Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar’s Third 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 MZiQ platform. Please feel free to flip through the slides during the conference call. Today with us, we have Mr. Andre 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 and all participants will be in listen-only mode during the company’s presentation. After Ultrapar’s remarks are completed, there will be a question-and-answer session, at that time, further instructions will be given. [Operator Instructions] We remind you that questions which will be answered during the Q&A session maybe posted in advance and on 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 the beliefs and assumptions of Ultrapar 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 your conference.

Thank you very much. Good morning, everyone. It’s a pleasure to be here with you to discuss Ultrapar’s third quarter results and to give you some of our perspectives and priorities for the next quarters. Here with me are the officers from our businesses, as well as our Investor Relations team. Starting with Slide number 3 and talking about Ultrapar in general. During the third quarter and following the truck drivers’ strike, we noticed a slight improvement in the economic scenario despite continuing high levels of unemployment around 12%, and increased inflation seen here in Slide number 3. With the conclusion of the recent elections and the definition of the new members of the executive and the legislative branches, we believe that there will be a more favorable environment for discussing the necessary reforms and adjustments for a resumption in Brazilian economic growth. Moving on to Ultrapar’s results in the quarter. Net revenues reached BRL23.8 billion, 17% higher than the third quarter of 2017. EBITDA was BRL850 million, a reduction of 30% over the same quarter last year due to a decline in EBITDA at Ipiranga and Extrafarma. Compared with the second quarter of 2018, however, EBITDA increased 18% due to better performance of our businesses in general, indicating a consistent and important recovery in Ultrapar’s results after the strike. Net income was BRL323 million, 41% below the third quarter of 2017 due to reduced EBITDA despite an important reduction in financial expenses. In relation to the second quarter of 2018, net income increased by 34%. Ultrapar ended the quarter with a net debt of BRL9.2 billion and leverage of 2.9 times net debt to EBITDA, again mainly due to a reduction in EBITDA over the past 12 months, which were impacted by the breakup fee related to the Liquigas…

Thank you. The floor is now open for questions. [Operator Instructions] And the first question will come from Frank McGann of Bank of America Merrill Lynch.

Well, thank you. Thank you, everyone, very much. Couple of questions, really, if I could. One, just in fuel distribution in Ipiranga, I was just wondering how you’re thinking about growth going forward, because clearly, the world has changed a lot, as you’ve said, it’s been a very difficult year for a number of reasons beyond your control, but the market itself seems to have changed a little bit. And particularly, with imports having become more important, it seems to be even lower than with the – declined some and I know that could be a bigger factor in the market going forward. Considering how you are thinking about the different factors that have driven your growth historically, whether it be the – adding new stations, the growth in the vehicle fleet and then the conversion of white-flags, how are you seeing each of those factors and other factors that could drive growth at Ipiranga going forward? And then secondly, in Oxiteno, it’s something you – this is just easy. If you could just remind us what the investment has been in the U.S. plant and what the expected return on that investment is going to be over time?

Hi, Frank, thanks for the questions. I’m going to start with Ipiranga, the fuel distribution business. Well, clearly, I think saying that 2018 has been a difficult year is kind of an understatement. It has been a very tough year and a lot of changes and especially with the truck drivers’ strike. But again, I mean, we are very optimistic on the way we are seeing the evolution after the strike. We are seeing a gradual, but consistent recovery in terms of volumes and the profitability of our business, especially when we look back right after the strike, which ended in the beginning of June. So we are optimistic about that. Going forward and looking to the future, this is a business that has a very, I would say, strong year in terms of economic recovery. So we are expecting clearly a recovery in economic activity, a recovery in GDP growth, and consequently, a decrease in employment and higher disposable income. This should benefit basically the consumption of fuel in the short term, short and medium term. This should allow the increase in sales of light vehicles, which would benefit the growth in terms of the fleet. And therefore, we are expecting a resumption in terms of the growth of this sector. Obviously, we’re not prepared to say that this growth will go back to the levels of growth that we saw back in 2010, ‘11, ‘12, which were very positive years for this segment. But clearly, we are expecting a very healthy recovery if the economy continues to improve. In terms of the competitive environment, we believe that structurally, imports will be part, let’s say, of the source of supply in this market going forward, not obviously with the same condition, which imports had in the past few years…

Okay. Got it. Thank you very much.

