Table of Contents

As filed with the Securities and Exchange Commission on May 4, 2020

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark one)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

Commission file number: 001-14950

 

 

ULTRAPAR PARTICIPAÇÕES S.A.

(Exact name of Registrant as specified in its charter)

ULTRAPAR HOLDINGS INC.

(Translation of Registrant’s name into English)

The Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

Brigadeiro Luis Antônio Avenue, 1343, 9th Floor

São Paulo, SP, Brazil 01317-910

Telephone: 55 11 3177 3820

(Address of principal executive offices)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading Symbol

  

Name of each exchange on which registered

Common Shares, without par value (represented by, and traded only in the form of, American Depositary Shares (evidenced by American Depositary Receipts), with each American Depositary Share representing one common share)    UGP    New York Stock Exchange

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

The number of outstanding shares of each class as of December 31, 2019.

 

Title of Class

 

Number of Shares Outstanding

Common Stock   1,086,029,894

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☒  Yes    ☐  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ☒     Accelerated Filer                 ☐

Non-accelerated Filer      ☐     Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.    ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.     ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

 

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

 

other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART I

     9  

ITEM  1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     9  

ITEM 2.   OFFER STATISTICS AND EXPECTED TIME TABLE

     9  

ITEM 3.   KEY INFORMATION

     10  

ITEM 4.   INFORMATION ON THE COMPANY

     37  

ITEM 4A.    UNRESOLVED STAFF COMMENTS

     100  

ITEM  5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     100  

ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     135  

ITEM  7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     149  

ITEM 8.   FINANCIAL INFORMATION

     151  

ITEM 9.   THE OFFER AND LISTING

     158  

ITEM 10.  ADDITIONAL INFORMATION

     158  

ITEM  11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     172  

ITEM  12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     181  

PART II

     183  

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     183  

ITEM  14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     183  

ITEM 15.  CONTROLS AND PROCEDURES

     183  

ITEM 16.  [Reserved]

     185  

ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT

     185  

ITEM 16B.   CODE OF ETHICS

     186  

ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

     187  

ITEM  16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     187  

ITEM  16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     188  

ITEM  16F.   CHANGE IN REGISTRANT’S INDEPENDENT PUBLIC ACCOUNTING FIRM

     188  

ITEM 16G.   CORPORATE GOVERNANCE

     188  

ITEM 16H.   MINE SAFETY DISCLOSURE

     191  

PART III

     192  

ITEM 17.  FINANCIAL STATEMENTS

     192  

ITEM 18.  FINANCIAL STATEMENTS

     192  

ITEM 19.  EXHIBITS

     192  
FINANCIAL STATEMENTS      F-1  

 

 

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INTRODUCTION

Ultrapar is a Brazilian company with more than 80 years of history, with leading positions in the markets in which it operates: Oil & Gas sector through Ipiranga, Ultragaz and Ultracargo, specialty chemicals through Oxiteno and retail pharmacy through Extrafarma.

 

   

Ultragaz is the leader in LPG (as defined below) distribution in Brazil, which is one of the largest markets worldwide. Ultragaz had a 23.4% market share in 2019 according to ANP and was one of the largest independent LPG distributors in the world in terms of volume sold. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Ultragaz—Competition”. As of December 31, 2019, we delivered LPG to an estimated 11 million households through a network of approximately 5.3 thousand independent retailers in the bottled segment and to approximately 55 thousand customers in the bulk segment.

 

   

Ipiranga is one of the largest fuel distributors in Brazil, with a network of 7,090 service stations and 19.3% market share in 2019 according to ANP. See “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Ipiranga—Competition”.

 

   

Oxiteno is a major producer of specialty chemicals and one of the largest producers of ethylene oxide and its principal derivatives in Latin America, according to IHS Chemical. Oxiteno has eleven industrial units: six in Brazil, three in Mexico, one in the United States and one in Uruguay and commercial offices in Argentina, Belgium, China and Colombia. For the year ended December 31, 2019, Oxiteno sold 734 thousand tons of chemical products.

