In 2018, Ultra underwent a profound process of reflection on its strategy with the objective of continuing its trajectory of both long-term growth and sustainability.
The revised strategic plan for each of the Company’s businesses was completed in a standardized and simultaneous manner. This facilitated a comprehensive analysis on the part of Ultra’s leadership as to aspirational (proposition, business principles and ambition), financial (company cash generation, debt and value), risk (degree of company exposure and sensitivity of corporate value) aspects and governance.
The first stage in revising the plans was an individual discussion of each business as to their respective markets, their positioning and their principal competences. A single Ultra vision was then incorporated into each of the businesses analyses and reflecting on the evolution in demographic and macroeconomic variables as well as those variables influencing commodities and technical aspects which most impact the Company.
On the basis of these analyses, a new business plan was constructed to include the strategic initiatives to be adopted for the creation of future value. For example, such initiatives include the improvement of the shopping experience at Extrafarma; the development of leadership at Ultracargo in support of the organic expansion plan; the accelerated migration to specialty chemicals at Oxiteno; the upgrading to a new level in Ultragaz’s operational model based on digital technology; and the accelerated development at Ipiranga of businesses to implement the Company’s One Stop Shopping Service Station proposal such as the Km of Advantages (Km de Vantagens) Loyalty Program and the am/pm and Jet Oil franchise networks. Following the consolidation of the plans, Ultra’s Executive Board and Board of Directors then designed a portfolio strategy broken down into guidelines for each of the businesses and for Ultrapar.
The revision in 2018 was the starting point of a new process in which the strategic business plans are from henceforth to be evaluated annually in tandem with Ultra’s budgetary process.
In parallel with their operations, all Ultra’s businesses adopt socio-environmental initiatives both to minimize the impact of their activities as well as to contribute to the building of a more sustainable society.
For instance, Extrafarma, operates a Health Services Waste Management Plan for handling the transportation, treatment and disposal of expired or damaged medications, syringes, needles and gauzes. A total of 1,182 units in the Ipiranga network were classified as eco-efficient at the end of 2018, adopting solutions for the rational use of water and energy. In turn, Oxiteno has been ISO 14001 certified since 2002 for its units in Brazil, as well as complying with the code and requirements under the Brazilian Chemical Industry Association’s (Abiquim) Responsible Care initiative. The same goes for Ultracargo, its terminals also being ISO 14001 certified and where there is a constant focus on opportunities for improving activities for reducing emissions and consumption of natural resources using a system for harvesting and reuse of rainwater. Initiatives at Ultragaz for mitigating environmental risks and reducing the impact of the operations include studies ranging from optimizing the distribution network to fleet renewal – with a corresponding reduction in emissions of CO2.
Among Ultrapar’s initiatives are those of the Ultra Formare program, where Company professionals offer their services as educators, monitors, counselors or supervisors. In partnership with the Iochpe Foundation, the program is run with the purpose of educating and inserting young people in the labor market by giving high school students access to professionalization courses – recognized by the Ministry of Education – for training as Administrative and Sales Agents. Training involves 25 hours weekly in 15 disciplines and includes visits to the Group’s businesses. Following the end of the course, the students are given an attachment in areas of Ultra’s businesses.