The next question comes from Christian Audi of Santander.

Excellent. I had a few questions on the Ipiranga front, more specifically if you could tell us about – again looking forward, how do you see the mix evolving of Otto cycle? You touched on your comments about diesel versus ethanol, and diesel which one should have maybe better momentum versus the other? Secondly, along the same line, if you could talk about – you mentioned potentially higher volume growth. But where do you see the volume growth be, maybe more positive on the Otto cycle and on the diesel? And then thirdly, on the – as a result of these SG&A improvements, you mentioned margin evolution. I was just trying to get some color from you on how quickly this margin could continue to improve. For example, I don’t know, if October numbers were in line with what you saw in the third quarter or you already saw a little bit of an improvement. But how quickly do you expect margins to improve from the levels that we saw in the third quarter? Will it already happen in the fourth quarter or is it more a 2019 event? So any color on that dynamic of evolution would be very helpful, please?

Hi, Christian, thanks for your questions. Well, starting with Ipiranga and the mix, well, basically, again, I mean, assuming that economy continues to recover, obviously, there is a very positive year on diesel consumption take into consideration, let’s say, that we see the economy picking up. So diesel has a positive year versus GDP, that is very clear, and you can see that when we see, let’s say, the GDP improvement. In terms of, let’s say, Otto cycle, ethanol versus gasoline, I think what we had in the past few months or few quarters was an unusual growth in ethanol versus gasoline due to the absolute level of prices of gasoline and ethanol. So clearly, we’ve reached the situation where the, let’s say, the absolute price per liter of gasoline was, let’s say, substantially high and therefore, there was a drive towards ethanol as a way to save, obviously, for people that were going at the service stations, going at the plant. Those 2, let’s say, talking about Otto cycle, if we assume that economy continues to improve and we see improvement in terms of disposable income, this should benefit Otto cycle volumes and should benefit, obviously, the growth in the average fleet, which has happened. The consumption of the sales of light vehicles have been improving this year, all of this year, month-after-month. And in terms of fuel consumption, the improvement was not immediate, especially because of the level again of low disposable income and at the absolute prices at the plant, which also impacted the consumption levels for fuel in general. Now what we assume as positive as well is the fact that if the real appreciation and with some drop of international prices, this tends to have a very positive impact in terms of demand, right, as prices somewhat are trading down. In that situation that we are going through right now, we should see improvement in demand and this improvement in demand should also generate improvements in terms of the profitability of our business. In terms of margins in general, sequentially, as I mentioned, we’re seeing improvements of margins between, I would say, the months within the third quarter. So July was a very tough month, August was better than July, September was better than August. And clearly, you see the level of margin in the fourth quarter of 2019 better than the third quarter of 2019. So on a sequential level, our estimate is a better fourth quarter versus the third quarter of 2018.

And this evolution to your point, now this has been – as we look – because you saw those close to BRL80 level, right, in the third quarter, a little bit below that. So we could expect that to improve into the fourth quarter as you’re seeing and looking out to 2019, expect a level even higher than this BRL80 or maybe stabilizing at these levels? What’s your read based on all you can see right now?

Yes. The way we see i, Christian is that the level in the fourth quarter of ‘18 should be better than the third quarter of ‘18. And then also on a sequential level during 2019, we should see improvements from the fourth quarter of BRL80 as well. And so our expectation today is an improvement. Obviously, we have second – first quarters normally are seasonally weaker than third and fourth quarter as you know in this business, but the trend is positive sequentially. And again, obviously, this is what gives us confidence to say what I said in the speech that we’re expecting a 2019 with a significant improvement in results at Ipiranga.

