Company mulls deals in renewable power; CEO Marcos Lutz says operational efficiency is a priority

18/08/2022

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Marcos Lutz — Foto: Claudio Belli/Valor

Grupo Ultra, one of the largest companies in Brazil, will focus on putting its house in order and then return to growth after raising about R$8.5 billion by selling two of its main businesses. The highly anticipated arrival of CEO Marcos Lutz is seen by the market as the turning point for the group that owns the gas station chain Ipiranga, LPG distribution company Ultragaz, and liquid bulk storage company Ultracargo.

For those betting on a more aggressive expansion drive, however, Mr. Lutz said efforts are concentrated on management and process improvement for now. “The goal is to end 2022 with better operational efficiency than at the beginning of the year,” the executive told Valor in his first interview after taking office.

He returned to the group last year as a shareholder in the company’s controlling group and joined Ultra’s board of directors in April 2021. Next year, he will replace Pedro Wongtschowski as the company’s chair.

Large mergers and acquisitions are not in the group’s plans for now. This does not mean Ultra is not analyzing business opportunities. The group is capitalized after selling, in recent months, its pharmaceutical retail division Extrafarma, the specialty chemicals business Oxiteno, and a 50% stake in the electronic toll collection company ConectCar.

The group is in talks over a potential partnership with a renewable power company through Ultragaz, sources say. Ultra still has a small operation in this segment with the sale of retail power in two states.

Mr. Lutz declined to comment on possible expansion moves through acquisitions. The company plans to get back into the M&A game later on, with the confidence that the balance sheet is strong enough to absorb potential deals.

The executive says there is also room for the arrival of partners in current operations or new businesses, but would not say if there are talks underway. “In the future, I see the group having partners in businesses that create value beyond the financial value,” he said.

In the executive’s view, the three current businesses – infrastructure and logistics (Ultracargo), energy (Ultragaz), and fuel distribution (Ipiranga) – still offer growth possibilities. It would make sense for Ultragaz, for instance, to join the power commercialization market, benefiting from the LPG company’s robust customer base.

The refineries put up for sale by Petrobras are not totally out of the plans, but there is much work to be done internally, especially at Ipiranga, before seeking large deals, the executive said. Ultra was very close to buying Refinery Alberto Pasqualini (Refap), in Rio Grande do Sul. Mr. Lutz said that Ultra analyzed the assets of the petrochemical company Braskem as well, but the return on capital was not so attractive.

With irregular performance in recent years, the fuel distribution company is the group’s largest business, and also its Achilles’ heel. Because of inadequate supply and pricing strategies in the past, Ipiranga is behind its main competitors Vibra (formerly BR Distribuidora) and Raízen (a joint venture between Cosan and Shell) in terms of margins. The Covid-19 pandemic, which brought down the demand for fuels, widened the gap.

The recovery trajectory has already started and the group projects that this gap will be bridged by the end of the year. Analysts covering the group, however, believe that this work may take longer and continue in 2023.

The executive acknowledged that it is necessary to deal with the natural anxiety of investors for the long-awaited turnaround of the group. “There is a lot of questioning about what opportunity is going to emerge. Refinery is not an object of desire, but an opportunity,” he said.

“You have to separate shareholders into two categories: those who think more in the short term (stock market investors) and those who think in the long term (of the controlling group),” he said. According to him, the shareholders of the company’s controlling group want operational quality, support inorganic expansion, and are somewhat conservative. In his view, Pátria, a fund that is a partner in the company and is also in the controlling group, is in the middle of the road. “They seek operational efficiency, but [support] projects that create value,” he said.

Mr. Lutz said he has not faced resistance from the oldest shareholders in the group – which is about to turn 85. “There is a process of [management] change indeed, but there is no resistance. I was raised here, I started as a trainee and was a manager at Ultracargo.”

After leaving Ultra, Mr. Lutz went to CSN, owned by Benjamin Steinbruch, and then was one of the main executives of the Cosan group, owned by Rubens Ometto Silveira Mello. While in Cosan, Mr. Lutz led important changes in the company, which was originally a sugar-and-ethanol company, and later became one of the largest fuel distributors in the country and an infrastructure company.

With the return of Mr. Lutz as a shareholder and CEO since earlier this year, the market expected that he would start a revolution. And high interest rates in Brazil mean a tailwind for the company’s short-term strategy, in his view.

With rising rates, it is not bad to be deleveraged, Mr. Lutz said. In June, leverage measured by the net debt-to-EBITDA ratio had already dropped to 2.2 times, compared with 3.1 times in the previous quarter, thanks to the proceeds from the sale of Oxiteno and the better operating result.

“After such a deleveraging, we will discuss the group’s pipeline,” he said. The proceeds from the sale of assets, which account for more than half of the group’s current market capitalization of just over R$15 billion, were expected to finance the strategy of focusing on the energy and infrastructure sectors and the purchase of Refap. As the deal with Petrobras fell apart, the funds will be partly directed to reduce indebtedness.

UBS has a positive view of Ultrapar, which has become “a new company after the sales of Oxiteno and Extrafarma and by completing the succession planning,” UBS analysts Luiz Carvalho, Matheus Enfeldt, and Tasso Vasconcellos wrote in a report this week.

According to the bank, the next step is the election of the new board of directors, in April, to prepare the group for the next two years. “The composition of the board is key to provide the necessary support for the capital allocation journey and potential diversification that will follow,” they highlighted. UBS has a buy recommendation for the company, with a target price of R$18 in 12 months. The company was traded at R$13.7 on Wednesday’s close.

According to the original plans, Mr. Lutz would not take over the company. “I didn’t come to Ultra to be CEO. I came to be a partner, that was the initial invitation,” he said. No eye like the master’s eye.

*By Stella Fontes, Ivo Ribeiro, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/