Business context and reporting period
Ultrapar Participações S.A. (Ultrapar Holdings Inc. in English) filed this Form 20-F on April 22, 2019 for the fiscal year ended December 31, 2018. The filing reports audited consolidated financial statements under IFRS as issued by the IASB; 2017 and 2016 comparisons were retrospectively restated for IFRS 9 and IFRS 15. This is an annual report, not a standalone fourth-quarter filing, and the supplied text does not provide clear Q4-only financial results.
Ultrapar operates five businesses: fuel distribution (Ipiranga), LPG distribution (Ultragaz), specialty chemicals (Oxiteno), liquid bulk storage (Ultracargo), and pharmacies (Extrafarma). Ipiranga generated approximately 84% of consolidated revenue in 2018, underscoring the group’s exposure to fuel distribution.
Key financial metrics
Amounts below are in Brazilian reais (R$), millions unless stated otherwise.
| Metric | 2018 | 2017, restated | Change |
|---|---|---|---|
| Net revenue | 90,698 | 79,230 | +14% |
| Gross profit | 6,161 | 6,799 | -9% |
| Gross margin | 6.8% | 8.6% | -1.8 percentage points |
| Operating income before financial result and equity-method results | 1,899 | 2,793 | -32% |
| Net income | 1,132 | 1,526 | -26% |
| Net income attributable to Ultrapar shareholders | 1,150 | 1,527 | -25% |
| Basic earnings per share | R$1.06 | R$1.41 | -25% |
| EBITDA, company-defined | 2,697 | 3,518 | -23% |
| Adjusted EBITDA, company-defined | 3,069 | 3,981 | -23% |
Net margin was approximately 1.2%, versus 1.9% in 2017. Adjusted EBITDA is a non-IFRS measure that adds back amortization of Ipiranga customer contractual assets; Ultrapar cautions that its non-IFRS measures may not be comparable with similarly named measures at other companies.
- Cash flow: Operating cash flow was R$2,889, up 66% from R$1,739. Investing cash outflow was R$3,178; financing cash outflow was R$801. Cash and cash equivalents ended the year at R$3,939, down from R$5,002.
- Debt and liquidity: Gross debt was R$15,206, versus R$13,591; net debt was R$8,212, versus R$7,221. Cash, cash equivalents and financial investments totaled R$6,994. Management reported a net debt/EBITDA ratio of 2.68x and said liquidity was sufficient for expected needs over the next 12 months.
- Investment: Additions to property, plant and equipment and intangible assets were R$1,377. Total 2018 investments net of divestments and repayments were R$1,947. The 2019 investment plan was R$1,762.
- Dividends: Ultrapar declared R$685 in dividends for 2018, approximately 60% of reported net income; reported dividends per share were R$1.26 before the subsequent stock split.
Material changes and operating performance
- Revenue growth did not translate into higher earnings: cost of sales rose 17%, faster than revenue, while gross profit fell 9% and operating income fell 32%.
- Ipiranga revenue rose 14% as fuel prices and taxes increased, while volume rose only 1%. Adjusted EBITDA fell 33% to R$2,052, affected by the truckers’ strike, fuel-cost and margin changes, and costs associated with the Iconic lubricants joint venture.
- Ultragaz revenue rose 16%, but volume fell 1% and EBITDA declined 41% to R$258. Results included a R$286 break-up fee paid after CADE blocked the proposed Liquigás acquisition.
- Oxiteno revenue increased 20%, helped by Real depreciation and higher U.S.-dollar product prices, despite a 3% decline in volume. EBITDA rose 111% to R$625, including the effect of tax credits relating to the exclusion of ICMS from the PIS/COFINS tax base.
- Ultracargo revenue increased 13% and EBITDA rose 44% to R$179, reflecting higher handling activity and the partial resumption of the Santos terminal after its 2015 fire.
- Extrafarma revenue rose 9%, but EBITDA turned to a loss of R$47 from positive R$23. The filing cites the pharmacy IT-system replacement, store closures, new stores still maturing, and increased competition.
Outlook, risks, contingencies and unusual items
- Outlook: Management budgeted R$1,762 of investment for 2019. The plan includes expanding logistics and retail networks, modernizing Oxiteno facilities, and adding Ultracargo tank capacity. The filing does not provide consolidated earnings or revenue guidance.
- Macroeconomic and currency exposure: Brazil’s GDP grew 1.1% in 2018 and the Real depreciated 17% against the U.S. dollar. Inflation, interest rates, political and fiscal uncertainty, and exchange-rate volatility may affect demand, costs, debt and reported results.
- Supply and competition: Petrobras is the principal supplier of LPG and oil-based fuels in Brazil, while Braskem is Oxiteno’s sole ethylene supplier at specified plants. Interruptions, pricing changes, raw-material inflation, or stronger competition could pressure operations and margins.
- Truckers’ strike: The nationwide 10-day strike in May 2018 disrupted deliveries and production across several businesses, reduced sales volumes and contributed to Ipiranga inventory losses following a government-ordered diesel price reduction.
- Legal and environmental exposure: Recorded provisions for tax, civil, environmental, regulatory and labor risks totaled R$943. Possible-loss contingencies totaled R$2,839 and were not provisioned. Tequimar faces criminal proceedings and potential civil/environmental claims relating to the 2015 Santos fire; the filing says eventual amounts could materially affect financial statements.
- Control weakness: Management and KPMG reported a material weakness in IT general controls over privileged access and change management. Management said the weakness had not caused a financial-statement misstatement, but disclosure controls and internal control over financial reporting were considered ineffective as of year-end. Remediation was planned; completion is not established in this filing.
- Auditor opinion: KPMG issued an unqualified opinion on the IFRS financial statements, but an adverse opinion on the effectiveness of internal control over financial reporting.
Most important facts for investors to verify
- Confirm the full-year figures and restated comparatives in the audited IFRS statements; the filing does not provide standalone Q4 results.
- Assess whether operating margins and Ipiranga profitability can recover after the 2018 decline, and whether growth in revenue reflects higher volume or mainly prices, taxes and currency effects.
- Review net debt, maturity schedule, covenant headroom and the effect of the planned investment program on liquidity and leverage.
- Track realization and durability of Oxiteno’s tax credits, and distinguish these items from recurring operating performance.
- Monitor progress in remediating the IT-control material weakness and any subsequent auditor or management assessment.
- Review developments in the Santos fire proceedings and the R$2,839 of possible-loss contingencies, including tax and antitrust matters.
- Check the execution and funding of the 2019 investment plan and port concessions, and the actual effect of IFRS 16 adoption beginning in 2019.