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Edited Transcript of UGPA3.SA earnings conference call or presentation 7-Nov-19 3:30pm GMT

Q3 2019 Ultrapar Participacoes SA Earnings Call

São Paulo Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ultrapar Participacoes SA earnings conference call or presentation Thursday, November 7, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Pires de Oliveira Dias

Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board

* Frederico C. Pinheiro Fleury Curado

Ultrapar Participações S.A. - CEO & Member of the Executive Board

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Conference Call Participants

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* Christian Audi

Santander Investment Securities Inc., Research Division - Head of Latin America Equity Research, Agribusiness & Oil, Gas and Petrochemicals

* Frank J. McGann

BofA Merrill Lynch, Research Division - MD

* Gustavo Allevato

Santander Investment Securities Inc., Research Division - Research Analyst

* Lilyanna Yang

HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas

* Pedro Medeiros

Citigroup Inc, Research Division - Director and Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's Third Quarter 2019 Results Conference Call. There is a simultaneous webcast that can be accessed through Ultrapar's website at ri.ultra.com.br and MZiQ platform. Please feel free to flip through the slides during the conference call.

Today with us, we have Mr. Fred Curado, Chief Executive Officer; and Mr. André Pires, Chief Financial and Investor Relations Officer, together with other executives of Ultrapar.

We would like to inform you that this event is being recorded (Operator Instructions). After Ultrapar's remarks are completed, there will be a question-and-answer session. (Operator Instructions)

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 1 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 beliefs and assumptions of Ultrapar management and on information currently available to the company. They involve risks and 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 call over to Mr. Curado. Mr. Curado, you may begin.

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Frederico C. Pinheiro Fleury Curado, Ultrapar Participações S.A. - CEO & Member of the Executive Board [2]

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Thank you, and good morning to everyone. It's a pleasure to be here. It's my first participation in one of the earnings calls. And I just had to do this because a year ago, in November last year, we shared -- in our Ultra Day here in São Paulo, we shared bit of a vision towards the future of our strategic direction. So I think, it's a good opportunity to update all of you in where we are in that aspect.

So I will quickly over the company and then talk a little bit about the consolidated picture.

So starting with Ipiranga. I think Marcelo has been doing a very good job in terms of bolstering the team and the organization, reducing costs, also being closer and closer to our resellers. There's tremendous effort as well on the pricing models to get more artificial intelligence as far as our optimization of pricing. And last but not least, the focus on having the adjacent businesses being managed and the whole follow-up of the business in a dedicated way with experienced management, dedicated management, which is responsible for their own P&L, I mean, management P&L. So as a result of all that, what I see in Ipiranga is a company which is getting more agile, is getting more efficient and more competitive, faster. It's, of course -- it's a long-term process, but I think, definitely, we are in the right direction.

So quickly over to Extrafarma, I was particularly pleased with the positive cash flow for the first time ever, I mean, ever under our hands -- in our hands, which is not by chance. It's a consequence of the turnaround that Ultragaz is leading since mid-last year. And we do see a continuous improvement in terms of not only economical results, but also our cash results.

We are -- as you probably know, we have changed dramatically the strategy of growth of the company. *&*So instead of accelerated and a ide open growth in terms of opening new stores throughout the country, we are focusing on density in those markets where we have a good competitive position. So just to mention one number or one aspect of this effort, we are reducing our presence from 14 states in Brazil to 11, and investing in the logistics, investing in the IT platforms to support those clusters where we are more competitive. So we think this is key for the consolidation -- for the recovery of the company. So good news there as well.

So moving on to Oxiteno. Oxiteno, what we said last year remains valid. Three priorities for Oxiteno is execution, execution and execution. We, of course -- we did not expect, I don't think anybody expected the downsliding prices of commodities. So we are simply as everybody else in the chemical industry with that. On the other hand, the company has been very fast to affirm to adjust its cost structure to this new reality, if you will. It's a cyclical business in terms of commodities. But we -- that cycle may be with us for some time, so maybe 2 years, 3 years. We don't know, of course. But we cannot just assume that a few months from now, things are going to go better again. So we are adjusting our cost structure, including a zero budget effort project we just finalized to this new reality.

