André Pires - Chief Financial and Investor Relations Officer.

Bruno Montanari - Morgan Stanley Frank McGann - Bank of America Merrill Lynch Luiz Carvalho - UBS.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar Second Quarter 2018 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br, and the MZiQ platform. Please feel free to flip through the slides during the conference call.

Today with us, we have 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] 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 the beliefs and assumptions of Ultrapar's 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. Pires. Mr. Pires, you may begin the conference..

Thank you and good morning, everyone. It's a pleasure to be here with you to discuss Ultrapar's second quarter results and to give you some perspectives on the next quarters. Here with me are the officers from our businesses as well as our Investor Relations team to help answering your questions.

I'd like to start with an overview of the events since our last call, Slide number 3.

Earlier this week, on Tuesday night, we published a notice to the market regarding the operation called control margin, this is an investigation involving employees of share distribution companies including Ipiranga, in the state of [indiscernible] state of Paraíba, whereas [indiscernible] the facts in order to take the necessary and applicable measures.

Also on Tuesday, we were informed of a criminal complaint filed by the public prosecutor of Brasília against resellers and employees from the distribution companies, among which there are 2 former employees of Ipiranga for a list of criminal acts against the economic order.

These matters have been conducted by our legal team and any update about this cases will be truly communicated to the market. Talking about our results, the quarter began with a good prospects for business. In April, we observed an increased in fuel sales volume particularly ethanol and diesel were than both gradually decreasing.

However, an increase of 18% in oil prices combined with a 17% devaluation of the real against the dollar were the triggers of a truck driver strick in May, which brought the country to a hold, impacted several sectors of the economy and causing huge losses to Brazil.

The country's logistics infrastructure is heavily dependent on road transportation, hence the strike affected almost all our businesses. At Ipiranga during the stoppage, due to the blockage in our distribution basis, we had difficulties to deliver our products.

They also impact in our other businesses, affecting the delivery of LPG at Ultragaz, speciality chemicals at Oxiteno and pharmaceutical products at Extrafarma. On top of this, there was a significant reduction of BRL0.46 per liter in the price of the diesel, which had an impact on margins during the period, during the accounting loss on inventories.

During the presentation, I will point out the strike-related losses, which totaled about BRL200 million, bringing BRL100 million in the second quarter alone. In slide 3, you can see the graph showing [indiscernible] for GDP deteriorating after the strike, jeopardizing the recovery in [indiscernible] economy expected for the second half of 2018.

The data on fuel volumes for the country as a whole, showed the impact caused by the strike on the fuel distribution market, our core target of the strike. The graph in the top right-hand corner illustrates the intensity of the impact caused by the fuel terminals lockout, which prevented the fuel distribution.

The magnitude of decline in volumes from May was enough to offset the accumulative growth up until April. Notwithstanding, we reported net revenues of BRL22.6 billion less than, higher than the second quarter of 2017 and [indiscernible] of BRL718 million, a 6% decline compared with the second quarter of 2017.

Based on the impact of the strike on the second quarter results was BRL189 million. If we exclude this effect our adjusted EBITDA would have been BRL907 million, 18% higher compared with the same period of last year, driven mainly by results from Oxiteno, Ultracargo and Ultragaz.

Net income came to BRL241 million, 2% increase over the second quarter of 2017, equivalent to BRL0.44 per shares.

In this quarter, the board approved the distribution of BRL304 million in dividends for the first half of 2018, equivalent to BRL0.66 per share, which corresponds to a payout ratio of 97% or 61%, if we consider net income excluding the time related to the Liquigas acquisition.

Let's now move on to slide #4 with the performance of our fuel distribution business, Ipiranga. Sales volume in the second quarter of 2018 reached 5,859,000 cubic meters, a 1% reduction compared with the second quarter of 2017. With a 7% drop in Otto cycle, and [indiscernible] in diesel.

Both fuels were [indiscernible] by the strike, due to the blockage of our distribution terminals. This resulted in an estimated impact of 4% in our sales volume. The strike effect was partially mitigated by the expansion of our service station network, and by higher sales to the large consumers.

It is worth mentioning that there was a positive trend at the beginning of the quarter according to the graph in the top right-hand corner of the slide, confirming our previous perspective for growth in volumes. We ended the quarter with a 8,044 service stations, a net addition of 301 stations in relation to the second quarter of 2017.

