Ultrapar Participações S.A. (UGPA3) Earnings Call Transcript & Summary

Good morning, and thanks for waiting. Welcome to the conference call of Ultrapar to announce the signing of the sales agreement for Oxiteno. This event is also being simultaneously webcast, and you can follow it on the company's website, ri.ultra.com.br or on MZiQ platform. This conference is going to be led by Mr. Rodrigo Pizzinatto, CFO and IR Officer for Ultrapar. We would like to inform you that this event is being recorded [Operator Instructions] [Audio Gap] performance. They involve risks and uncertainties since they refer to future events and depend on circumstances that may or may not occur. Investors should understand that general conditions and other operating conditions may affect the future performance of the company and lead to results that will materially differ from those in such forward-looking statements. Now we are going to turn the call to Mr. Rodrigo Pizzinatto that will start to the presentation. Please, Mr. Pizzinatto, you may go on.

Good morning, everyone. It's a pleasure, and thank you for attending this conference call in such a short time. You will find the presentation on our website. I'm going through it. There are just a few slides, but I'm going to start on Slide #3. I am pleased to announce another important step in our process to revisit our portfolio. We announced today the signing of the sales agreement of Oxiteno to Indorama, a Thai petrochemical company. With the sale, we conclude the stage of rationalization of portfolio, which we started with the announcement of the sale of Extrafarma in May and then our share in ConectCar in June this year. These divestments are related to our strategy of building a more complementary and synergistic portfolio, which we have been discussing with you for some time. With the conclusion of this portfolio move, we'll be better positioned to advance in the businesses where we have more structural advantages in terms of scale, competitive differentials, sector knowledge and others with a more robust and better starting point for the growth in the coming years. I also reinforce our view that we are in a unique time of investment opportunities in the energy and infrastructure sectors. In the oil and gas area, besides the ongoing investments for expansion and productivity of Ipiranga and Ultragaz, we have been evaluating potential investments in refining and natural gas, as you know. In infrastructure, we have been making growing investments in Ultracargo. In March, we had the specific event of the company to highlight the growing opportunities we have seen there. We also have been studying how to leverage businesses and competencies to actively participate in the energy transition process, both in natural gas that I mentioned, which is a transition fuel with a smaller carbon footprint, but also in renewables. In addition, we also see opportunities to create value in other businesses that are adjacent such as the profitable growth of AmPm and in the development of abastece aí. As you know, it's just the largest loyalty program in Brazil. They have the abastece aí app, which is a digital payment method. Thus, the sale of Oxiteno today will allow us to improve our capital structure. With the sale, our leverage debt was 2.8x net debt-to-EBITDA ratio in June. If we exclude Oxiteno's results from EBITDA and include the cash expected from sale, our leverage would be around 1.7x. And with this, this transaction strengthens our financial, strategic and management capabilities to better seize the opportunities ahead of us in the coming years with a more robust complementary and synergistic portfolio. Now I'm going to Slide #4, and I'll talk about the transaction with a bit more details. Indorama is one of the large petrochemical companies in the world with operations in more than 30 countries in products such as PET, polyester and integrated oxides. In addition to the benefits of the geographic expansion at Oxiteno's position in Latin America, Indorama's current scale with revenues about USD 10 billion, specific knowledge of the industry and the company's operation in the United States, where it is one of the largest producers of ethylene oxide, will provide relevant synergies in the business combination Indorama-Oxiteno. From Ultrapar's point of view, recent results with a strong generic combination of strong volumes, high margins and devaluated exchange rate increased the value perception of the business. The enterprise value of this transaction is USD 1.3 billion. Oxiteno has results, as you know, that follow certain industry cycles. Considering the average EBITDA of the last 3 to 5 years, which was about USD 120 million, USD 130 million that normalizes the cyclicality of the business, the EV/EBITDA multiple of the translation is 10 to 11x for Ultrapar, which is higher than the trend in multiple of other companies in the industry and also above the average multiple of Ultrapar itself. This transaction was made at this level due to the relevant synergies for Indorama in this transaction. Now we are going to the next slide before our Q&A. Just with further details, the payment will be USD 1.150 billion at the closing of the transactions and USD 150 million on the 2-year anniversary of closing. Given that the transaction value have higher than Oxiteno's book value, we'll have a capital gain on the transaction. And our expectation is that income tax on the capital gain will be less than USD 70 million, which is obviously subject to closing and foreign exchange adjustments. Condition precedent are usual for the type of transition. The main ones involve the approval by Brazilian regulatory agencies as well as in the U.S.A. as well as the conclusion of the preemptive right process for Ultrapar's shareholders. And talking about that, this transaction also gives rise to preemptive rights to Ultrapar's shareholders since Oxiteno's shares were merged in 2002 when it became a wholly owned subsidiary of Ultrapar. This process, as I mentioned, is similar to the one we had with Extrafarma sale and aims to meet the Brazilian laws in line with Article -- with Section 253 of the Brazilian Corporations Law. Thus, each shareholder of Ultrapar will have the right to acquire Oxiteno's shares in proportion to its stake. We will call a general meeting in a few week, which will consign the beginning of the period to exercise the preemptive right. All the details of the operation will be made available at the time of the call. I emphasize that Oxiteno is a private company and will have a foreign controlling shareholder. Therefore, whoever acquires Oxiteno's shares will not have liquidity to negotiate the shares in the future. The exercise of preemptive right and financial settlements will occur before the closing as it is a condition precedent to the completion of the transaction. However, the transfer of the shares will be subject to the fulfillment of all conditions precedent and may suffer price adjustments. Well, with this, I conclude my presentation, and now we can start the Q&A session.

