Ultrapar Participacoes S A : 1Q24 Transcription conference call

International Conference Call

Ultrapar Participações S/A (UGPA3)

1Q24 Earnings Results

May 9, 2024

Operator: Good morning, ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to Ultrapar's 1Q24 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. 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.

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

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

And on slide 2, I want to highlight that both the Earnings Release and this presentation consider Ultrapar's data from continuing operations in 2023 and 2024. With the conclusion of the sales of Oxiteno and Extrafarma throughout 2022, Ultrapar's consolidated data since then has no longer included the results of these two companies.

And moving on to slide 3, as you can see in the chart in the upper left side, our recurring EBITDA totaled R$ 1 billion 306 million in the first quarter of 2024, 28% higher than that of the 1Q of 23. This increase is due to the higher EBITDA of the three main businesses, specially Ipiranga, results that I will detail in the next slides.

Ultrapar's net income was of R$ 455 million, 66% higher year-over-year, due to the EBITDA growth I've just mentioned and the lower net financial expenses.

Investments totaled R$ 438 million in the 1Q of 24, an increase of 20% year-over-year, mainly as result of greater investments at Ultracargo.

We had an operating cash consumption of R$ 573 million in the 1Q of 24, R$ 138 million lower than the consumption of the 1Q of 23, mainly reflecting the higher EBITDA of the businesses and the increase of R$ 265 million in draft discount operations in the 1Q of

24. These effects were attenuated by higher working capital at Ipiranga. Moving now to slide 4, to talk about our liability management.

We ended the first quarter with a net debt of R$ 7.8 billion, an increase of R$ 1.7 billion in relation to December 2023. This increase is mainly a consequence of the payment of dividends in March this year and the investment in working capital. We have a seasonal calendar effect in the first quarters, as you can see in the chart, resulting from the bank holiday at the end of the year. Added to this, Ipiranga recorded a higher level of working capital in the first months of 2024, with the effect on prices of tax increases, higher inventories and lower suppliers, due to the reduction in imports, which have longer payment terms.

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Our leverage went from 1.1x in December 2023 to 1.3x in March 2024, due to the higher net debt that I've just mentioned, attenuated by the higher EBITDA in the last 12 months. I'd like to point out that the numbers of net debt for the 1Q of 24 still do not include pending receivables of R$ 964 million related to the sales of Oxiteno and Extrafarma.

As you can also see in the table, at the bottom of this slide, the net debt in March 2024 added to draft discount, vendor and pending receivables of Oxiteno and Extrafarma, is R$ 8.4 billion, which is approximately R$ 900 million lower than the balance of the same period last year.

Moving on to the next slide, slide number 5, to talk about another good quarter for Ultragaz.

The volume of LPG sold in this first quarter was 4% lower year-over-year, due to the 6% reduction in the bottled segment, on the back of lower market demand and a more competitive environment after the pass-through of tax increase in some segments. The bulk segment remained stable, with its growth offset by lower sales to condominiums.

Ultragaz's SG&A in the 1Q of 24 was 1% lower than that of the 1Q of 23, due to initiatives to increase operational efficiency and lower expenses with sales commissions, partially offset by higher personnel expenses, mainly resulting from collective bargaining agreements.

Ultragaz's EBITDA totaled R$ 401 million in the quarter, 4% above that of the 1Q of 23. This growth is explained by initiatives to increase efficiency and productivity implemented in the last quarters, by better sales mix and by inflation pass-through, despite lower sales volume.

For the second quarter, we expect Ultragaz to continue its good operating performance, with EBITDA similar to that of the first quarter, despite seasonally stronger volumes.

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

The company's average installed capacity was 1 million and 67 thousand cubic meters in the 1Q of 24, a growth of 12% over the 1Q of 23, due to the capacity additions coming from Opla, Vila do Conde and Rondonópolis terminals throughout

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the second half of last year. These capacity additions still had a small impact on this quarter's results and should begin to gradually contribute to the upcoming months, as operations ramp-up.