During the period practically BRL2 million transactions were [indiscernible] of our tax saving, an increase of 150% compared with the first quarter of 2018. While the average number of active participants rose 126% compared with the same quarter.

The am/pm convenience store chain launched an exclusive line of the search with its own brand and [Indiscernible] premature. The am/pm stores are now installed at 31% of our service station network, while the number of bakeries and Beer Caves increased by 19% and 22%, respectively year-over-year.

Finally, of the economic visible targets of our loyalty programs, program register a records penetration with the accumulation of 22% in points of all transactions that happens in the quarter, with the number of participants reaching 28 million people.

The finance of the growth was significantly affected by the strike, but [Indiscernible] cost reduction in [Indiscernible] drivers produced a onetime loss of BRL 120 million on inventories in the quarter.

[Indiscernible] major one-off costs [Indiscernible] of operation, making an impact of BRL 4 million, given a negative effect of BRL 162 million [indiscernible].

On the other hand Ipiranga [Indiscernible] second quarter of 2018, it's currently expenses related to the consolidation of Iconic's results where they're stable comparable to the same period of last year, shown the results of increased focus on expenses going forward.

As a consequence, Ipiranga posted an adjusted EBITDA of BRL 402 million in the second quarter of 2018, a year-on-year reduction of 29%. If we exclude the impact from the strike, recurring adjusted EBITDA would have been tropically flat year-on-year.

Moving now at the current quarter, [Indiscernible] continues to be challenging, as a result of recent changes caused by the strike and the slow recovery of the economic environment. These factors reduce the visibility regarding the future performance.

Therefore, in the short term, we do not expect a significant evolution in our results, despite our recent improvement in market share. Despite the short-term challenges, we continue to believe in the good fundamentals of the fuel distribution sector in Brazil. In this sense, we're adjusting our cost and expenses and focusing on productivity.

In addition, we have been working on the optimization of working capital in order to improve the return on capital employed in our business. We also continue to focus on improving the relationship with our resellers, prioritizing their first and start up of operations at service stations are very contracted.

We're more selected in our investments, seeking the best profitability in face of the current market conditions. Moving onto Oxiteno in the Slide #5.

Oxiteno's total sales volume in the second quarter of 2018 was 193,000 tons, a growth of 6% compared with the same period of last year, largely due to greater sales volume of commodities, which increased by 31%.

Specialty sales volume were up by 1%, again in relation to the same period of last year, due to higher sales in the U.S., despite lower sales in the domestic market due to the strike. During the strike, Oxiteno temporarily ceased operation at 4 production facilities in the Southeast regions in Brazil.

Even the impossibility of delivering products, there is an estimated loss of 6,000 tons in volume. [Indiscernible] EBITDA in the second quarter of 2018 was BRL 121 million, 90% higher than the second quarter of 2017, which show exclusive nonrecurring effects in the second quarter of '17, and the impact of the strike.

This positive performance reflects the higher sales volumes, as well as the 12% evaluation in the real against the U.S. dollar, and higher EBITDA margins in dollars. The combination of these events more than compensated the impacts caused by the strike, estimated in BRL13 million. The EBITDA margin during the quarter was $174 per ton.

The new plants in the USA is in the process of, to being commissioned and ready to begin operations. This should help dilute cost and expenses during the second half of 2018. In addition, Oxiteno continues to focus on innovation [Indiscernible] new specialty chemicals on the market, notably [Indiscernible] of [Indiscernible] and personal care.

In addition, Ultrapar was recognized as one of the leaders in innovations of the [Indiscernible] by the newspaper Valor Econômico. Oxiteno also stands out for its operational excellence and received the global award from Shell, as the best performing company in the use of catalyzers.

Looking to the quarters ahead, we can observe that the factors that had positively impacted Oxiteno's results remains unchanged, which makes us believe in the continuous expansion of Oxiteno'sEBITDA.We recall that specially the third quarter is seasonally stronger in volumes. Now moving onto Ultragaz in slide number 6.

In the second quarter of 2018, volumes remained stable in relation to the second quarter of 2017. The bottle segment grew 1%, mainly due to the commercial initiatives, particularly in the Northeast and Midwest regions of the country.

This effect was neutralized by a 4% decrease in the bulk segment, which was the most affected by the strike, due to logistical difficulties in the distribution products, in distributing products.