So -- but the true real value creation levers at Oxiteno remain being the increasing mix, quality of the mix of our products more and more trying to buy -- invest in R&D, more and more having specialty chemicals in lieu of commodities -- petrochemical commodities. And the second lever is the maturity of our U.S. operation. We changed the management of that operation last in April, May. And changes are still going on as a slowdown of changes. Very, let's say, positive expectations we have for this new team there. So we see 2020 as a year -- a better year than 2019, for sure. And probably within 2 or 3 years, we're going to see the full potential of that operation being realized. So that's for Oxiteno.

Quickly over to Ultragaz. Ultragaz had a stellar quarter. The third quarter is always the best quarter for Ultragaz in the seasonality of Brazil. But it's not -- again, it's not by chance that they came to those results. I mean it's a reflect of their continuous focus on innovation, continuous focus on operational excellence. And also, there is a nice -- it's a good perspective going forward, which is, as you probably know, for many, many years, we had a difference in pricing for the LPG for the domestic use and for the bulk use for business -- small and medium-sized businesses. And that's unjustifiable. Our difference in price has been eliminated -- virtually eliminated. Now it's about 3% only. And Petrobras has committed to match those 2 prices, not by increasing the domestic but by reducing the bulk until March next year. So this clearly increased the competitiveness of our use for small and medium-sized businesses vis-à-vis natural gas and other sources of energy.

The other thing, which is more mid to long-term, which will be a good driver for Ultragaz growth and profitability will be the potential privatization of Petrobras assets, infrastructure assets and the midstream assets. So today, it's very difficult to import LPG in Brazil because of the whole infrastructure in the hands of Petrobras. And so they are the business. Virtually, they're sole importer of LPG as they sell some assets and those assets goes to private enterprises. We believe, you will have better access and more competitiveness in the access to raw materials. And that's another, let's say, driver of growth and value for Ultragaz.

And finally, which is our fifth company, Ultracargo. Company is again a leader in it's -- on its space. Has been having a very good year. And the view we have for this company is to continue to invest. We won a concession bid -- tender earlier this year for a new terminal in the north of Brazil in [Belém] area, which we believe it will be a significant expansion of our presence in that region. And so our business continue to invest because as the downstream sector in Brazil, including refining of the transportation and retail, as it gets more integrated with the potential privatization of Petrobras assets, we see Ultracargo quite well positioned to be a player in this new environment.

So now trying to put an umbrella over the Ultrapar and all its 5 businesses. We have done a lot in the last 12, 18 months in terms of improving management model, improving the organization, improving our governance. And these actions, they're not always very visible to the outside world, but I really believe they are essential for the company's growth, longevity and capacity.

So just a quick one on a few of the initiatives. As far as governance, I think, an important change in our Board of Directors was effected last April. In particular, the creation of committees. So now we have 3 committees in place. And the committees certainly give us greater agility and better dynamics in the process of decision making that the senior management will propose, especially in relation to the strategic direction of the company's portfolio, and we have to concentrate our capital or to allocate our capital.

So as far as the companies grow themselves, the 5 business at that level, we have also created some new instruments, advisory boards. They're not statutory boards or committees. They are advisory boards. But they are pretty much active in following up the development of the companies. And it's been a very powerful instrument for me and for André to be closer and more -- in a more, let's say, objective, more agile and timely basis to follow up the businesses, the 5 businesses, because the 2 of us we sit in all 5 advisory boards. Besides the 2 of us, we have in each one, 2 or 3 outside members, members with expertise in that particular industry. So it's a good instrument to be closer, to be faster and steering the business towards making any adjustments which is needed, again, on a timely basis.

And finally, I will just mention the effort to build up or maybe to rebuild a pipeline of leaders, a pipeline of business leaders, not only in our business, but also to the Ultrapar (inaudible). So this definitely is one of the pillars for the future of the company. We have had in the last 18 months, 45% of renewal in the first 2 levels of the company. And with a combination of outside hires, combination of promotions, but also some horizontal transfers, which I prefer to call horizontal growth opportunities because that creates improvement for the individual, but also for the organization. It's cross-feeding of expertise and knowledge. So we're doing that in a very transparent, very respectful, in a planned way. So it's a lot to be done over 18 months, but the organization is reacting positively, and we see a higher agility already with this renewal in our ranks.

So I'll pass over to André to go to -- to lead you through the results, and we'll be back at the end for the Q&A. Thank you.