[Operator Instructions] Our first question comes from Andre Hachem from Itaú.

I have 2 questions from my side. First, could you please talk about the total amount of the transaction? How much is equity? And how much is that, that is coming along? Or is the amount is just equity? That's the first question. Second question, I would like to understand a little better. Last week, you talked about 2 movements: first, expansion; and then revisiting your current portfolio. With the sale of Oxiteno, it seems that you have more room to take the next step. So could you give us a bit more color about your structure movements? What kind of debt you're going to have? But what you think your next step is going to be now that you seem to have completed your portfolio review? And also, you can have a mismatch but timely between the money coming from Oxiteno and the payment that you have to make. How do you see this mismatch? And could you see that during this mismatch period, you could have a higher leverage ratio?

Thanks, Andre, for your questions. I'm going to start with the equity debt question. The amount of $1.3 billion will come in as company cash. But inside Oxiteno, we have an intercompany debt that will go with the translation, about $750 million. So we are going to receive USD 1.3 billion in cash depending on the closing date, as I mentioned, and closing conditions. As for debt, as Fred mentioned last week, we have ongoing questions about the acquisition of Refap and other projects of expansion at different points of maturity. And these funds that come in with the closing of this transaction increase our financial capacity to advancing these processes. We -- answering your next question about the interim mismatch, we don't control time of expansion projects. But the divestments announced, including Oxiteno, is the largest. We hope that the closing of the transaction will be in the beginning of '22, which is going to be before the disbursements for these other projects that are ongoing and under assessment. So we are going to get paid before we start paying if we decide to move on with the projects that are ongoing.

Our next question comes from Gabriel Barra from Citibank.

Congratulations on the translation. I have 2 questions on my side. First, thinking of tax payment alone, it's important in this transaction when you take a look at the book value of Oxiteno inside Ultrapar, you see that there is a relevant capital gain. I might be wrong, but in my calculations, it would be a much higher amount of income tax than you announced. Could you talk a bit more about these taxes? Because I think there is a relevant impact for us to know how much the company is going to have in its cash in the end of the transaction. That's the first question. Second question, timeline. If you could give us a bit more color and what the transition process is going to be for Oxiteno and even Extrafarma. Making a follow-up of the previous question, it would be very interesting to understand how much -- when the company is going to receive the whole investment amount? And as for the amount that you talked in terms of leverage, 1.7, given the amount that you disclosed in the presentation, you could get to a lower leverage ratio. So I would like to understand this 1.7 a bit better.