EBITDA at Ultragaz rose 23% in the period, reaching BRL148 million, as a result of our management team committed to operational efficiency and low cost, beside the continues focus on differentiation and innovation. Examples of [Indiscernible] reduction in freight costs with the migration of clients from [Audio gap] types CIF to FOB.

Additionally, marketing expenses and expenditures [Audio gap]. On the other side, the strike had an estimated impact on Ultragaz of BRL10 million, due to the estimated loss of 7,000 tons in the volume in the bulk segment. For the current quarter, we are expecting volumes to be similar to those in the same quarter of 2017.

For EBITDA, our perspective is for another quarter of growth, due to the results of commercial and cost management currently underway. Now let's now go on to talk about our liquid bulk storage business in slide number 7.

Ultracargo's average, storage average increased by 8% in the second quarter of 2017, this was due to the partial resumption of activities at the Santos terminal in June of 2017, and the greater handling of ethanol at the Santos and Suape terminals. In the quarter, Ultracargo's EBITDA was BRL54 million, an increase of 108% year-over-year.

[Indiscernible] average storage over the period [Audio gap] at the terminals. In addition, we had some recurring effects both in the second quarter of '17 and second quarter of '18. If we exclude these effects, growth would have been 20% due to higher average storage and prices at the terminals, as already mentioned.

For the third quarter, we expect similar levels of average storage in EBITDA in relation to the third quarter of 2017. In this context, I would remind you that the comparisons between the third quarters will no longer include any significant effects related [Indiscernible] at the Santos terminal.

Let's move on to slide number 8, and let's talk about our pharmaceuticals business, Extrafarma. Extrafarma recorded a 19% increase in the number of drug stores. And ended the second quarter of 2018 with 406 stores. A gross addition of 86 stores over the past 12 months.

At the end of the quarter, 54% of the stores have been operating for less than 3 years compared with 47% in the second quarter of 2017. This reflects the increasingly, increasingly rapid expansion of our network.

Gross revenues increased 16% over the second quarter of '17 with 70% growth in retail sales, resulting from the larger average number of stores, the annual readjustment in pharmaceutical prices and the more intensive pace of promotional activity.

In June 2018, Extrafarma installed and newly PU system for improving productivity and better inventory management at the distribution centers and stores, with the addition to provide a better shopping experience for our customers.

The implementation and stabilization phases of the newly PU system caused the truck driver strike, which impacted operations in [indiscernible] the receiving in delivery products, had an estimated impact of of BRL 7 million on the results.

Therefore, the margin number of maturing stores and the nonrecurring effects related to the implementation of the new retail system and the strike, resulted in a negative EBITDA of BRL 7 million in the quarter.

Excluding the effect of the new stores and nonrecurring events, EBITDA would have been BRL110 million in the second quarter of '18, when compared with an EBITDA of [indiscernible] in the second quarter of 2017.

For the current quarter, we are projecting similar growth rate in revenues together with an impact on EBITDA, due to the network expansion and increased number of maturing stores as well as the one-off effects of the stabilization of the new system. Going now to Slide number 9.

In this last slide, I would like to comment on some actions and initiatives we are taking in order to ensure the recovery and strengthening of the company, as well as mentioning our priorities for the second half of 2018 and 2019. [indiscernible] despite the short-term challenges, we continue to believe in the good fundamentals of this sector.

In this sense, our focus is on the commercial and operational management in line with the current market conditions. We are adjusting our cost and expenses focusing on productivity. In addition, we have been working on the optimization of working capital, with the objective of improving the return on capital employed in our business.

We also continue to focus on improving our relationship with our sellers, prioritizing the support and customer service. Maintaining our strategy of differentiation and the organization of services and [indiscernible] at the service stations.

Ipiranga has a [indiscernible] platform of convenience businesses for facility [indiscernible] consumers daily routine and mobility. At Oxiteno, as already mentioned, we will initiate the production at the new plant in the U.S., contributing to improvement of profitability.

As you know, since last year, we have been working on the commercial front through premarketing to accelerate the plant to ramp-up phase, closing the first half of 2018, and then annually. Our value represents around 30% of the [indiscernible] capacity. Again, the recent devaluation of the real [indiscernible] the returns from this business.

At Ultragaz and Ultracargo, our intention is to maintain the focus on operational efficiency, while at Extrafarma, we are strengthening the businesses foundations for growth with the implementation of the new retail system.