 

   

Ultracargo is the largest provider of liquid bulk storage in Brazil, with six terminals and storage capacity of 814 thousand cubic meters as of December 31, 2019, and leading positions in the main ports in Brazil in which it operates.

 

   

Extrafarma is the sixth largest drugstore chain in Brazil, according to ABRAFARMA, with 416 drugstores and 3 distribution centers as of December 31, 2019.

References in this annual report to “Ultrapar”, “we”, “our”, “us” and “the Company” are to Ultrapar Participações S.A. and its consolidated subsidiaries (unless the context otherwise requires). In addition, all references in this annual report to:

 

   

“ABIQUIM” are to Associação Brasileira da Indústria Química, the Brazilian association of chemical industries;

 

   

“ABRAFARMA” are to Associação Brasileira de Redes de Farmácias e Drogarias, the Brazilian association of pharmacy and drugstore chains;

 

   

“ABTL” are to Associação Brasileira de Terminais de Líquidos, the Brazilian association of liquid bulk terminal operators;

 

   

“ADSs” are to our American Depositary Shares, each representing (i) one common share, with respect to any period on or after August 17, 2011; or (ii) one non-voting preferred share, with respect to any period prior to August 17, 2011;

 

   

“Alesat” are to Alesat Combustíveis S.A.;

 

   

“am/pm” are to Ipiranga’s convenience stores franchise network that operate under the brand am/pm, managed by am/pm Comestíveis Ltda.;

 

   

“American Chemical” are to American Chemical I.C.S.A., a company that was acquired by Oxiteno in November 2012, currently Oxiteno Uruguay;

 

   

“ANFAVEA” are to Associação Nacional dos Fabricantes de Veículos Automotores, the Brazilian association of vehicle producers;

 

   

“ANP” are to the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, the Brazilian oil, natural gas and biofuels regulatory agency;

 

   

“ANVISA” are to the Agência Nacional de Vigilância Sanitária, the Brazilian health surveillance agency;

 

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“Aqces” are to Aqces Logística Internacional Ltda.;

 

   

“Araújo” are to Drogaria Araujo S.A;

 

   

“Arch Andina” are to Arch Química Andina, C.A., a company that was acquired by Oxiteno in September 2007, renamed Oxiteno Andina;

 

   

“ARLA” are to Automotive Liquid Reducing Agent;

 

   

“B3” are to the B3 S.A.—Brasil, Bolsa, Balcão, the São Paulo Stock Exchange;

 

   

“Braskem” are to Braskem S.A.;

 

   

“Brazil” are to the Federative Republic of Brazil;

 

   

“Brazilian Corporate Law” are to Law No. 6,404 enacted in December 1976, as amended by Law No. 9,457 enacted in May 1997, by Law No. 10,303 enacted in October 2001, by Law No. 11,638 enacted in December 2007, by Law No. 11,941 enacted in May 2009, by Law No. 12,431 enacted in June 2011, by Law No. 12,810 enacted in May 2013, and by Law No. 13,129 enacted in May 2015;

 

   

“Brazilian GAAP” are accounting practices adopted in Brazil that comprise the Brazilian Corporate Law and the Pronouncements, Guidelines and Interpretations issued by the Accounting Pronouncements Committee (“CPC”) and approved by the Federal Accounting Council (“CFC”) and the Brazilian Securities and Exchange Commission (“CVM”);

 

   

“Brazilian government” are to the federal government of the Federative Republic of Brazil;

 

   

“CADE” are to Conselho Administrativo de Defesa Econômica, the Brazilian Antitrust Authority;

 

   

“Canamex” are to the chemical business formerly owned by the Berci Group, a company that was acquired by Oxiteno in December 2003, currently Oxiteno Mexico;

 

   

“CBL” are to Chevron Brasil Ltda. (currently IPP), a former subsidiary of Chevron that, together with Galena, held Texaco;

 

   

“CBLSA” are to Chevron Brasil Lubrificantes S.A., now called Iconic;

 

   

“CBPI” are to Companhia Brasileira de Petróleo Ipiranga, a company that was merged into IPP in November 2009;

 

   

“Central Bank” are to the Banco Central do Brasil, the Brazilian central bank;