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [3]

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Thanks, Fred. Good morning, everyone. And moving on directly to the results for the quarter beginning with the performance at Ipiranga in Slide #3. Ipiranga ended the third quarter of 2019 with flat volumes compared to the same period last year due to a 4% growth in Otto cycle, driven by higher ethanol sales and a reduction of 4% in Diesel with lower sales to the B2B segment.

Compared to the second quarter of 2019, sales volume increased by 10%, with a growth of 7% and 14% in Otto cycle and Diesel, respectively.

We ended the quarter with a total network of 7,151 service stations, a net reduction of 35 service stations compared with the last quarter. This decline was due to the churn in service stations with suboptimal performance and lower throughput. Despite a reduction in the number of service stations, there was an increase in the volumes sold during the period, which demonstrates an increase in service station productivity.

The am/pm business unit ended the third quarter of 2019, with 2,386 stores. That's a net reduction of 23 stores compared to the previous quarter due to initiatives to increase top line productivity and efficiency. Here, again, the focus is on quality instead of quantity. Through a pilot project, we are structuring proprietary store operations so that we can accelerate growth in a sustainable way. We expect to be implementing some stores using this model before year-end. We're also working with specialized franchisees for the management of stores at Ipiranga service station in addition to the traditional franchise model.

Moving on to the digital relationship initiative, our Abastece Ai continued to grow in usage, increasing its penetration in excess of 10% of the service station volume sales. As for our loyalty program, Km de Vantagens, the number of participants jumped to 32 million people in the third quarter of 2019, representing 34% of service station sales.

Ipiranga's SG&A fell by 10% in the third quarter of 2019, following management initiatives for reducing costs and expenses. In addition, the overall improvement in our credit portfolio has allowed a reversion in provisions, which contributed for the SG&A decrease. As a result, the EBITDA increased by 24% compared to the third quarter of 2018, mainly due to the improvement in margins, the reduction in SG&A and better results at ICONIC.

Unitary EBITDA was BRL 99 per cubic meter in the quarter. Considering IFRS 16 adjustments and the segregation of corporate expenses, Ipiranga's EBITDA was BRL 676 million in the quarter.

For the fourth quarter of 2019, we continue to see an improvement in the market dynamics. In addition, we expect that the initiatives to optimize costs and expenses will contribute to the continued improvement in operating results in relation to the last quarter and on a year-on-year basis.

Moving on to Slide #4, talking about Oxiteno. Oxiteno's specialty chemical sales volume fell by 5% in the third quarter of 2019 due to continuing weak industrial performance in Brazil and lower demand from Latin American markets. Commodities volumes in turn recorded a 4% decline in relation to the third quarter of 2018, a quarter with above-average glycol sales. However, compared to the second quarter of 2019, there was a growth of 6%, driven especially by the agrochemicals and HPC segments and reflecting seasonal fluctuations between periods.

In the U.S., the Pasadena plant continues to ramp up, still contributing though negatively to results due to the fixed costs and expenses.

If we look at the graph of international prices, we can see the continued drop in the prices of MEG and ethylene, maintaining the squeeze on glycol margins. The outcome of this scenario in the quarter was an EBITDA of BRL 74 million. That's a decrease of 58% compared with the third quarter of 2018 due to the compressed glycol margins and a reduction in sales volume. On a quarter-on-quarter comparison, however, EBITDA rose by 91%, driven by the increase in sales across all segments. Considering IFRS 16 adjustments and the segregation of corporate expenses, Oxiteno's EBITDA was BRL 79 million in the quarter.

The current dynamic of compressed glycol margins should persist for the next quarters. In this context, we are adjusting Oxiteno's cost and expenses structure to reduce the impact on results. We are continuing to implement initiatives to optimize working capital as well as being more selective in the allocation of capital to preserve operating cash generation.

Now moving on to Slide #5. Let's talk about Ultragaz. Growth in sales volumes at Ultragaz resumed in the third quarter of 2019, with increases in both bottled and bulk segments, in line with the recovery in the overall market trend for the period. One of the factors driving improved demand was the reduction in LPG prices during the quarter. The decrease was most pronounced in the bulk segment, reducing the spread for bottled gas and increasing the competitiveness of LPG over natural gas. With this, EBITDA at Ultragaz increased by 9% on a year-on-year basis, reaching a record quarterly result of BRL 174 million due to the improvement in gross margins and higher sales volume. Considering IFRS 16 adjustments and the separation of corporate expenses, Ultragaz EBITDA was BRL 186 million in the quarter.