Got it. And then on the opening of storefront, can you tell us a little bit given the adjustment in CapEx that you had made previously, what – how do you see the evolution of conversions for the fourth quarter and into 2019, please?

Yes. The focus is not necessarily number of service stations that we are opening, but more on the selectivity and the quality of the service stations that we are opening, one. And two, the focus is well on being very effective in terms of the capital allocation methodology by focusing more on, let’s say, rebate model versus the traditional signing bonuses that we use to pay to our resellers. Obviously, we’re not giving up on the signing bonuses. If there is, let’s say, a business that will bring good returns to us, we will consider the signing bonus as well, but we are, of course, somewhat towards the rebate model. I think – so we don’t have a goal in terms of number of service stations that we’re going to open in the next quarter. But what we can say is that we are focusing as well on inaugurating service stations that have somewhat been contracted for before 2017 and have not been inaugurated so far. So only in 2018, we have inaugurated 140 service stations that has already, as I said, been contracted for before, some of them already been paid by before. So the focus is to – and we have in this, let’s say, carryover of service stations, another 300 stores in that situation that we are going to, let’s say, focus rather than necessarily signing new contracts, if you know what I mean.

Yes, yes. Understood. Just to finish up. Given this focus on a higher return, can you just share with us what do you think the return on capital employed might have been for the third quarter? And how do you see that number evolving into the fourth and into 2019 as a whole, because historically, you’ve always done a good job in that improvement in the ROIC, but can you give us a little bit more color on that, please?

Christian, we see that, let’s say, an inversion in terms of return on invested capital for Ultrapar and for Ipiranga going forward. Probably in the third quarter – the second and the third quarter, sorry, are at the bottom in terms of return on invested capital. As you know, if you look historically, our return on invested capital at Ultrapar has been in the last couple of years around 16% –15%, 16% consolidated, right, for Ultrapar as a whole. And we see this number to-date closer to 10% and going back to those levels in the next couple of years. This is our objective, taking into consideration what we see, let’s put it like that, as well as, let’s say, medium to long-term plan. So the 16%, 15% levels we achieved in the last couple of years. We are having a deterioration now, but we – I mean, we have plans to go back to those levels in the next couple of years. And this is the same for Ipiranga. Ipiranga has been consistently above 20% in the last couple of years. We’re now below that and we’re seeing that, again, plans to go back to the 20% level in the next few years.

Great. And the last question, can you just remind us what your CapEx, when you adjust it, was for the whole year and where you realistically think you might finish the year, Andre?

Christian, our original budget the one that we announced in the end of 2017 was a CapEx of BRL2.7 billion. I would say that the number should be significantly lower than that, probably more than 30% below this number.

Okay, great. Thank you very much.

The next question comes from Regis Cardoso of Credit Suisse.

Hi. Hi, Andre. Hello everyone, have a nice day. I wanted to – I was here into the call, I wanted to bring some of the topics we discussed earlier in the conference call in Portuguese. Three quick questions. One is, it seemed to me that there was a confusion about margins as how would they have come down relative to the previous quarter, second quarter ‘18, if you were to adjust the second quarter for the impacts you highlighted from the truckers’ strike? In our view, that is because of your inventory gains that impacted both quarters whereas for the current quarter, fourth quarter, we might, on the contrary, have inventory losses. So if you can, Andre, please comment on that? The second topic would be about the portfolio of businesses and particularly how do you see growth avenues in the medium and long-term, so looking beyond to 2019, and that is particularly in light of the acceleration of closures in the drug store business, Extrafarma, the recent investments abroad in Oxiteno and the tougher environment in the fuel distribution, where M&A is clearly, I mean, it seems not to be an option anymore. So I mean, how do you see it? Are you considering divesting drug stores? Are you considering accelerating expansion in outside Brazil, how do you see it? And third topic, if you could provide us an update on the many different risks that I believe most of them are under control, but nevertheless if you can share with us which you think might be more relevant or more imminent in terms of public hearings for regulatory changes, investigations in the state of Parana, and particularly the recent settlement by a competitor of Ipiranga with the antitrust in the state of Minas Gerais? Thank you.