1) Calculation base | December de 2018 Amount (R$ 000') | ||
Net Income (NI) | 90,697,983 | ||
Operating Profit (OP) | 1,899,354 | ||
Gross Payroll (GP) | 1,387,940 | ||
2) Internal social indicators | Amount (R$ 000') | % of GP | % of NI |
Food | 122,807 | 8.8 | 0.1 |
Compulsory social charges | 446,372 | 32.2 | 0.5 |
Private pension fund | 26,654 | 1.9 | 0.0 |
Health | 159,578 | 11.5 | 0.2 |
Occupational safety and health | 14,125 | 1.0 | 0.0 |
Education | 1,235 | 0.1 | 0.0 |
Training and professional development | 14,170 | 1.0 | 0.0 |
Employee profit or results sharing | 162,971 | 11.7 | 0.2 |
Others | 103,641 | 7.5 | 0.1 |
Total – Internal social indicators | 1,051,553 | 75.8 | 1.2 |
3) External social indicators | Amount (R$) | % of OP | % of NI |
Education | 1,523 | 0.1 | 0.0 |
Culture | 165 | 0.0 | 0.0 |
Others (donations and indemnities for damages caused) | 5,927 | 0.3 | 0.0 |
Total contributions to society | 7,615 | 0.4 | 0.0 |
Taxes (excluding social charges) | 2,045,871 | 107.7 | 2.3 |
Total – External social indicators | 2,053,486 | 108.1 | 2.3 |
4) Environmental indicators | |||
Related to the Company’s operations | 47,558 | 2.5 | 0.1 |
Total environmental investments | 47,558 | 2.5 | 0.1 |
The year 2018 proved to be a most challenging one, characterized by extraordinary events such as the truckers’ strike which had an impact on several sectors of the economy and brought to a halt the recovery in the Brazilian economy and underway up to the middle of May. The outcome was a negative impact on the levels of both consumer and business confidence, a state of affairs which was only to be reversed once the outcome of the general election became clear. However, a stronger economy prior to the truckers’ strike had been instrumental in two fresh cuts of 0.25 p.p. in the basic interest rate which was reduced from 7.0% at the end of 2017 to 6.5% per annum, a rate which has been maintained since March 2018. The average dollar rate in 2018 was R$3.65/US$ compared with R$3.19/US$ in 2017, a depreciation in the local currency of 14%.
A further significant event during the year was the decision on the part of OPEC members to reduce oil production resulting in rising prices until September. From October onwards, prices fell back following the announcement of increased production in the USA and continuing high levels of inventory. By the end of the year, a barrel of oil was priced at US$53/barrel (Brent), a depreciation of 20% in the year.
As to the sectors in which we operate in Brazil, the increase in newly licensed vehicle numbers resumed during the year to total 2.5 million, a growth of 14% compared with 2017; in the market for chemical products for industrial use, Abiquim data revealed a decline of 1% in Domestic Apparent Consumption; and pharmaceutical retailing data supplied by Abrafarma members shows sales revenue rose 8% in 2018.
In 2018, Ultra posted net revenues of R$91 billion, 14% higher than 2017 and reflecting an increase in revenues at all the businesses. Adjusted EBITDA amounted to R$3.1 billion, 23% less than the preceding fiscal year due to the lower EBITDA reported by Ipiranga, Extrafarma and Ultragaz, and payment of the breakup fee following the rejection of the Liquigás acquisition early in 2018. In summary, Ultrapar delivered solid results during the year, albeit below initial forecasts. Gross profit in 2018 amounted to R$6,161 million, a reduction of 9% compared with 2017, due to a decrease in aggregate earnings and specifically earnings at Ipiranga and Ultragaz. Net earnings were R$1.1 billion, a 26% reduction in relation to 2017.
Cost of goods sold and services rendered at Ultra was R$84,537 million in 2018, an increase of 17% compared with 2017 due to growth at all the businesses.
Ultra ended the fiscal year 2018 with a gross debt of R$15,206 million and gross cash of R$6,994 million, the Company reporting net debt of R$8,212 million, an increase of R$991 million when compared with 2017. Net debt at the end of 2018 corresponds to 2.68x EBITDA over the past 12 months compared with 1.81x at the end of 2017.
Amortization profile
Ultra’s outlook for 2019 is a positive one, in line with prospects for an improvement in the Brazilian economy with a growing GDP and declining unemployment as well as expansion in household income, factors which impinge directly on the Company’s results. The commitment to operational excellence at all the businesses, the adoption of measures to reduce costs and expenses as well as the optimization of working capital – with constant discipline in the allocation of capital and a focus on cash generation – will continue being among the objectives pursued by Ultra. A further objective is to reduce financial leverage over the next few quarters thus freeing capacity for investment and prospection of both organic and inorganic investments. In short, the Company expects to see a significant increase in EBITDA in relation to 2018, principally in the light of improving results at Ipiranga and a recovery in those of Extrafarma.
In 2018, Ultra invested approximately R$1.9 billion, less than was planned and announced to the market in late 2017 due to the decision to preserve cash in the light of a challenging scenario with results impacted by non-recurring events. The truckers’ strike for example resulted in losses estimated at R$213 million while the federal anti-trust authority (Cade) vetoed the Liquigás acquisition, the Company incurring the cost of a break-up fee of R$286 million. To this should be added a further disbursement of R$84 million with respect to the Cease and Desist Agreement signed by Ultragaz with Cade in the final quarter of 2017.