 

   

“Chevron” are to Chevron Latin America Marketing LLC and Chevron Amazonas LLC;

 

   

“Cia. Ultragaz” are to Companhia Ultragaz S.A.;

 

   

“Code” are to the U.S. Internal Revenue Code of 1986, as amended;

 

   

“Commodity Exception” are to gains derived from “qualified active sales” of commodities and “qualified hedging transactions” involving commodities, within the meaning of the applicable U.S. Treasury regulations;

 

   

“CONAMA” are to Conselho Nacional do Meio Ambiente – the National Council of the Environment;

 

   

“ConectCar” are to ConectCar Soluções de Mobilidade Eletrônica S.A., a joint-venture initially formed by Ipiranga and OTP (Odebrecht Transport S.A.), which started its operations in November 2012. In January 2016, Redecard S.A. acquired OTP’s interest in ConectCar;

 

   

“Conversion” are to the conversion of all preferred shares issued by the company into common shares, at a ratio of 1 (one) preferred share for 1 (one) common share, as approved at the extraordinary general shareholders’ meeting and the special preferred shareholders’ meeting, both held on June 28, 2011;

 

   

“CVM” are to Comissão de Valores Mobiliários, the Securities and Exchange Commission of Brazil;

 

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“Deposit Agreement” are to the Deposit Agreement between Ultrapar Participações S.A. and the Bank of New York Mellon, dated September 16, 1999, and all subsequent amendments thereto;

 

   

“DI” are to the Brazilian money market interest rate (Certificados de Depósito Interbancário);

 

   

“DNP” are to Distribuidora Nacional de Petróleo Ltda., a company that was acquired by Ipiranga in October 2010 and was merged into IPP in February 2011;

 

   

“DPPI” are to Distribuidora de Produtos de Petróleo Ipiranga S.A., a company that was merged into CBPI in December 2008;

 

   

“DPSP” are to Drogarias DPSP S.A.;

 

   

“EMCA” are to Empresa Carioca de Produtos Químicos S.A.;

 

   

“Extrafarma” are to Imifarma Produtos Farmacêuticos e Cosméticos S.A.;

 

   

“Extrafarma Transaction” are to the exchange of shares of Extrafarma for Ultrapar’s shares on January 31, 2014, as described in “Item 4.A. Information on the Company—History and Development of the Company—Extrafarma”;

 

   

“FGTS” are to Fundo de Garantia do Tempo de Serviço, the Brazilian government severance indemnity fund;

 

   

“Galena” are to Sociedade Anônima de Óleo Galena Signal, a former subsidiary of Chevron that, together with CBL, held Texaco;

 

   

“IAS” are to International Accounting Standard;

 

   

“IASB” are to International Accounting Standards Board;

 

   

“Iconic” are to Iconic Lubrificantes S.A., formerly CBLSA, an association formed by Ipiranga and Chevron, which started its operations in December 2017;

 

   

“ICVM 527/12” are to CVM Instruction No. 527/12, issued by the CVM on October 4, 2012, which governs the voluntary disclosure by listed companies in Brazil of EBITDA—Earnings Before Interest, Taxes, Depreciation and Amortization, and EBIT—Earnings Before Interest and Taxes, for the results disclosed from January 1, 2013 onwards;

 

   

“IFRS” are to International Financial Reporting Standards, as issued by IASB;

 

   

“IGP-M” are to General Index of Market Prices of Brazilian inflation (Índice Geral de Preços – Mercado), calculated by the Getulio Vargas Foundation;

 

   

“IpiLubs” are to Ipiranga Lubrificantes S.A., a company that was merged into CBLSA in November 2018;

 

   

“Ipiranga” are to Ultrapar’s subsidiaries that operate in the fuel distribution business and related activities;

 

   

“Ipiranga Group” are to RPR, DPPI, CBPI, Ipiranga Química S.A. (“IQ”), Ipiranga Petroquímica S.A. (“IPQ”), Companhia Petroquímica do Sul S.A. (“Copesul”) and their respective subsidiaries prior to their sale to Ultrapar, Petrobras and Braskem;

 

   