Gabriel, thanks for your questions as well. Well, let me start with the rationale of the income tax to be paid. You're right, the book value of Oxiteno is about BRL 1.7 billion. And together with the transaction, we are going to transfer to the buyer a prepayment of exports that today is into account of Oxiteno and a subsidiary of Ultrapar abroad. And with the transfer of this debt, this reduces the equity amount and, therefore, the taxed amount on capital gains. In addition, there is an allocation of transaction expenses and other effects that will enable us to have an estimated disbursement of income tax on capital gains that is below USD 70 million. That obviously also subject to the closing adjustments and the exchange rate. As for the time of the ongoing transactions, well, we have the lowest transaction, which is ConectCar that is to be completed in the coming months, is still in '21. Then Extrafarma, as we have a bit of a longer process because of the Brazilian antitrust agency, we expect to complete it in the first half of '22. We still do not have a clear visibility of when the process is going to be because, again, the greatest uncertainty in terms of time is regarding the Brazilian antitrust agency and its final decision. And in Oxiteno, we estimate a relatively lower time for the antitrust agency because this is a transaction that involves a company that has very little activity in the regions in which we operate, except for the U.S. But given the size of the American market, this is a transaction that should not face much time for decision of American regulatory agencies. But the estimate in terms of times for the final decision of our regulating agency is about 6x. But again, we do not control the time. And obviously, it can be extended, legally speaking, up to 11 months total time. With that, we will probably have in terms of receivables of the highest portion of Oxiteno $1.150 billion in the beginning of '22, following the final decision of the antitrust agency and other conditions precedent. So we should receive $1.150 billion in the beginning of '22, ConectCar this year and the first installment of Extrafarma also in the first half of '22. With these transactions, we are looking into right now in the best case scenario, if we move on with the acquisition of Refap, it would be payment to be made in the second half of '22. As for leverage, which was your last question, the rationale of leverage is very simple. We considered in our calculation data from June '21. In EBITDA, we removed the EBITDA of the last 12 months of Oxiteno. And in net debt, we added the estimates of receiving receivables of cash free of tax. That is the calculation that went from 2.8x to 1.7x, 2.8x in June.

Okay. Just a quick follow-up, talking about Extrafarma, the amount that you are using somehow to deduct from taxes.

So yes, the loss that we just disclosed of impairment in the Extrafarma operation is going to be used in Ipiranga to reduce the disbursements imposed in Ipiranga, okay, disbursements of taxes on Ipiranga.

The next question comes from Luiz Carvalho from UBS Bank.

I would like to try and recap your amount -- your math here, $1.150 billion of equity, $750 million of debt. So you're talking about taxes. The difference between these 2 amounts and the book value that you have today. So my question is, first, should know if this is correct. And the second question, in the conference call -- the previous conference call, it was very clear that you are in the process of revisiting our portfolio. But could you give a bit more color about other recurring revenues that the company is looking into for the future?

Luiz, also thank you for your questions. Well, first, about taxes. I'm going to use the reference amount in dollars just to make it easier. Enterprise value, $1.3 billion. Oxiteno's PL in dollar, $330 million and debt of $750 million, net debt. That altogether would have a net amount of $221 million with 34%, give $75 million. And then we have some transaction expenses, the possibility of using credits in the balance sheet to also reduce the disbursement. And that's why we were thinking of an amount below $70 million for income tax due to the transaction. As for other projects, well, we have been talking about the transaction in the refinery. I think is very clear. Natural gas, Fred himself mentioned recently the opportunities we are looking into both in investments in GNL and distributors. I think these are the most tangible projects right now. And we also have been analyzing opportunities in renewables, but that is still in the beginning. And what we have been doing is accelerate the expansion of Ultracargo. And the opportunities have been increasing in Ultracargo in addition to other expansions that are ongoing, especially infrastructure in Ipiranga, Ultragaz infrastructure and also AmPm. These are the main projects, and we are going to give you more disclosure as they materialize.

Next question comes from Thiago Duarte from BTG Pactual.

Rodrigo, I have one more question here. I would like, Rodrigo, you to talk a bit about the synergy of the remaining portfolio in Ultra. Strategic-wise, it is very clear you're talking about the energy business with Ipiranga, Ultragaz, infrastructure with Ultracargo, that is very much correlated with fuels. But I would like to hear from you, Rodrigo, about the capacity to capture synergies as the portfolio is given today. And why do I ask that? In the past some time ago, we discussed with you about the need of the group to simplify the decision-making process and bring management closer to business units to enable synergies to be truly captured. Today, the impression that we have is that businesses are still somehow managed in a very independent way. So I would like to hear from you, how you see that these 3 main businesses that will remain can indeed deliver synergies in between themselves, Ipiranga, Ultracargo and Ultragaz, if you please.