The reduction in the investment budget reflects the constant monitoring of investment policy, the aim of which is to increase the selectivity of capital injections and weighted towards those which reduce risks and expand the Company’s margins. It was in the light of this logic in December that Ultra announced its Investment Plan (organic) for 2019, approved by the Board of Directors and amounting to approximately R$1.8 billion.
A total of R$824 million has been allocated to Ipiranga, half of which will be invested in the expansion of the network – with the addition of further service stations and am/pm and Jet Oil franchises – and in logistical infrastructure, which includes the construction of two fuel distribution bases and the expansion of another three. The remaining funds will be used in the maintenance and modernization of the Company’s activities, principally in renewal of reseller agreements and in information systems for supporting operations.
The R$319 million planned for Oxiteno are to be allocated largely to maintenance work and technological updating for productive units and for information systems to increase efficiency and productivity gains.
An injection of R$279 million is to be made in Ultragaz for driving the capture of new clients in both bottled and bulk gas segments, the replacement and acquisition of gas bottles, the expansion and maintenance of the filling plants as well as further investments in Information Technology.
Investments estimated at R$161 million at Ultracargo will be allocated to increasing tankage capacity by 16% in the second half of the year with the completion of expansion work on the Itaqui (MA) and Santos (SP) terminals – and the continuous improvement in safety measures and infrastructure at the units.
Investments of R$158 million will be used at Extrafarma for the continued expansion of the network (opening of drugstores), qualification of the logistics infrastructure – the construction of two Distribution Centers, one in São Paulo and the other in the Northeast is contemplated – and the acceleration of improvements in the Information Technology area.
Ultrapar’s shares in fiscal year 2018 closed at R$53.2 on B3 (São Paulo), a reduction of 29%, and with this the Group’s market capitalization was R$30 billion. By comparison, the Ibovespa stock index rose 15% in the same period. On the New York Stock Exchange (NYSE), Company’s securities depreciated 40% in the year, while the Dow Jones Industrial Average fell 6%. Financial volume in Ultrapar’s shares, considering trading on B3 (UGPA3) and NYSE (UGP) combined, was R$ 139 million per day (+6%).
Ultrapar’s Corporate Bylaws establishes the distribution of a mandatory minimum dividend to its shareholders of 50% of the adjusted net income. In the past five years, the portion of net income allocated for dividend payments was an average of 60%. In 2018, the Company declared dividends of R$ 685 million – a payout of 60% on net income for the year – and equivalent to a dividend yield of 2% on the average issued share price.
The Value Added Statement reports the aggregate amount of wealth generated by the Company and its distribution among the different stakeholders that contributed to its performance. In 2018, Ultra generated value added of R$6.7 billion distributed as follows:
The structure and processes which are part of Ultra’s governance model contribute to ethical, transparent and responsible management and to the appropriate strategies for the long-term sustainability of the businesses. The increasingly close relationship between the Board of Directors and the Executive Board – responsible, respectively, for establishing guidelines to be followed and for executing the necessary actions in line with plan – strengthens the necessary conditions for the creation, preservation and/or maximization of value for stakeholders, particularly the shareholders.
The Company has been trading its shares in Brazil (under the UGPA3 symbol) and in New York (UGP) since 1999. At the end of 2018, Ultra’s market capitalization stood at R$30 billion. The main shareholders are Ultra S.A. Participações, holding 22% of the Group’s shares, Parth do Brasil Participações Ltda. (8%) and BlackRock, Inc. (5%). Of the total shares, 2% are held as treasury stock.
The inclusion of the Company in the Novo Mercado, the segment of B3 S.A. – Brasil, Bolsa, Balcão (B3) reserved for companies in proven alignment with the highest market standards, is testimony to Ultra’s adoption of best corporate governance practices. Among others, these include 100% tag along rights for all shareholders and the maintenance of at least 20% of independent members on the Board of Directors: in the case of Ultra, 75% of board members fall into this category.