“Ipiranga Group SPA” are to the Share Purchase Agreement entered into and among Ultrapar, with the consent of Petrobras and Braskem, and the Key Shareholders on March 18, 2007;

 

   

“Ipiranga Group Transaction Agreements” are to agreements related to the acquisition of Ipiranga Group by Ultrapar, Petrobras and Braskem. Each Ipiranga Group Transaction Agreement is incorporated by reference to Exhibits 2.5, 2.6, 2.7, 4.4, 4.5, 4.6 and 4.7 to Form 20-F of Ultrapar Participações S.A. filed on June 7, 2007;

 

   

“IPP” are to Ipiranga Produtos de Petróleo S.A., formerly CBL;

 

   

“IQVIA”, are to the merger of Quintiles and IMS Health, Inc.;

 

   

“IRS” are to U.S. Internal Revenue Service;

 

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“Key Shareholders” are to Ipiranga Group’s former controlling shareholders prior to the closing of the Ipiranga Group SPA;

 

   

“Latin America” are to countries in America other than the United States and Canada;

 

   

“Liquigás” are to Liquigás Distribuidora S.A.;

 

   

“LPG” are to liquefied petroleum gas;

 

   

“LPG International” are to LPG International Inc.;

 

   

“NAFTA” are to North American Free Trade Agreement, formed by the United States, Canada and Mexico. A revised version of NAFTA has been agreed to by all three countries for approval under a new name, the United States Mexico Canada Agreement, or USMCA, and is awaiting legislative approval before it comes into force;

 

   

“Northern Distribution Business” are to former CBPI’s fuel and lubricant distribution businesses located in the North, Northeast and Midwest regions of Brazil;

 

   

Novo Mercado” are to Novo Mercado listing segment of B3;

 

   

“NYSE” are to the New York Stock Exchange;

 

   

“Oleoquímica” are to Oleoquímica Indústria e Comércio de Produtos Químicos Ltda.;

 

   

“Oxiteno” are to Oxiteno S.A. – Indústria e Comércio, our wholly-owned subsidiary and its subsidiaries that produce ethylene oxide and its principal derivatives, fatty alcohols and other specialty chemicals;

 

   

“Oxiteno Andina” are to the business of Oxiteno that was carried out in Venezuela until October 2019. In October 2019, Oxiteno Andina was sold to a buyer in Venezuela;

 

   

“Oxiteno Mexico” are to the business of Oxiteno carried out in Mexico;

 

   

“Oxiteno Nordeste” are to Oxiteno Nordeste S.A. Indústria e Comércio, which was merged into Oxiteno in December 2019;

 

   

“Oxiteno Uruguay” are to the business of Oxiteno carried out in Uruguay;

 

   

“Oxiteno USA” are to the business of Oxiteno carried out in the United States;

 

   

“Pague Menos” are to Empreendimentos Pague Menos S.A.;

 

   

“Parth” are to Parth do Brasil Participações Ltda., an investment company controlled by Mrs. Daisy Igel’s family and owner of 8% of Ultrapar’s capital stock;

 

   

“Petrobras” are to Petrobras – Petróleo Brasileiro S.A.;

 

   

“Petrochemical Business” are to IQ, IPQ and IPQ’s stake in Copesul;

 

   

“PFIC” are to passive foreign investment company;

 

   

“PIS and COFINS taxes” are to Programa de Integração Social (Integration Program Taxes) and Contribuição para o Financiamento da Securidade Social (Contribution for the Financing of Social Security Taxes), respectively;

 

   

“Plural” are to the former Brazilian association of fuel distributors (now Sindicom);

 

   

“Raia Drogasil” are to Raia Drogasil S.A.;

 

   

Real”, “Reais” or “R$” are to Brazilian Reais, the official currency of Brazil;

 

   

“Repsol” are to Repsol Gás Brasil S.A., a company that was acquired by Ultragaz in October 2011 and was merged into Cia. Ultragaz in December 2012;

 

   

“RPR” are to Refinaria de Petróleo Riograndense S.A. (formerly Refinaria de Petróleo Ipiranga S.A.), a joint-venture owned by Petrobras, Braskem and Ultrapar;