Well, starting – Regis, starting with the margins, I think it’s very difficult for you to make a clear comparison between a quarter such as the second quarter, which was very atypical because of the truck drivers’ strike with for several other quarters. Again, just trying to help you out there in terms of making the correct assessment of our results. Second quarter of 2018, we have a very strong beginning of the quarter, April and the first couple of weeks of May, with prices going up, but also volumes going up and therefore, the profitability of the business is improving significantly. And then obviously, it came to a halt with the truck drivers’ strike. I think it was specifically May 21. And then when you look at to the numbers, I mean, the impact of the strike, part of that was obviously due to inventory loss when the government decided to reduce the prices of diesel at the refinery gates, but also another strong impact of the strike was the slowdown of the businesses and, of course, the number of days that we started without selling a single drop of fuel because of the blockages. So if you take – if you try to quantify all that and compare with the third quarter of ‘18, I think it’s a rather difficult exercise. In terms of the third quarter of 2018, obviously, there was some positive impacts by the price increase of diesel that was valid from September 1 on. But what I have mentioned and I’d like to repeat is that this impact was completely neutralized by some other expenses such as I would say tankage expenses related to take-or-pay contracts. So if you combine these 2, it comes to 0, right? So that’s a good way to understand…

Thanks. And if you can also comment on your portfolio trend?

Yes, there was a second question, sorry, Regis. Well this – I mean, basically – well, first starting with Extrafarma, as I mentioned in the call in Portuguese, we’re very confident with the current strategy of Extrafarma. We basically adjusted the strategy by, let’s say, reducing the pace of stores opened, but not moving up on the organic growth strategy. We are focusing on increasing the density of our stores, but also, let’s say, being less tolerant in terms of the stores that are not performing according to the business plan. We do not have any plans to divest from this investment, quite the opposite. And we believe that Extrafarma is a player in the consolidation – the potential consolidation of the drug store retail business, which is a business that should continue to grow above average, above the average growth of the economy in Brazil. And we’re very confident with the instructions that we have there. So no, let’s say no plans, let’s put it like that to get out of this business. But obviously, as we’ve done in the past, I mean, if by some reason any of our business by the way do not – if they do not perform the way we believe that they should perform, if we don’t see more potential for this business, we can always consider a divestment. So there’s no – nothing written in stone on that. But currently, our strategy there is to keep on growing organically and – but become more, let’s say, concentrated base and more on increasing the density in the store opening process.

Thanks, Andre for the very good answers. If you allow me just a quick follow-up on your first answer about the Ultrapar [ph] spot on, perfect on the expectations for increased profitability in the fuel distribution business next year. And I think that’s our expectations too. It’s probably market consensus in our numbers. Just to give you a sense, we incorporate margins of 110 next year. So my follow-up question is whether you think these previous expectations are still aligned with the current market reality or has – I mean, has the sector moved down more permanently? Thanks.

Regis, I’m not so sure what are the market – overall market expectations for 2019. Again, now from our perspective – from our point of view, we’ve seen people say in the last couple of months a consistent improvement in terms of loyalty and in terms of profitability. And this maintains our confidence that we’re going to have significant recovery in results in 2019 versus 2018.

Thanks. Thanks, Andre.

The next question is a follow-up from Frank McGann of Bank of America Merrill Lynch.

Yes, just a quick question on a detail related to Venezuela. Just wondering how much you still have on your books related to Venezuela that potentially could be a source of future write-offs, because I didn’t realize there was – let’s say it could be written off at this point?

Frank, well, 0. Basically we’ve written off 100% of our assets there. This is the residual value of the assets that were there. Obviously, the business is – the plant is not operating basically selling something that they had and inventory is still there, but we’ve written off the value of the assets. Obviously, if by some reason in the future – since this is an asset impairment, not a goodwill.

Okay. Thank you.

Our next question will come from Erika Lucchesi of HSBC.