Ultra’s management befalls to the Board of Directors (BD), together with the Executive Board. At the end of 2018, the BD, consisted of eight members elected for a two year term by the Annual General Meeting, the supreme decision-making body, with reelection permitted. In 2018, board directors met on ten occasions in accordance with their duties among which are the overall guidance of the businesses and to nominate the occupants of positions on the Executive Board at the Company. As part of the planned succession process, the year was marked by the investiture of Pedro Wongtschowski as Chairman of the Board of Directors, replacing Paulo Cunha, who has vacated the position after 20 years.
During the year, the Board of Directors also nominated three new names to make up the Executive Board as chief executive officers of the Ipiranga, Ultragaz and Extrafarma businesses. At Ipiranga, Leocadio de Almeida Antunes Filho retired, being replaced by Marcelo Pereira Malta Araújo; at Ultragaz, Tabajara Bertelli Costa is now responsible for the business, replacing Pedro Jorge Filho, also in the light of the latter’s retirement on December 31, 2018; and at Extrafarma, the chief executive officer’s position is now held by Rodrigo de Almeida Pizzinatto, replacing André Covre.
Chairman
Vice Chairman
Directors
President
Councilors
On April 10, 2019, Ultra’s Extraordinary and Annual General Meeting (E/AGM) approved the new membership of the Board of Directors and the Fiscal Council. The members of the Board of Directors will have a two year term of office as from the date of their election while the members of the Fiscal Council shall have a one year mandate.
In addition to those committees which are mandatory in accordance with the Corporate Bylaws, the Board of Directors has two other committees to support its discussions and decision making processes: the Audit and Risks Committee and the People Committee. The Corporate Bylaws also indicate the possibility of the installation of the Fiscal Council on a non-permanent basis.
In addition to other responsibilities, it is incumbent on the Audit and Risks Committee to analyze reports and financial statements, evaluate the effectiveness and sufficiency of internal controls, supervise the management of risks to the Company and recommend the appointment of the independent auditors.
Among its other duties, the People Committee is responsible for guaranteeing that the Company is adequately prepared for the succession of its executives and to ensure the adoption of a competences and leadership, attraction and retention model in accordance with its strategic plans. The committee consists of four members, two of whom are outside appointees.
The non-statutory Conduct Committee is responsible for coordinating Ultra’s Ethics and Compliance Program, proposing updates, initiatives and guidance as well as acting in case of doubt and infringements of conduct. The Committee’s members are elected by the BD, the president being an independent member.
In addition to these committees, there are other non-statutory bodies which give support more especially to the Executive Board, among them, committees with respect to Insurance, Risks and Financial Investments, Investments, Disclosure and Trading, Data Security and Occupational Safety. In 2018, the Company established a committee dedicated to discussing innovation. Members are drawn from leaders in Ultra’s new technologies and digital transformation areas, the objective being to encourage an exchange of experiences and the development of joint initiatives. Special mention should also be made of the Human Resources Committee, its membership drawn from each of the businesses as well as Ultra itself with the objective of planning and debating actions with respect to people-related horizontal themes.
Approval was given by Ultra’s Extraordinary General Meeting (EGM) held on April 10, 2019, for establishing one more committee to advise the Board of Directors: the Strategy Committee, responsible for guiding and monitoring the strategic plans of the Company’s businesses, managing the Investments Policy and deciding the strategy for capital allocation and portfolio management.
The performance, career and succession processes are critical for the development of leadership both for Ultra’s current necessities and future ambitions. The management of meritocratic performance strengthens the recognition of premium delivery and behavior which assure the implementation of the strategy, the creation of value and the organizational culture. In this way, it is possible to differentiate high performance leaders.
Ultra’s Career and Succession Cycle takes place annually for promoting executive discussions on a collegiate basis for evaluating performance and potential. This process allows plans to be defined for developing executives and identifying potential successors. A total of 97 executives, among Officers and Executive Managers were included in the 2018 Cycle.
Movements of executives in the Company are aligned to corporate strategy. During the year, there were structural changes at all the businesses resulting in replacements and hiring of professionals. Taking into account all the executive officer positions, there were 15 movements, 63% of these being occupied by executives already working in the organization.
In relation to compensation, in 2018 an integrated system was designed and launched, introducing more comprehensive mapping of executive performance as well as the setting of goals and reflected in variable remuneration.