 

   

“SEC” are to the U.S. Securities and Exchange Commission;

 

   

“Securities Act” are to the U.S. Securities Act of 1933, as amended;

 

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“Selic” are to the Brazilian base interest rate;

 

   

“Serma” are to Associação dos Usuários de Equipamentos de Processamento de Dados e Serviços Correlatos, our wholly owned company, responsible for providing IT services to Ultrapar and its subsidiaries;

 

   

“Share Exchange” are to the exchanges of RPR’s, DPPI’s and CBPI’s preferred shares and any remaining common shares for Ultrapar’s preferred shares in connection with the acquisition of Ipiranga Group;

 

   

“Sindicom”, formerly Plural, are to the Brazilian association of fuel distributors;

 

   

“Sindigás” are to the Brazilian association of LPG distributors;

 

   

“Southern Distribution Business” are to Ipiranga Group’s fuel and lubricant distribution businesses located in the South and Southeast regions of Brazil and their related activities;

 

   

“STF” are to Supremo Tribunal Federal, the Brazilian Supreme Federal Court;

 

   

“SUDENE” are to Superintendência do Desenvolvimento do Nordeste, the development agency of the Northeast of Brazil;

 

   

“TEAS” are to TEAS – Terminal Exportador de Álcool de Santos Ltda., a company acquired by Ultracargo in March 2018;

 

   

“Temmar” are to Terminal Marítimo do Maranhão S.A., a company that was acquired by Ultracargo in August 2012 and was merged into Tequimar in December 2013;

 

   

“Tequimar” are to Terminal Químico de Aratu S.A., Ultracargo’s subsidiary that operates in the liquid bulk storage segment;

 

   

“Texaco” are to the Texaco-branded fuels marketing business in Brazil, previously carried-out by CBL and Galena, companies that were acquired by Ipiranga in March 2009;

 

   

“Tropical” are to Tropical Transportes Ipiranga Ltda.;

 

   

“TRR” are to Retail Wholesale Resellers, specialized resellers in the fuel distribution;

 

   

“Ultra S.A.” are to Ultra S.A. Participações, a holding company owned by members of the founding family and senior management of Ultrapar. Ultra S.A. is the largest shareholder of Ultrapar, holding 20% of its total capital stock;

 

   

“Ultracargo” are to Ultracargo Operações Logísticas e Participações Ltda., our wholly owned subsidiary and its subsidiaries that provide storage, handling and logistics services for liquid bulk cargo;

 

   

“Ultragaz” are to Ultrapar’s subsidiaries that operate in the distribution of LPG;

 

   

“Ultrapar International” are to Ultrapar International S.A.;

 

   

“União Terminais” are to União Terminais e Armazéns Gerais Ltda., a company that was merged into Tequimar in December 2008;

 

   

“União Vopak” are to União Vopak Armazéns Gerais Ltda., a joint-venture in which Ultracargo has a 50% stake;

 

   

“Unipar” are to União das Indústrias Petroquímicas S.A.;

 

   

“U.S. Holder” has the meaning given in “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Considerations”;

 

   

“US$”, “dollar”, “dollars” or “U.S. dollars” are to the United States dollar; and

 

   

“2018 Shareholders’ Agreement” has the meaning given in “Item 4.A. Information on the Company—History and Development of the Company—Corporate Events”, “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Material Contracts”.

Unless otherwise specified, data related to (i) the Brazilian petrochemical industry included in this annual report were obtained from ABIQUIM, (ii) the LPG business were obtained from Sindigás and ANP, (iii) the fuel distribution business were obtained from Sindicom (formerly Plural) and ANP, (iv) the liquid bulk storage industry were obtained from ABTL, and (v) the retail pharmacy business were obtained from ABRAFARMA and IQVIA.

 

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PRESENTATION OF FINANCIAL INFORMATION

Our audited consolidated financial statements included in Item 18 were prepared in accordance with IFRS as issued by the IASB and include our consolidated Statements of Financial Position, as of December 31, 2019, 2018 and 2017 and the related Statements of Profit or Loss, Statements of Comprehensive Income, Statements of Changes in Equity and Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017, as well as notes thereto.