The cubic meter sold grew by 21% year-over-year, mainly due to greater handling of fuels in Santos, Vila do Conde and Aratu, and the startup of operations in Opla and Rondonópolis.

Ultracargo's net revenues were R$ 263 million in the 1Q of 24, 11% higher than that of the 1Q of 23, as result of the higher cubic meter sold and spot sales.

Combined costs and expenses were 8% above that of the 1Q of 23, as a consequence of higher personnel expenses, legal advisory with contractual renewal and depreciation, in line with the capacity additions.

Ultracargo's EBITDA totaled R$ 165 million in the quarter, a 16% growth year-over-year, due to greater capacity occupancy with profitability gains, spot sales and productivity and efficiency gains, despite higher expenses. EBITDA margin was 63% in the 1Q of 24, 3 percentage points above that of the 1Q of 23.

For the second quarter, we expect Ultracargo to continue its good results, with EBITDA levels close to those seen in the last quarters.

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

First, I'd like to draw your attention to a change that we made in our report. abastece aí, which since the beginning of 2020 had been reported with the results of the holding company and other companies, is again consolidated into Ipiranga's results. To allow comparability between past periods, we added the results of abastece aí into Ipiranga for 2023 as well, and on page 3 of the Earnings Release we have detailed the composition of these adjustments to allow a complete understanding.

About the results. The volume sold by Ipiranga in this first quarter grew by 2% over the 1Q of 23, with a 7% growth in the Otto cycle, driven by the greater share of ethanol the product mix, partially offset by a 3% decrease in diesel.

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We ended the 1Q of 24 with a network of 5,881 service stations, 4 more than in December 2023. A total of 55 service stations were added to the network, and 51 were closed during the quarter. Furthermore, we ended the quarter with 1,532 AmPm stores, with same store sales growth of 6% in the 1Q of 24.

Ipiranga's SG&A increased by 5% over the 1Q of 23, due to higher personnel expenses, mainly increased headcount and collective bargaining agreement, and provisions for doubtful accounts. These effects were partially offset by lower expenses with contingencies provisions.

The other operating results line totaled a negative R$ 165 million in the quarter, a worsening of R$ 26 million year-over-year, as result of higher costs with carbon tax credits. The line of result from disposal of assets totaled R$ 36 million, resulting from the sale of 8 real estate assets.

Ipiranga's EBITDA totaled R$ 819 million in the quarter. Recurring EBITDA totaled R$ 783 million, 48% higher year-over-year. The higher EBITDA reflects better margins, mainly due to commercial environment normalization and inventory gains in the 1Q of 24, despite three negative effects: (i) the higher level of inventories in the sector, due to distribution companies' positioning for the planned tax increases in the first months of the year, (ii) tax distortions, with emphasis on the Amapá tax benefit, which was revoked last April, and (iii) irregularities in the biodiesel mixture, which had a share increase from 10% to 14% in the mix in the last 12 months.

For the second quarter, we do not anticipate significant inventory gains. On the other hand, we expect the normalization of the inventory levels in the sector and the reduction of the effect of tax distortions in Amapá. Therefore, we expect a profitability similar to that of the first quarter.

With that, I now conclude my presentation. I appreciate your interest and attention. And let's now move on to the Q&A session to answer your questions. Thank you!!

Question-and-Answer Session

Operator: The floor is now open for questions for investors and analysts only.

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Monique Grecco, Itaú BBA: Good morning. Thank you very much for the opportunity to ask a question. And I have two questions. The first one concerns Ipiranga. In the webcast of the previous quarter, you indicated that you expected Ipiranga to reach margins aligned with the recurring margins of 2023, but the results were below what was expected. Pizzinatto has just highlighted that it was a quarter with higher inventory levels and competition due to irregularities and tax discrepancies. But despite these reasons, what extent do you think that the limited opportunities of trading may also have contributed to results below what was expected?

The second question is the following: I know it's early, but could you please share us more about the impact of everything that's happening with the floods in the South of Brazil, especially with Ipiranga and Ultragaz? And what kind of impact are you anticipating for upcoming months because of the floods in the South of Brazil? Thank you.