Recent cuts in LPG prices should contribute to a continued increase in sales volume compared with 2018 as well as providing more favorable prospects for returns from the operation.

Now to Slide #6, talking about Ultracargo. In the third quarter of 2019, Ultracargo's average storage rose by 2% due to greater handling of fuels and corrosives, although partially offset by the decline in the ethanol handling. In the quarter, we resumed operations in 84,000 cubic meters of capacity at the Santos terminal that was out of action since 2015. In October, we unveiled the first expansion phase at the Itaqui terminal with 30,000 cubic meters of capacity. This enhanced storage capacity will be contributing to growth in operating results from the fourth quarter '19 onwards.

In September, Ultracargo signed an agreement of BRL 30 million with the federal prosecutor's office still relative to the lawsuit filed due to the fire in the Santos terminal in 2015. This amount complemented the agreement executed in May 2019 as part of the civil inquiry.

The provisioning of this amount had an impact on Ultracargo's EBITDA, which reached BRL 36 million in the third quarter of 2019. If we exclude the impact of the agreement, EBITDA was BRL 49 million, an increase of 12% compared with the same period of last year, mainly due to greater handling of products and higher average prices.

Considering IFRS 16 adjustments and the segregation of corporate expenses, Ultracargo's EBITDA was BRL 45 million in the quarter. The tendency will be for growing results at Ultracargo to increase its storage capacity at Santos and Itaqui terminals.

Let's move on now to Slide #7 and talk about Extrafarma. In the third quarter of 2019, Extrafarma continued the process of closing underperforming stores, resulting in a net closure of 10 stores in the period and reflecting a stricter approach to underperforming units. Thanks to greater selectivity in the expansion of the network, the percentage of mature stores during the quarter reached 51%. Gross revenues grew by 5% in the quarter compared to the same period of last year. The recovery in the third quarter of '19 of both wholesale and retail sales was due to the stabilization of the new retailing system as well as the larger number of mature stores.

EBITDA for the quarter was BRL 5 million negative due to the still pressured competitive environment and the impact of closing underperforming stores, partially offset by the growth in sales and the constitution of tax credits in the period.

Considering IFRS 16 adjustments and the segregation of corporate expenses, Extrafarma's EBITDA was BRL 80 million in the third quarter of 2019.

Our efforts to optimize working capital together with greater selectivity of investments contributed to a positive operating cash generation of BRL 17 million in the quarter. This was the first positive cash generation since the acquisition of Extrafarma.

In August, we unveiled the distribution center in Guarulhos, which will now supply the drugstores in the greater São Paulo region and contribute to the improvement in the level of service and greater logistical efficiency.

In September, we launched Extrafarma's first own brand products, Be Better, which will contribute to network monetization and differentiation. In addition, we are implementing improvements to our operation, which include personalized promotions, new store system and better generic deals, which should contribute to higher sales and results. With current initiatives for increasing operational efficiency and improving profitability of Extrafarma, we expect the trends towards a consistent year-on-year improvement in results to be maintained in the next quarter.

Now looking at the consolidated figures for Ultrapar in Slide #8. Ultrapar EBITDA reached BRL 888 million in the quarter, an increase of 4% compared to the third quarter of '18 due to the increase in the EBITDA at all businesses except Oxiteno. If we exclude the impact of the agreements at Ultracargo, EBITDA was BRL 101 million, an increase of 6%. Compared to the second quarter of 2019, the EBITDA rose by 51%, driven by results at Ipiranga, Oxiteno and Ultragaz, and also due to the focus of all businesses on controlling costs and expenses.

In the third quarter of 2019, Ultrapar's SG&A decreased by 1% compared to the same period last year. Considering IFRS 16 adjustment, EBITDA was BRL 979 million.

Net earnings were BRL 321 million, virtually flat compared to the third quarter of 2018 and 153% higher than in the second quarter of 2019, due principally to the increase in EBITDA. Net profits post-IFRS 16 adjustments was BRL 307 million.

Total investments year-to-date were BRL 1.1 billion, 30% less than the same period in 2018, a result of greater selectivity in the allocation of capital. With this, operating cash generation after investment in the last 12 months amounted to BRL 1.8 billion, practically double the amount recorded in 2018.