On CapEx, we've been more selective in decisions we make on investments [indiscernible] the discipline in the allocation of capital, [indiscernible] better returns. Prior to this, we have been working on some initiatives to reduce working capital and increase control of cost and expenses in an effort to strengthen our cash generation.

We have resilient businesses and positions of leadership in the market in which we operate. We are confident that we are taking the necessary steps to return to growth pace of our results, always looking to improve generational value for our shareholders. With this, I conclude what we have prepared for you today.

I'd like to thank you all for the attention and would welcome any questions you may have. We can now begin the Q&A session. [Technical Difficulty].

[Operator Instructions] The first question comes from Bruno Montanari with Morgan Stanley..

Thanks for taking my questions.

Andre I just want to double check something, you mentioned, you, if I understood correctly, that you do not expect major improvement in margins at Ipiranga despite gaining market share, just wanted to understand this, this is a result of Ipiranga, perhaps, doing the margins with existing customers? Or is this a changing mix more towards the clients and the TRRs? And also, could you give us an idea of what is the margin distinction between retail and large clients on a percentage base or on a nominal base? That would be super helpful..

Bruno, basically, thanks for the question. Basically, what we, I mean, we are observing at this point is that, the impact of the strike are still somewhat in the market, all right? So it's very difficult to have the right visibility to try to have a very correct expectation in terms of the evolution from now on.

It's not a question about positioning in the market, it's a question that the market is under pressure, especially after the strike. As I mentioned in my call, we came in to the second quarter with very, let's say, very positive impressions at the beginning of the quarter in terms of volume and in terms of margins.

And obviously, the strike created a big impact in the quarter. So you came out of the quarter with, let's say, we have different scenarios in terms of competition and difference scenarios in terms of margins as well. So that's why we don't see much evolution in the short term at this point, right.

Obviously, we're going to work towards a normalization of debt, as the impact of the strike starts to dissipate. We have to take into consideration, obviously, that the price of diesel is too frozen at the refinery, so this is something that has an impact in the market.

As for the mix, we have major change in the mix, basically, you saw very good volumes for Ipiranga especially in the B2B side.

This is due to, let's say, the efforts we have been making to maintain some of the customers with somewhat loss in the next couple of years, especially, during a period where you had a very tough competitive environment for diesel because of imports.

As you know most part of the imports came more for diesel than gasoline, and therefore, on the B2B side, which is more diesel, the competition was tougher.

And last but not least, the difference between a B2B customer, or, for example, the margins, or the B2B margins versus the margins in the [indiscernible] is around 40%, but this is the same historical level that we have been observing over the years..

All right. And just a pre-follow-up. When you mentioned still intense competition. I understand that imports are no longer coming or are not coming at the same level of margin into they were before.

So is the competition between the well-established players? Or is the competition still with the white flags?.

No, imports are not, currently are not, at least not coming on our relevant way to the market. The competition, this is a very competitive market, so it's within everybody, and especially when you have in the case of diesel, a price that is somewhat frozen, the competition remains and the market becomes more rationale, let's put it like that..

The next question comes from Frank McGann with Bank of America Merrill Lynch..

If I could follow up on that question, I think, Ipiranga is probably the area where the most focus should be probably, in terms of the competitiveness of the market, I mean, it's been competitive like you said for a long time.

It seems to be coming more competitive and I don't know if that's because of the franchisees are demanding more from you before or perhaps some other players as well? Is it because, there's more stability in the market, it's perhaps a more, somewhere more open market because imports can be a competitive threat.

It's [indiscernible] if you could discuss that a bit and then secondly, when you're saying that, results are going to stay, continue to be impacted, are we talking about results staying, more or less, to the reported numbers for the second quarter, in line with that level or maybe a little bit better? Or are we talking about the adjusted number, taking out the strike effects of, and thinking that the results will stay at that higher level?.

Well, thank you, Frank, thanks for your question.

The market, I mean the competition of the market is very much related to the fact that, one, you have a frozen price at the refinery gate, which makes it difficult to expand margins on that particular situation, and two, a market where, what we had seen over the years, is more challenging economic scenarios with less opportunity to grow volumes, and also, in a sense, lower disposable incomes.

So it becomes more competitive because the volumes are not there. I think that's, let's say, a very quick summary about what we do see.

In terms of the evolution of margins and volumes, I mean, it's difficult to say, I would like to be so precise in terms of how we're comparing to, but basically, when I say evolution is improving from now on is what I'm trying to say, this is more challenging, but again, the visibility is very low.