Leonardo Linden: Monique, let me tell you about the whole quarter. Arbitration started in January at breakeven levels, and gradually, it was closing. It was somewhat closed by the end, but at the same time, despite the diesel market had an excess supply for two reasons. First, because there was a perspective of gaining inventory with all the differencing taxes in January and February. So, everyone increased their inventory levels for a quarter that normally as part of the season, it's lower or it's lower.

And in the 1Q, there was the adversity, which was widely discussed, which was the special regimen at Amapá. We have meant R$ 930 per m³ loss, that was inventory levels adjustment. It was expected but not on Amapá. We did not expect the tax discrepancies to be present, and it has impacted our margin forecast. Because ultimately, we had to really support and be able to compete.

That impact on the tax exemption impacted our stations, very important stations have lost volume and margins. So, to preserve businesses, especially our own contracts with service stations, we have brought down our margins, maintaining volume levels.

And that was the right decision, in my opinion, because if you analyze the 1Q over the 1Q24, we can see a volume gain of 2%, and very little impact in terms of market share. Therefore, it was a strategy to maintain our business.

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Concerning opportunities of trading gain, I would not say we have anything there. It's an important means to us. It has helped us, and we are going to carry on with the same strategy, with the same beliefs about how trading can help us in our businesses.

Concerning the South of Brazil, the material impact over Ipiranga is not relevant. But this is not a material discussion about relevance. I would like to emphasize that normally we have a high participation. I would like to say that Ipiranga, and Rio Grande do Sul is where Ipiranga started, Ipiranga is fully involved in the process of providing support to the population from the region, making donations, fuel, water, food, being part of some rescue activities. Today, we have set up a new logistics to support physicians to take them to Rio Grande do Sul, carry medications and other extremely needed goods.

We are also working with NGO Ação Cidadania, and everyone is invited to make a donation, and then Ipiranga matches what is donated by the population. There is a link in Ipiranga's Instagram, in my own personal account, just click, and I know I can count on everyone's collaboration. The state needs help. And the sooner they can resume their lives, their activities in the state, the better to everyone, and this is what we should all focus on.

Luiz Carvalho, UBS: Thank you very much for taking my question. I have two quick questions. First, to Lutz. We have been emphasizing that strategy of capital allocation of the Company. You have had a very good turnaround in the main businesses of the Company. And maybe now you can give us some more details about the recent acquisition of asset at Hidrovias do Brasil, part of the interest of Hidrovias do Brasil. So, tell us what you expect in terms of synergy, return on investment. What are the main metrics that should be considered when trying to understand the investment in Hidrovias? I would like to hear more about other opportunities as well. The deal of Hidrovias does not impact the leverage of the Company, and you have a very comfortable indebtedness level.

Secondly, concerning Ultragaz, we have seen a recovery of the whole industry, especially with the privatization of Liquigás. But speaking with other players in the area, we have seen some reduction of prices you have said that the ROIC of new entrants

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would be lower, limiting interested parts. I would like to understand how are you understanding that ROIC dynamics for Ultragaz? Is it at the same level as we have been observing or do you expect it to be reduced? Thank you.

Marcos Lutz: Concerning Hidrovias, we have been as part of the process of increasing our shares getting to a maximum of 40%. The asset has a number of market opportunities in our opinion. There is a synergy of knowledge, which is very relevant for Ipiranga, for Ultracargo. The North region transportation is very relevant, and the area will probably increase really using that crop and of crop period in Mato Grosso.

So, we think the investment has been very positive. As I have told you before, Hidrovias has a model where they grow in scale and operationally, and I believe we can help a lot. It is a publicly traded company, I do not think it's on us to make any comments, they would make comments when the right time comes. Let me now hand it over to Tabajara to make the comments about Ultragaz.

Tabajara Bertelli Costa: Thank you for the question. In our opinion, we have maintained the strategy, still operating in the segments that we have prioritized, working on operational efficiency. The market has a number of cycles. We want to be closer to our clients, developing our network of resellers. We are expanding our network of resellers.