Moving on to the next slide to talk about our debt profile. Net debt at a quarter end was BRL 8.6 billion, an increase of BRL 482 million in relation to the second quarter of 2019, mainly due to the disbursements for dividend payouts and FX variation on the dollar-denominated debt in the period. With this, leverage measured by net-debt-to-EBITDA was 2.7x, a slight increase compared to the preceding quarter.

We continue to implement our liability management strategy, lengthening our debt profile and keeping our average cost very competitive. At the end of the third quarter of 2019, our average duration was 5 years and our weighted average cost of debt was 99% of our CDI rates.

With this, I conclude my presentation. Thank you all for participating, and we can now begin our Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Frank McGann of Bank of America.

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Frank J. McGann, BofA Merrill Lynch, Research Division - MD [2]

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If I could, 2 questions. One, Ipiranga, in terms of the cost performance, seems to be quite good in the quarter. And I was just wondering if you could perhaps go into a little bit more details of where the cost improvements were coming and how sustainable you think they are?

And then secondly, just in terms of the broader distribution markets. The white flag volumes continue to be very strong when we look at the industry data. And I was just wondering what -- how you're seeing the overall competitive environment and how you expect it to develop over the next 12 months?

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [3]

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Frank, this is André here. Well, talking to -- beginning with the performance of Ipiranga in terms of costs. In fact, I mean, Ipiranga has been implementing a series of measures to control costs and expenses and to adjust its expenses to, let's say, the market reality. So part of this reduction has to do with those initiatives.

In addition to that, specifically in the third quarter, there was a reversion of provisions for bad debt,in the amount of BRL 20 million. This reversion is basically an adjustment that is relative to the improvement of the quality of the credit portfolio, the clients' portfolio of Ipiranga. So taking all this into consideration, we believe that this is pretty sustainable. Obviously, if we look on a -- from a unitary point of view, per cubic meter, the reduction also reflects the volume improvement from the second to the third quarter of 2019, basically using some operational leverage to dilute fixed costs. So in general, this is, again, a reflection of the initiatives that Ipiranga has initiated, although the process is still going. We believe that there will be more, let's say, gains going forward in terms of opportunities to either reduce cost or improve, let's say, the logistics costs by streamlining our, let's say, our logistics -- infrastructure and logistics route. So there will be opportunities there as well, further opportunities.

As for the white flag, I think, you're right. I mean the white flags or independent distributors, they continue to be, let's say, an important competitor. Basically, what we see is that they've been taking advantage of a market that still suffers from, I would say, the income appreciation for most part of the population. So their model of discount price continues to have a very, I would say, powerful value proposition. But we believe that once we see a more sustainable economic recovery on one hand, I mean, our competitiveness should pay out in terms of our value proposition of our business model.

In addition to that, looking a little bit further ahead, if we think about what is potentially going to happen with the privatization of 50% of the refined capacity by Petrobras and if we assume that the market is going to work in a way that it's more similar to what we see in other markets when you have private players in refining and overall refining plus logistics infrastructure, players that have more scale, more capacity, more offtake, should have better bargain powers on the supply side as well.

So again, further down the road, we believe that our business model in having more scale, a broader presence should prevail and should be able to command more efficient, I would say, cost structure and therefore, bring more competitiveness to the final customer, I would say.

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Operator [4]

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Our next question will come from Lilyanna Yang of HSBC.

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Lilyanna Yang, HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas [5]

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Could you please comment on Petrobras' downstream assets that are put for sale? You indicated the synergy gains and the change in dynamics for the sector. So could you highlight where you think adding these assets could be beneficial for you and/or even for the sector in case you end up not eyeing or buying them?

And also, can you -- on the second question, could you comment on how you plan to monetize your nonfuel segment in your convenience store model? How different do you see yourselves from BRD and from Raizen Combustiveis?

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Frederico C. Pinheiro Fleury Curado, Ultrapar Participações S.A. - CEO & Member of the Executive Board [6]

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We -- the way we see the Brazilian market, Petrobras has been the only player, it's not only, but almost 100% of the refining capacity in the country. And of course, as such, it optimizes the country as a whole, the combination of the several refineries. And also keeping in mind the obligation to supply the whole country, I mean, so they have it on one side, the monopoly, quasi monopoly in refinery, but also on the other side, they have the responsibility of making sure that the whole country is properly supplied.

