Ultrapar Participações S.A. (Ultrapar Holdings Inc.) — 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed May 4, 2020. This is an annual report, not a standalone fourth-quarter filing. Audited consolidated statements are prepared under IFRS in Brazilian reais (R$). U.S. dollar figures are convenience translations at R$4.0307 per US$1.00 on December 31, 2019.
Business context
Ultrapar operates five businesses: fuel distribution (Ipiranga), LPG distribution (Ultragaz), specialty chemicals (Oxiteno), liquid-bulk storage (Ultracargo), and retail pharmacy (Extrafarma). Ipiranga was the largest contributor to consolidated revenue. At year-end, Ipiranga had 7,090 service stations and 19.3% fuel-distribution market share; Ultragaz had 23.4% LPG market share; Oxiteno sold 734 thousand tons; Ultracargo operated six terminals with 814 thousand cubic meters of capacity; and Extrafarma operated 416 drugstores.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | R$89,298 million | R$90,698 million | -2% |
| Gross profit | R$6,111 million | R$6,161 million | -1% |
| Operating income before financial result and equity-accounted results | R$1,301 million | R$1,899 million | -32% |
| Net financial expense | R$507 million | R$114 million | Higher expense |
| Net income | R$403 million | R$1,132 million | -64% |
| Net income attributable to Ultrapar shareholders | R$374 million | R$1,150 million | -68% |
| Adjusted EBITDA | R$2,800 million | R$3,069 million | -9% |
| Operating cash flow | R$2,925 million | R$2,889 million | +1% |
Gross margin was approximately 6.8% in both years; operating margin declined to about 1.5% from 2.1%, and net margin to about 0.5% from 1.2%. Adjusted EBITDA is a non-IFRS measure defined by the company and should not be treated as a substitute for net income or operating cash flow.
Cash used in investing activities was R$1,835 million, including R$1,133 million of additions to property, plant and equipment and intangible assets. Cash used in financing activities was R$2,922 million. Cash and cash equivalents ended the year at R$2,115 million. Current financial investments were R$3,090 million; including non-current financial investments, cash and investments totaled R$5,712 million for the company’s net-debt calculation.
Gross debt, as defined for net debt, was R$14,393 million and net debt was R$8,681 million, up from R$8,212 million in 2018. Management reported net debt to EBITDA of 2.87x. Loans and debentures due in 2020 totaled R$1,117 million before estimated interest; the filing gives R$1,532 million including estimated interest. The 2019 balance sheet also recognized R$1,589 million of lease liabilities under IFRS 16; these are distinct from the stated net-debt measure.
Material changes and segment performance
- Ipiranga: Revenue decreased 1%; fuel volume fell 0.8% to 23.5 million cubic meters, including a 3.6% decline in diesel. Adjusted EBITDA rose 18% to R$2,428 million, supported by cost reductions, tax credits and IFRS 16 effects, partly offset by lower volume.
- Oxiteno: Revenue fell 10% and volume fell 5% to 734 thousand tons. Adjusted EBITDA decreased 67% to R$208 million; operating income before financial result and equity-accounted results turned to a R$26 million loss. Lower product prices and sales, and the absence of substantial 2018 tax-credit benefits, weighed on performance.
- Ultragaz: Revenue increased 1%, while volume decreased 1% to 1.706 million tons. Adjusted EBITDA rose to R$571 million from R$258 million, including the absence of the R$286 million Liquigás transaction break-up fee recorded in 2018, as well as improved margins and IFRS 16 effects.
- Ultracargo: Revenue rose 10% to R$541 million, reflecting expanded Santos and Itaqui capacity and higher productivity. EBITDA fell 10% to R$161 million, including the R$65.5 million provision related to the Santos fire settlement and start-up costs.
- Extrafarma: Revenue grew 2%, but EBITDA was negative R$570 million versus negative R$47 million. The principal unusual item was a non-cash R$593 million goodwill impairment; store closures, competitive pressure and store maturation also affected results. The chain opened 29 stores and closed 46.
Outlook, risks and unusual items
- COVID-19 (developments after year-end): Management said the pandemic’s full impact could not be quantified. It expected lower fuel and LPG revenue, increased customer credit losses and payment delays, and possible weakness in specialty chemicals demand. The filing noted reduced fuel demand in late March 2020 and significant volatility in exchange rates, commodity prices and credit markets. The December 2019 impairment and credit-risk assessments do not incorporate the subsequent pandemic effects.
- Liquidity and investment response: In March and April 2020, Ultrapar and Ipiranga obtained R$1.48 billion of additional, fully funded financing with approximately one-year maturity to strengthen liquidity. The original 2020 investment plan of R$1.771 billion was cut by approximately 30% on April 1; the filing does not state a definitive revised total and says it could be adjusted further.
- Other principal risks: Ipiranga and Ultragaz rely heavily on Petrobras for fuel and LPG supply; Oxiteno relies on Braskem for Brazilian ethylene. Other material exposures include Brazilian economic, political and currency volatility; competition and fuel-market informality; commodity and input-price swings; regulation and environmental liabilities; and access to financing. The Real depreciated 4% against the U.S. dollar in 2019 and a further 35% through April 23, 2020.
- Contingencies: Provisions for tax, civil, environmental, regulatory and labor risks totaled R$925 million at year-end. Additional proceedings assessed as possible, but not provided for, involved R$2.84 billion. For the 2015 Santos terminal fire, Ultracargo recorded a R$67.5 million conduct-adjustment agreement and agreed to a further R$13 million social-project payment; negotiations over other alleged environmental damages remained open and could require additional, unprovided payments.
- Accounting and controls: IFRS 16 was adopted prospectively in 2019, adding right-of-use assets and lease liabilities without restating comparatives. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management reported that a material weakness identified in 2018 had been remediated by year-end 2019.
- Dividends: Ultrapar declared R$479 million of 2019 dividends, including R$124 million from prior-year reserves; reported dividends per share were R$0.44. A further R$261.5 million, or R$0.24 per share, was approved in February 2020 for payment from March 6 onward.
No specific 2020 earnings or revenue guidance is provided; management emphasizes uncertainty around the pandemic and its effects.
Most important facts for investors to verify
- Whether COVID-19-related volume declines, customer delinquencies and working-capital pressure persisted, and the resulting impact on cash generation and covenant headroom.
- Whether the R$1.48 billion of short-term financing was repaid, refinanced or replaced, and how cash, net debt and lease obligations evolved.
- Whether the impairment and operating losses at Extrafarma indicate further impairment risk or a sustainable path to improved profitability.
- Whether Oxiteno’s lower sales and margins recovered, and the sensitivity of results to ethylene supply, input costs, foreign exchange and demand.
- The status and potential cost of remaining Santos fire environmental claims, and the outcomes of the R$2.84 billion of possible-loss proceedings.
- Whether dividend payments and the reduced investment plan remained consistent with liquidity needs and debt covenants.