There are situations going on in the market, as you pointed out. But I think that we are on the right track, focusing on customers and relationships with the network, and we can see strengthening of commercial relationship and expansion of that in upcoming years. This is the best strategy to us.

Luiz Carvalho: Great. If I go back, Lutz, in this level of leverage, do you expect to mature the investment of Hidrovias? Or are you already open for other opportunities concerning your level of leverage of the Company?

Marcos Lutz: We want to expect and develop further the investment of Hidrovias, but we are also open to other opportunities.

Gabriel Barra, Citi: Thank you for taking my questions. There are two important points which are follow-ups to some extent of the previous questions. First, about Ultragaz. We have seen lower volumes in bottled operations, and based on what Pizzinatto has said

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about the dynamic for the next quarter, maybe there are going to be higher volumes with stable results. That would be in line and similar to the previous quarter. So, I would like to understand in the mid and long-term. Are there any initiatives that will get more matured throughout the years? What can we expect in terms of volume and margins looking ahead? In recent conference calls, and Tabajara has said that, maybe we should not expect such high margins as we have had in previous years. But what can we anticipate for 2025, 2026?

Now, thinking about Ipiranga and going back to the first question we had today, I recall Pizzinatto talking about the margins in the end of February, thinking about margins aligned with the average of the year, but the negative impact was all concentrated in March, a month where there was not that much visibility. And this is why I decided to ask you. Amapá was one of the main detractors of margins in the quarter, and most of the month of April has also been under effect until finally, the injunction was best in the court. So, can you tell us something about the margins in the beginning of this next quarter? How are you doing with that? I think the dynamics now is much better than what used to be in the past. But what can you anticipate in terms of short-term? Thank you.

Tabajara Bertelli Costa: Based on what I have said before, we have the same strategic view. We have long-term initiatives. You mentioned one, capturing financial efficiency. We have met exactly what we have planned but there is still room every single quarter to expand further. In terms of profitability, we can see a gradual improvement. But in upcoming years, we believe we can go deeper and build something else in the long term.

There is huge potential for the Company, in our opinion.

Leonardo Linden: You are right. March was the worst month. There was an impact in January and February, but things got worse in March. And yes, it invaded the month of April until that special tax regimen was revoked. We expect now a natural recovery once it's over.

Vicente Falanga, Bradesco: Good morning. Thank you for taking my question. I would like to insist once again on Ultragaz' market. You have mentioned in the release that the competitive environment is somewhat tougher. Is there anything that concerns

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you? Has there been some players acting not very rationally, have you lost market share? And if yes, how are you planning to recover that? Is it only price? Are you going to do anything else? This is the topic that I would like to hear more from.

And finally, about ethanol, which is part now of the tax reform, it's going to go into effect as of 2027. Do you believe that it can be anticipated to some extent? Because this is a mechanism that has been considered for a while, and it would be somewhat simple to implement.

Tabajara Bertelli Costa: Let me start with Ultragaz. Especially about the quarter, in our opinion, it was a competitive quarter. There were some problems of taxes that have led to price increases in the market. We see increased competitiveness, especially in the bottled segment. And we still maintain our strategy of strengthening and protecting our network.

We are expanding our network of resellers, having a stronger network, and we want to really expand it to be more and more competitive, and also a progression in operational efficiency. If we have a strong position in the bottled area and expanded network, we can keep on competing at a good level.

Marcos Lutz: The last point about that mono-phase tax understanding. It has proved to be very effective, improving tax rate, improving competition and everything. Now the industry is considering that it makes sense and just expand that to hydrated ethanol. And that makes sense to all players, the government, manufacturers, distributors, everyone.

What I can tell you is that there are some discussions of possibly anticipating that having a unified system for the whole process. I feel there is a difference at what level the taxes are collected, if it's at the consumption level or at the consumption point. These are just technical issues, but as it's part of the tax reform, it's going to go into effect anyway, it does make sense to possibly anticipate that. We believe that's going to happen.

Bruno Montanari, Morgan Stanley: Good morning. Thank you for taking my questions. First, level of inventory, especially for diesel, until the end of the quarter, do you expect

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