So when you break that structure in regions, so they are privatizing 2 refineries in the south of the country, 2 refineries in the northeast of the country. They're preserving the cluster in the southeast. And they also sell the 1 in the Amazon and a few of smaller ones. That's where we believe there will be a fundamental change in the dynamics once, of course, every new player, which refinery will try to optimize its own refining operation.

Keep in mind as well that, along with the refinery, the whole midstream infrastructure comes along in that -- the inbound and outbound infrastructure comes with the refinery. So it's this combination. Again then, when you look at the value chain, we have not only Ipiranga, but we also have Ultragaz and Ultracargo play in that sector. So there is a strategic alignment so -- we see among those 3 companies. And they all 3 are quite well positioned in that value chain, which will probably have a more, let's say, regionally optimization -- optimization work towards every region of the country as we -- by the way as we see in the U.S. and Europe. So that's more or less the logic of what we see. So having an important presence in the offtake of those refineries and being also a very important place in the retail under our resellers network, I think, places us in a good -- it's a good place to be, we believe, in that in the next few years as this privatization process moves on.

So now to your am/pm, we are, I mean, I think, unquestionably ahead in terms of the number of stores, the maturity of our franchise, vis-à-vis the other convenience stores or networks in Brazil. The strength of our brand as well. It's for many, many years, am/pm. So what we are doing, we're not saying that we -- by -- we don't have any dogma saying that we want to be stand-alone and we don't need or we don't want partners. It's just that we are, I think, ahead. And we are, I mean, even making what is a good operation, much better. As André mentioned in his speech, having more dedicated management, am/pm, we already see some very good results as far as the projection of the future and the management of the supply chain, et cetera. So we may even consider having a strategic partnership going down the road. But let's say that the base case is an organic growth and but -- under a very different management optics, which is a dedicated and professional team with experience in retail, and even more so in food retail, along with the convenience.

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Lilyanna Yang, HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas [7]

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If I may just follow-up. I wonder if it makes sense for Ultrapar, I mean, today, to go more asset -- asset light without having a partner with expertise in the refining business ahead of the potential acquisition of Petrobras assets?

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Frederico C. Pinheiro Fleury Curado, Ultrapar Participações S.A. - CEO & Member of the Executive Board [8]

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We -- I mean, we see that there are some skills in that operation. So it is downstream an integrated deal. Refining is a clear skill in operating refinery. Trading is another one. Distribution and retail. We kind of believe we are good in distribution and retail. We do have experience in operating a large and complex petrochemical and biomechanical industrial operation. We do not have specific industry experience in running refineries, and we have limited experience in trading. So a partner is probably -- would be an alternative. It's very early stage to define what's the ultimate strategy and what's the ultimate, let's say, structure to Ultragaz opportunities. But that's something we are contemplating as a possibility. It would be probably good alternative for us to have a partner, but I would not say that this is a mandatory requirement.

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Operator [9]

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And our next question will come from Gustavo Allevato with Retail.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [10]

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So in the previous call, you mentioned that the SG&A tariff reversion of BRL 150 million to BRL 200 million for the next 18 months. So looking the results, we noticed that there was some reduction already in third quarter. So among these tariffs, I would like to know how much more can we expect? This BRL 150 million, BRL 200 million is additional regarding what the company achieved in the third quarter or is something already embedded in the third quarter results?

Also in the SG&A reduction on a qualitative basis, if you could provide some guidance regarding what the company is doing.

And moving to Oxiteno, so -- the results are slightly improving, especially in the U.S. So when can you expect the units in the U.S. regarding the expansion of the company compared to last year? Should we breakeven regarding -- in terms of EBITDA?

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [11]

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As for the SG&A opportunities in Ipiranga, we have already started to implement those changes some time ago. There is still more to come. The overall potential is around BRL 150 million per year. But part of that has already happened or is already happening in the second or third quarter of this year. So we don't have any number for the next quarters, of course. But I mean, when this is all said and done, and taking into consideration especially the improvement in the logistics part, it's something on a yearly basis, sustainable BRL 150 million to BRL 200 million a year, something like that.