Hi. Good morning, everyone. Thanks for the call. First – my first question is regarding Ipiranga. We are seeing a more competitive environment for fuel distribution companies and also an improvement of economies to it at low paces. I’d like to better understand, why are you seeing these improving of margins coming from and if possible, tell us a magnitude of how much of it could increase? My second question is regarding working capital. We know that it’s significantly increased in this quarter. What I’d like to understand, if there is something that the company to worry about? And just follow-up questions regarding the price fixing investigations. I would like to know if the company is considering potential fines or penalties regarding the price fixing investigations? Thank you.

Pardon me, this is the operator, I want to confirm the speaker line, are you still there?

Yes. I am here. Can you hear me?

Yes. I know you are there, ma’am. I’m trying to confirm with the speakers, they’re still –

Okay.

Conferring over an answer or if – okay. It appears we have lost connection with the speaker line. I will play phone music on the call for everyone. Please stay on line until we reconnect. Pardon me, this is the operator. Thank you for standing by. Please continue to hold while we reestablish the connection with the speakers. Thank you. We have reestablished the speaker connection. Please continue. Andre, please go ahead, when you are ready.

Yes, we’re ready to go. I mean, I will just answer the question.

Yes.

Yes.

We’re reconnected to the call. I don’t believe we heard the answer to your – to Erika Lucchesi’s question.

I didn’t hear Erika’s question anyway.

Okay. Erika, go open, go ahead.

Yes. So my first question is regarding Ipiranga. We are seeing a more competitive environment and also economic improvement is still at low paces. We would like to better understand where are you seeing this margin improving coming from? My second question is regarding working capital. We noticed a significant increase in this quarter. What we’d like to turn understand if this is something that the company is worried about? And just a follow-up question regarding price fixing investigation. We’d like to understand if the company is considering potential fines or penalties regarding these investigations? Thank you.

Hey, Erika, well, in terms of Ipiranga, where the margins are coming from, well, basically, first of all, operational leverage. So we see, I mean, if you look at volumes, volumes have been improving. If you look at diesel in the third quarter of ‘17 versus third quarter of ‘18, there is an improvement of 5% in volumes there. We also – I also mentioned the fact that SG&A is stable as compared to the third quarter of ‘17, and in addition to that, if we exclude the consolidation of ICONIC with SG&As getting down 4%. So in general terms, I mean, we see, let’s say – and obviously, the fact that there was some changes especially after September 1 in terms of the – let’s say the diesel submission program by – and frozen, let’s put it like that. The diesel prices, this has also – this also contributed and it is contributing for the profitability of the business. Talking about working capital, I mean, our – if you look at – I think what is important for you to look at that is the cash conversion cycle. The cash conversion cycle, in general, is in terms – is 2 days. If you compare our cash conversion cycle, especially at Ipiranga, we have a reduction of 2 days of cash conversion cycle between December 2017 and September 2018. Each day of Ipiranga is BRL150 million. So we’re talking about BRL300 million of improvement in terms of working capital. Obviously, when you look at the numbers in absolute terms, there is an increase since prices have increased in this period. But if you look in terms of our operating cash flow generation, we are improving our cash flow generation, right? It’s something that is important for you to analyze. Looking especially considering the fourth quarter of 2018 now, which is a quarter that normally there is a big divestment of working capital, which is seasonally the case every fourth quarter with the exception of the fourth quarter of ‘17, Ipiranga tends to reduce its inventories and tends to divest from a working capital. Our expectation for the year 2018 as a whole is that we’re going to generate a higher, let’s say, operating cash flow in 2018 versus the full year of 2017, even considering that EBITDA in 2018, as you know, will be lower than the EBITDA of 2017. So there has been a big improvement in terms of operating cash flow generation by the reduction of CapEx and by also the reduction of working capital in general. Third question about price fixing investigations, all the investigations that are currently going on are on our explanatory notes there, I mean, we are following up on that – on those investigations and we’re not expecting any major outcomes or fines on that matter.

Okay. Thank you.

And the next question comes from Lilyanna Yang of HSBC.