And although the strike has ended more than a month ago, I think the impacts of the strike are somewhat still there.

So it's going to take some time to dissipate even though economic activity as you probably been observing, the economics activity has been come back to normal after the strike, I mean there was a big, this was a big dent in the expected recovery of the economy in Brazil.

But certainly that is important on that front to mention when we talk about the way the market is structured right now is what we are doing in terms of focusing the treatment of our capital allocation and improving our return on invested capital.

I mean, I talked about on the speech, we've been very selective on our CapEx approach but not only that, optimizing our working capital and others area of focus that we are doing, and last but not least, we are accelerating the inauguration of the gas stations that had already been contracted by Ipiranga, especially over the last quarter, the last quarter of 2017, which, let's say, we already contracted, already signed but this is one of the reasons we're not operational.

So we are speeding up this process very optimistic about that and bare in mind that those are investments that have already been expensed, have already been done. So basically this should contribute towards the end of the year for better volumes for us.

And also should in a way keep our focus on maintaining our leadership position in terms of market share..

Okay.

And in terms of like the third quarter, I know it's early to target a EBITDA number, but are you thinking it's going to be closer to the reported number of BRL402 million that you had in the second quarter this year? Or could we see a recovery that closer to the first quarter levels and then stabilize there?.

Frank, I'll get to that. I mean, it's, I mean, I cannot give you a more precise estimate at this point..

Okay. Thank you..

[Operator Instructions] The next question comes from Luiz Carvalho with UBS. Please go ahead. .

Hi there. Thank you for taking the question again. And the after reporting this call. Just quick, 2 quick follow-ups. The first one, a follow-up on a previous question, regarding imports. Just checking, did you have any impact? Or any gain from imports during the second quarter? And the second question is more about the leverage.

You mentioned in the Portuguese call that, I mean, the current leverage are close to 2.6x, 2.5x, I now that at the beginning it's not that comfortable, and of course, that we do see some, I'll say, nonrecurring impact from that front.

But how do you see the [indiscernible] let's say, a lower CapEx? And potentially also lower cash generation, the leverage is coming down over the next couple of quarters? Do you have any, I'm going to say, mid-targets or mid next year, late this year in terms of leverage? Thank you..

For the first question related to import gains, this was negligible. I mean, the number was very small in the second quarter. So completely negligible.

Now in terms of, can you repeat your second question again, it was about leverage?.

Yes, sure, in terms of leverage, I mean, you mentioned during the Portuguese call that the current net debt-to-EBITDA leverage is not comfortable or not where the company wants to be, right? And, I mean, you mentioned that your nonrecurring CapEx, as you announced earlier this year, are over the cash generation now, also could be lower, right? So the EBITDA could be lower.

So how do you see the deleveraging process bringing the leverage back to, I don't know, 1.5x, 2x, over the next quarters? Do you think that, do you have any internal target, that you can share with us?.

Thanks. Basically, all of measures that we have been taking in order to bring back this number, we don't have a target, but basically that, our objective is to be between 1.5x and 2x net debt-to-EBITDA. And then basically, I think the main and most efficient through is the most likely then on our CapEx process.

As I mentioned in the call, the call in Portuguese, not all of it being selected but also using all the methods of bringing businesses to them especially, for example, looking at a more, let's say, earn outside of bonuses for resellers rather than the finance bonuses, which have been the norm for Ipiranga.

Using third-party balance sheet is a way of financing, for example, our resellers. And therefore, working both on the CapEx and in working capital as well, as we need to improve our operating cash flow generation, and therefore, consequently, reduce our leverage.

Obviously, there is an expectation in the next 12 months of a better EBITDA than in the last 12 months, because in the end, we have some important impact especially if you take into consideration the time period for the loan acquisition of EBITDA.

But all in all, I mean, our focus is on the selectivity of investments and moving other methods of investments and optimizing working capital in order to improve or generation of operating cash flow..

This concludes the question-and-answer session. At this time, I'd like to turn the floor back to Mr. Pires for any closing remarks..

Well thanks everybody. Thanks for your attention and participating in our call. As always our IR team is available to answer your call or other questions you might have. And I hope to see everybody again on our next call for the third quarter results. Thank you very much and have a good afternoon. Bye-bye..

Thank you. This concludes today's Ultrapar Second Quarter 2018 Results Conference Call. You may disconnect your lines at this time..