In terms of Oxiteno, the U.S.A. operations, we have an expectation of improved results for 2020. The breakeven should be achieved at some point between the second and third quarter of 2020 on a monthly basis. But on a full year basis, it's a 2021 expectation, right? But crossing the line, I would say, some time during 2020.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [12]

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Okay, very clear. And if I can ask another question regarding Ipiranga. So I know you guys don't like to record on monthly basis, so we noticed like strong volumes in July and August, but likely reduction in September going to the fourth quarter. So can we expect the same trend of the third quarter or should the deceleration in September should prevail?

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Frederico C. Pinheiro Fleury Curado, Ultrapar Participações S.A. - CEO & Member of the Executive Board [13]

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Gustavo, yes. Well, basically, as we normally say, right, I mean, we should try not to look specifically at given short periods, like monthly views, right? From our perspective, the trend that we saw in the third quarter, which is improving volumes and for Ipiranga itself, improving market share, should prevail also in the fourth quarter. I mean we have seen an improved market dynamic and improved economic dynamic throughout the end, let's say, the third quarter -- the end of the third quarter, going through the fourth quarter as well. So yes, we believe it should prevail.

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Operator [14]

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Our next question will come from Pedro Medeiros of Citigroup.

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Pedro Medeiros, Citigroup Inc, Research Division - Director and Analyst [15]

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Congrats on the results. I have a couple of follow-ups. I think most of the questions were already answered in the prior call and this one. My first one is coming back to the topic of Oxiteno. If you look at the broad business, you've shown already sequential margin improvements taking outside the typical seasonality. So I just wanted to understand the outlook for the fourth quarter, okay? Should we continue to expect on a margin basis, sequential margin gains? So just trying to understand a bit of the recurrence of the third quarter results.

My second question is, well, you have been commenting about the targets for recovering returns at Ipiranga. And considering the comments of the recurring nature of Ipiranga's margin this quarter and cost improvements that were already achieved, do you -- can you give us, like, some additional color on how do you think Ipiranga returns spend? And how far are we from the corporate targets and perhaps when do you expect to achieve that? Is that already visible, considering the performance in the third quarter? So I would appreciate if you can comment on that.

And just one last point, okay. I apologize. So coming back to the topic of the September sales, apparently, most of the changes in volumes were driven by the diesel market. So can you get us some additional color on what's happening on the diesel market and why do we expect it to be reversed in the fourth quarter.

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [16]

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Starting with Oxiteno. I mean, again, there is some seasonality, right? I mean the third quarter seems -- tends to be the best quarter in the year, as Oxiteno, I mean, is involved in, let's say, in the industrial segment. Fourth quarters are normally weaker from a volume and activity point of view for Oxiteno. So there is a trend of slight improvement. But obviously, we have to look at this trend more in the long run. So clearly, we are more optimistic about 2020. But on a quarter-to-quarter basis, we have to take into consideration the seasonality being the fourth quarter normally a relatively weak quarter every year for Oxiteno.

On Ipiranga, talking about what we see in terms of improving the company results over the next few quarters. I mean as I mentioned in my speech, we continue to see conditions to similar improvements, both in terms of volumes and in terms of margins as well on a sequential basis quarter-to-quarter and on a year basis compared to the same period of last year. So yes, I think, there is a gradual recovery going on.

You mentioned, how far are we in terms of our expectations from our corporate side to get there. I mean it is difficult to say how far. But I mean, we believe, that there is more room for improvement in the next few quarters. So we feel good about the initiatives that have been introduced at Ipiranga, the way that Ipiranga is being managed per business units, the focus on, let's say, operational excellence and in costs. The focus on, let's say, implementing a new pricing system with more quantitative approach. So things are starting to pay out from our perspective -- to pay off, I'm sorry, from our perspective when we look at the results versus the initiatives that are being implemented.

As for September sales in terms of the diesel market, again difficult to define a trend that is given by a specific month. We have lost share in the second quarter in B2B due to sales were poor for Ipiranga. Some of this market share has been recovered in the third quarter. But as you know, I mean, this is a spot market, right? It depends on the conditions, at this very moment, depends on the prices adjustments by Petrobras. I can say that I mean, second quarter, again, was a period where our loss -- our loss in market share was greater than we anticipated. I think we'll recover this loss in market share, especially in the diesel market. And we continue to see a sequential improvement in overall volumes in the next few quarters.