Hi. Thank you for the opportunity, Andre. My question is on the – also on fuel distribution infrastructure. Petrobras had plans of selling refineries with the associated infrastructure assets and it looks like these plants might be resumed soon. So we wonder if there’s any opportunities for you in trying to get a hold of specific assets or – and a similar question, if Ipiranga with maybe Ultracargo or Ultrapar will be thinking of investing more heavily in logistics, infrastructures, similarly to what we have seen happening by like one of your largest peers?

Hi, Lily. In terms of your first question, well, this process was a process that we’re – the process of selling a participation in some refineries with the associated infrastructure was launched in the beginning of the year. But obviously, a few weeks after the launch of this process – or a couple of months, I don’t remember anymore, the process was somewhat canceled due to the truck drivers’ strike. I agree with you that this is probably going to be resumed at some point. This is something that we were participating already analyzing if this makes sense to us. It’s something that we are far from having a conviction because, obviously, the process didn’t go forward. We do not have enough information to, let’s say, make a comment. Obviously, we always have an interest as part of our business. We always have an interest in terms of infrastructure on fuel distribution. Refineries is more challenging by the nature of the business. So this is something that, clearly, if this process is resumed, we’re going to be, let’s say, making a deep analysis on if this makes or does not make sense for us. But again, as I said, there’s no, let’s say, conviction at this point. In terms of investing in logistics, it’s the start of our business. I mean, Ipiranga has been investing in logistics to improve given that infrastructure capacity has been improving, let’s say, tankage capacity over the last few years and we’ll continue to do so. If we’re going to do that more heavily or not, it’s too early to say. Same is true for Ultracargo. As you know, Ultracargo has resumed its capacity at the Santos terminal. We have acquired part of the terminal that do not belong to us but also used by us and was somewhat damaged by the fire. We are improving this – [Technical Difficulty].

This is the operator. Mr. Pires, are you able to hear us?

Okay. Hello?

Yes. We can hear you now, sir.

You were not answering – hearing my question because I was answering the question. I was in the middle of answering.

Yes, sir, your line went out, cut out again. You were muted. We were unable to hear your answer.

You stopped when you mentioned that Ultracargo bought additional assets recently.

Okay, okay, so okay. So you didn’t miss much. So Ultracargo bought additional assets that were operated by us, but not necessarily belong to us. It was damaged by the fire, where we’re building the tankage capacity there and we should start operating this new capacity by mid-2019. And finally, Ultracargo is also spending its capacity in Itaqui, state of Maranhao, where we’re adding another 48,000 cubic meters of capacity that will be basically dedicated for fuel. So we are investing in infrastructure capacity. We’re not obviously allocating a lot of capital to that, but it’s something that is part of our business and depending on the way the market evolves, we can speed up or accelerate these investments.

Appreciate your prudent views on this. May I ask also if you have a target leverage for the group?

Yes. Basically, the 2.9 times that we reached in the third quarter of this year, we consider a ceiling in terms of leverage. And basically, it is important to mention that this – let’s say, this level takes into consideration in the last 12 months of EBITDA, which had a couple of very important one-offs, which were the payment of the breakup fee for the non-acquisition of Liquigas, BRL286 million [ph], and also the impact of the truck drivers’ strike of another close to BRL200 million. So it’s almost BRL0.5 billion of one-off, let’s say, items that impacted our EBITDA for the last 12 months. So looking forward, and also take into integration our expectation of significant improvement in EBITDA for 2019, I mean, now our vision is that we should start to gradually decrease our leverage going back to levels that – and are closer to our historic levels, which are between 1.5 times to 2. times, sorry, 1.5 times to 2 times net debt-to-EBITDA. We expect to reach the levels by the end of next year, end of 2019.

Okay. Thank you.

Okay.

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

Well, thank you, everyone. Thanks for your attention. Sorry for the small technical problems. Hopefully, I can see you all on our Ultra Day on November 29, which is going to take place here in Sao Paulo in a few weeks. Thank you very much. Have a good day. Bye-bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.