultracargo, in the amount of R$ 59 million, and the sale of 3 real estate assets.

Ipiranga's EBITDA totaled R$ 1 billion and 513 million in the quarter, 184% higher than that of the 3Q of 22. Recurring EBITDA was R$ 1 billion and 445 million in the quarter, 199% higher year-over-year. The higher EBITDA mainly reflects two factors: first, margins benefited from the inventory gains caused by the increases in fuel costs throughout the quarter. I remind you that, in the 3Q of 22, we had reductions in fuel costs and inventory loss. The second factor was the normalization of the commercial environment in the 3Q of 23, due to a more regular supply of products in the market,

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which affected the second quarter results. These two factors were partially offset by higher expenses.

As you may have noted, the fuel distribution sector has had more volatile results in recent quarters. Therefore, we also highlighted on the slide the EBITDA per cubic meter of the last twelve months, helping to provide a better perspective of the results over time.

In addition to the normalization of products supply, the third quarter result benefited from inventory gains. For the fourth quarter, considering the current scenario of products supply and no significant impacts of inventories, we expect a profitability measured in EBITDA per cubic meter above that of the last twelve months and continued recovery of the return levels of the industry.

With that, I now conclude my presentation. I appreciate 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!

Question-and-Answer Session

Operator: Ladies and gentlemen, we will now open the floor for questions. We will take questions from investors and analysts. To send a question, please press *1 on your touch tone phone, and if at any point your question is answered, you may remove yourself from the line by pressing *2.

Questions will be taken in the order they are received. We kindly ask you to when you pose your question, pick up your handset to provide optimum sound quality. Please, hold while we poll for your questions.

If you are following the conference call via webcast, please click on "question to the host" to send your question.

First question comes from Monique Greco, Itaú BBA.

Monique Greco: Hello, everyone. Good morning. Can you hear me?

Rodrigo Pizzinatto: Yes. Good morning, Monique.

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Monique Greco: Good morning, thank you for your presentation. Congratulations on your very strong results. I have two questions on my side. Let me start from the end of your presentation, Pizzinatto. You talked about the dynamics expected in terms of margin for quarter 4 in Ipiranga. Can you please share with us a little bit more about what you are feeling in terms of the competitive dynamics? We saw that in the first half of the year this competitive dynamic was very linked to products imported from Russia. So, can you please share with us what you see for the dynamics, the diesel dynamics in quarter 4?

And also, we have been talking a lot about diesel and the Otto Cycle ends up staying in the background. So, I would also like to hear from you what these dynamics look like for the Otto Cycle.

And my question to Lutz, is that in Ultra Day you talked a lot about some opportunities for growth with a strong focus on agribusiness and also energy transition. So, can you please talk more about this, what are your prospects ans opportunities in this sector, what are the main criteria that you can see there when you're looking at these opportunities? Thank you.

Leonardo Linden: Hello, Monique. This is Linden. So, your first question was about competitive dynamics. Of course, this is an ever-competitive market and in quarter 4 we are seeing a somewhat more balanced situation in terms of supply and demand, which balances out the market. But we have to look at this market as a movie and not a snapshot.

What we saw in quarter 3 was indeed a favorable scenario for our business, but we cannot forget, and we were coming from a semester which was very poor, we had some major inventory losses with a high supply of diesel, as you said yourself, and this scenario started to change in quarter 3, then we had some inventory gains and better market conditions.

And in quarter 4, I'd say the situation is more balanced, but it is a transition quarter because we are also starting to see some parity opening up, we started to see a higher appetite for imports, so I think we will have a transitional quarter in quarter 4. But as you heard in Rodrigo's explanation, we are looking at quarter 4 potentially with higher margins than what we saw in the past 12 months.

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Rodrigo Pizzinatto: And just an additional comment, Monique. In the first half, we had an excess of products in the market and retail fuel is no different from other industries when you have excess product, this will negatively impact your margins, and what we had in quarter 3 (and that should remain in quarter 4) is this return to normal levels, normal stock levels in the industry, and that allows our margin to return to the levels expected.

So, now I'd like to hand the conference over to Marcos.

Marcos Lutz: Hello, Monique. Good morning. So, let's start by the criteria, which I think is the most important point in your question. We will have to have huge discipline looking at the risk/return ratio of our projects. As we said, we want to be more exposed to agribusiness, we want to grow more in these regions in our 3 areas of business, Ultracargo, Ultragaz and Ipiranga are making all the efforts to expand their operations in these markets, and we are considering multiple projects and companies that have a higher exposure to these markets, and the main criteria here is the return on investment, of course, combined with the risks of this investment.