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Operator [17]

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And our next question will come from Christian Audi of Santander.

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Christian Audi, Santander Investment Securities Inc., Research Division - Head of Latin America Equity Research, Agribusiness & Oil, Gas and Petrochemicals [18]

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I have 3 follow-up questions. Fred, going back on to the refinery, potential refinery acquisition. Are you looking at that more as a defensive maneuver in the sense of you needing to be there to protect the refinery elements or part of your chain or more as an opportunistic one in the sense of you seeing synergies, attractive synergies to be had that could really add upside for your business?

The second question, André, was going back to Ipiranga on the competitive front. You already touched on the white flags, but can you just comment a little bit about the behavior you have been seeing from both BR Distribuidora and the newly entrant foreigner -- foreign companies that bought smaller players. What type of aggressive, nonaggressive type of behavior you've seen from them from a pricing or competitive point of view?

And then lastly, if you could just provide an update on the potential regulatory changes in the fuel distribution, which ones you think may pass, may not pass. Just a general update would be very helpful, please.

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Frederico C. Pinheiro Fleury Curado, Ultrapar Participações S.A. - CEO & Member of the Executive Board [19]

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So welcome back, Christian. So no, we don't see the senses, no. We see it as a value creation opportunity. Ipiranga, whoever acquires refineries, we have in Ipiranga a large customer. So I think, the stake that Ipiranga has as a large distributor throughout the country is there in any case. So Ipiranga, we believe, will benefit from the same reasons that we already talked about in a few questions ago. Scale and the volume pricing, probably there will be the norm under a, let's say, market -- normal market condition. So the benefit is there. But we also see the refining itself -- the refineries itself. There is value there, we believe. Structurally, Brazil will be more and more long in crude oil. So as the pre-salt exploration goes up, the surplus of oil will increase and Brazil become a higher, higher net exporter of oil.

On the other hand, we do not foresee, at least now, any new investments in new refineries in the country. We don't see quite frankly in the world and the movement is the other way around. And Brazil has a structural deficit in refining products, more specifically diesel and gasoline. So you have the very unique combination, which is a country where, geographically, we are kind of a far from, let's say, the major markets. And number two, we have a country which has a very large domestic market with a situation where we are long in crude and short in refined products. So that business we see with potential by itself. So we see that business as a Ultrapar business, not necessarily as Ipiranga business. We see Ipiranga, Ultracargo and Ultragaz again in this ecosystem as benefiting from those changes. So it's not a defensive movement. It's a value creation movement for us.

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [20]

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And Christian, about the other 2 questions. On the competitive front, I mean, as I mentioned, the market remains very competitive but, let's say, the overall market dynamic has been improving. I prefer not to comment individually on the behavior of each one of the players in the market. But what I can say again is that the overall market dynamic is improving, which is allowing us to recover margins as we did, right, in the sequential quarters end as we did compare to the third quarter of last year.

As for updates on regulatory changes, there hasn't been any new, let's say, initiatives since the last 3, 4 or 5 months. I think the only topic that has somewhat advanced more was the one related to the direct sales of ethanol from the ethanol [mills] to the service stations. So this has, I mean, moved through the change that had to be moved. However, in order to be implemented, it needs, as you know, to be regulated from a tax point of view, how they are going to replace, if it is the case, the distributors from parts of the chain of tax collection. There hasn't been any new regulation on the tax front. So if this -- I mean the regulation in order to go ahead meets this tax code to be changed, there has been no proposal for a tax code change, so we don't know. So again, I mean, after what we saw last year with a lot of initiatives, I mean, I think now we are waiting to see what are those initiatives that eventually we'll see.

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Operator [21]

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This concludes our question-and-answer section. At this time, I would like to turn the floor back to Mr. Pires for any closing remarks. Please go ahead, sir.

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André Pires de Oliveira Dias, Ultrapar Participações S.A. - Chief Financial & IR Officer and Member of Executive Board [22]

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Okay. So thanks, everybody, for the interest in participation in our call. Hope to see you again in our fourth quarter results late February. And we're going to have an Ultra Day here in São Paulo, Brazil, early March, March 5. So see you all then. Thank you very much. Have a good afternoon. Thanks.

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Operator [23]

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Thank you. This concludes today's Ultrapar's Third Quarter 2019 Results Conference Call. You may now disconnect your lines at this time.