Ultra conducts its businesses in an integral and ethical manner, a posture which forms part of its governance and encapsulated in its Code of Ethics. The first version of the Code was published in 2004, together with its various corporate policies, covering issues such as corruption, conflict of interests, anti-trust practices, disclosure of material facts and securities trading and risks, among others.
Between 2013 and 2015, Ultra’s Compliance Program was fine-tuned by the Board of Directors with the constitution of a new Conduct Committee under the leadership of an independent member. The Program’s activities are now conducted based on a dedicated structure of governance in Compliance, the definition of which is formally enshrined in the documentation of the program, the latter with the necessary independence to exercise its functions.
The Compliance Program underwent a formal and complete evaluation in 2017 and impacting positively on employee behavior. The program’s profile has been raised thanks to communication awards, executive events, improvements in controls and participation in specialized corporate governance forums. In addition, the program received important support in 2018 with the introduction of an additional managerial layer dedicated to compliance and incorporated directly in each one of the businesses, thus increasing its capillarity and focus.
Throughout the period, the Program’s supporting guidelines were revised and updated, on these occasions both on-site and online training sessions being run together with specific communications, ensuring that the compliance theme is always updated and uppermost in the minds of the Company’s more than 17 thousand employees. In this context, worthy of note in 2018 was the complete revision and relaunch of the Code of Ethics, the Corporate Anti-Corruption Policy and the Corporate Anti-Trust Policy.
Available to all stakeholders, the Guidance and Whistleblowing Channel is the responsibility of an outside and independent company and can be accessed via the link www.canalabertoultra.com.br or by telephone 0800-7017172. Reports are handled confidentially and investigated by the Compliance team at Ultra, reporting to the Conduct Committee – and this in turn to the Board of Directors.
Ultra’s risk management policy is continually evolving given the nature of its businesses. The Company adopts procedures for evaluating and mitigating the risks of its operations with a focus on behavioral aspects, processes and controls based on best practices and on regulatory references developed by authorities, agencies or academia.
As part of this ongoing process, in 2018, the Board of Directors formalized its governance risks enshrined in the Corporate Risks Management Policy, consolidating six risk families to which Ultra is subject – Strategic, Operational, Financial, Compliance, Cybernetic and Human Capital. In addition, the Policy also establishes principles, responsibilities and guidelines to be followed by all Group businesses and governance bodies.
Discussions of risks are conducted on a structured and independent basis at each one of the businesses and covering both the internal and external risks chain. These are mapped by the Risks Matrix System, each scenario identified being quantified in terms of impact and vulnerability and then generating the appropriate mitigating action plans.
The Corporate Risks area plays an active role in discussions at the level of the businesses by stimulating, criticizing, consolidating and reporting the risks on an integrated and standardized basis. This approach allows senior management to focus effectively on the more important issues.
The risk management culture is disseminated and reinforced throughout the Group through communications, evaluations and technical and behavioral training. The same policy also allows for the creation of specific intra-business committees on matters involving Operational Safety and Data Security.
Ultra also seeks to remain connected to the principal world tendencies and technologies in risk management, developing methodologies and tools which impede and mitigate events which are potentially dangerous to life, the environment and to the Company’s businesses and their stakeholders. As an example, Ultra has developed methodologies for evaluating the maturity of employees in terms of safe and ethical postures. On the basis of these evaluations, specific training and controls are established for targeted audiences.
Ultra has an independent internal audit area, reporting to the Audit Committee, for monitoring procedures and internal controls at all the businesses, identifying improvements to processes and diminishing risks involving operational activities and in the preparation of financial statements.
In addition to interacting with the outside auditors to satisfy requirements according to the Sarbanes-Oxley (SOX) legislation for the financial statements published in the United States, the area is also responsible for the execution of the annual operational audits plan, this being discussed initially with management and the principal governance bodies. The internal audit also reports on its activities at the end of each fiscal year as well as handling one-off matters involving specific evaluations at the businesses.
This independent monitoring provides inputs to the Risks area, which adjusts its mapping processes in line with the data received and advises the risk managers on any remedial actions also supplying the compliance areas with information on preventive measures for improving the Compliance Program. In this way, a synergy of information and actions is promoted between the internal controls and integrity areas.