So, there are more mature projects that give us slightly lower returns, but have also lower risk, which can be very attractive, and less mature projects have higher risk and that has to be justified.

And also, about risk/return, it is important to know that even with the current return levels, the risk/return ratio of fuel distribution project in Brazil is not yet appropriate. We have a volatility level that we think is here to stay in this segment and this would warrant a requirement for a higher return from this project.

Today we see, for example, that the price in Brazil is higher than the international price, so this increases the entrance of products, so we should have an inventory loss because we should see a price reduction in Brazil shortly in the future because it doesn't make sense to have a price which is that higher than the international price, so we will see this volatility taking place. It's what I said about seeing it as a movie versus a snapshot, we need to more and more focus on seeing the past 12 months, and not just the past quarter to evaluate whether we are going in the right direction or not.

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Monique Greco: Perfect. Thank you.

Operator: The next question comes from Leonardo Marcondes, Bank of America.

Leonardo Marcondes: Good morning. Thank you for taking my question. I have two questions about Ipiranga. My first question is about the service stations. Can you please recap what are the effects that we can expect from Ipiranga after you finish this process with the service stations? And also, what can we expect from the company in terms of the future and your brand strategy for the future?

And also, I have a question about Ipiranga's margins. You already mentioned what you expect for quarter 4, but looking at the mid to long-term, I think your market passing a current margin of about R$100-110/m³ from you. In your mind, does this level of margin make sense or do you think you can have stronger recurring margin for Ipiranga looking forward?

And still within this context, considering the 4 pillars of the turnaround process of the company, is there still room for improvement in your opinion? And if yes, this improvement will come from which pillars? I remember you mentioned that there were some improvements to be made in your trading network and logistics, so can you give us more color about that?

Leonardo Linden: Hello, Leonardo. Good morning. Thank you for your question. Well, about the close down of service stations, I'd say that the effect will be a healthy effect both from the Ipiranga's standpoint and also the reseller's standpoint. This was a clearance of legacy service stations that we absolutely had to do, and as you said, we are coming to the end of this process and what we still expect to have in the future is a natural clearance of our network of service stations, which takes placed naturally. But the bulk of this process is already finished, and you'll start to see the effects, for example, when you start seeing productivity gains or increased productivity of each Ipiranga service station.

For the brand strategy, we will continue with the same strategy that we have been using so far. We are making investments, raising the bar of quality because of the reasons I mentioned before, because we want points of sale that have the highest potential, we are looking at our business prioritizing premiums linked to performance,

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because this brings us a healthier relationship, and we will keep investing as we have been investing in the past years. As I said, we've now a slightly higher level of quality, we're always raising the bar.

Now, as for the margin, we talked about this during Monique's question, but you asked us if this "makes sense". One thing is what we expect, and another thing is what we think we should have according to the compensation level expected for the business. For the next quarter, or this quarter that is starting now, we're expecting a margin higher than what we saw in the past 12 months, but what we should have in this business is something that could provide us with a return of about 20%, which is what we are pursuing. So, as an industry, I think we still have room to improve in terms of profitability and that's what we have been working for.

Leonardo Marcondes: Just one follow-up question about the service stations. I remember that there was the point of depreciation, and now with a healthier network, I imagine that there will be a positive impact on the receivables of Ipiranga overall. So, can you please talk about this just to recap?

Rodrigo Pizzinatto: Hello, Leonardo, this is Rodrigo. Yes, we should see a benefit in the reduction of amortization and depreciation for Ipiranga but remember that we have other investments to make, so there's this dynamic in our depreciation, but this stand- alone effect finished now in the month of September, so we should see this benefit of reduction in our depreciation and amortization.

And I didn't understand your question about the impact on our receivables.

Leonardo Marcondes: Well, now that you have a healthier network, more robust network service stations, is there still room to improve your receivables?

Rodrigo Pizzinatto: I don't think that's relevant, Leonardo. The effect on receivables reflects the best situation in terms of receivable now, so we don't have any additional recognition in the future or looking forward.

Leonardo Marcondes: OK. Thank you.

Leonardo Linden: And, Leonardo, to your last question about if there is any room for improvement, and you talked about the 4 pillars…

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