The following standards became effective on January 1, 2019:

(i) IFRS 16—Leases: IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. IFRS 16—Leases replaced the previous lease accounting requirements and introduced significant changes in the accounting, removing the distinction between operating and finance leases under IAS 17—Leases and related interpretations, and requires a lessee to recognize a right-of-use asset and a lease liability at lease commencement date. The impact to the consolidated financial statements is demonstrated in the recognition of right-of-use assets and lease liabilities in the balance sheet.

Accordingly, leases entered into by the Company and its subsidiaries, identified and effective at the date of transition and with maturities of more than 12 months, were accounted in the consolidated financial statements as follows:

 

   

recognition of right-of-use assets and lease liabilities in financial position, initially measured at the present value of future lease payments; and

 

   

recognition of amortization expenses of right-of-use assets and interest expenses on the lease payable in the financial result in the statements of profits or loss.

The Company selected as transition method the modified retrospective approach, with the cumulative effect of initial application of this new pronouncement recorded as an adjustment to the opening balance of equity and without restatement of comparative periods.

(ii) IFRIC 23—Uncertainty Over Income Tax Treatments: IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 – when there is uncertainty over income tax treatments. In such circumstance, an entity shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, applying this interpretation.

The adoption of IFRIC 23 by the Company did not have a significant impact on the Company’s consolidated financial statements, since all the procedures adopted for the determination and collection of income taxes by the Company and its subsidiaries are supported by the legislation and precedents from administrative and judicial courts.

The following standards became effective on January 1, 2018:

(i) IFRS 9—Financial instrument classification and measurement that includes new requirements for the classification and measurement of financial assets and liabilities, derecognition requirements, new impairment methodology for financial instruments, and new hedge accounting guidance.

(ii) IFRS 15—Revenue from contracts with customers, which establishes the principles of nature, amount, timing and uncertainty of revenue and cash flow arising from a contract with a customer.

These adoptions impacted our consolidated financial statements. Thus, the information for the year ended December 31, 2017, presented in this annual report, was retrospectively restated in our annual report for the year ended December 31, 2018, to reflect the changes resulting from the adoption of IFRS 9 and 15 as the Company adopted the full retrospective method.

 

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The financial information presented in this annual report should be read in conjunction with our consolidated financial statements.

Segment information for our businesses is presented on an unconsolidated basis. See Note 33 to our consolidated financial statements for further information on segment information. Consequently, intercompany transactions have not been eliminated in segment information, and such information may differ from consolidated financial information provided elsewhere in this annual report. See “Item 7.B. Major Shareholders and Related Party Transactions—Related Party Transactions” for more information on intercompany transactions.

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables and charts may not be an arithmetic aggregation of the figures that precede them.

On April 23, 2020 the exchange rate for Reais into U.S. dollars was R$5.447 to US$1.00, based on the commercial selling rate as reported by the Central Bank. The commercial selling rate was R$4.031 to US$1.00 on December 31, 2019, R$3.875 to US$1.00 on December 31, 2018, and R$3.308 to US$1.00 on December 31, 2017. The Real/dollar exchange rate fluctuates widely, and the current commercial selling rate may not be indicative of future exchange rates. See “Item 3.A. Key Information—Selected Consolidated Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency. Solely for the convenience of the reader, we have translated some amounts included in “Item 3.A. Key Information—Selected Consolidated Financial Data” and elsewhere in this annual report from Reais into U.S. dollars using the commercial selling rate as reported by the Central Bank at December 31, 2019 of R$4.031 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Such translations should not be construed as representations that the Real amounts represent or have been or could be converted into U.S. dollars as of that or any other date.

Market share and economic information

All market share information, unless otherwise specified, related to (i) the LPG business was obtained from ANP, (ii) the fuel distribution business was obtained from Sindicom (formerly Plural) and ANP, (iii) the liquid bulk storage industry was obtained from ABTL and (iv) the retail pharmacy business was obtained from ABRAFARMA and IQVIA. Unless otherwise specified, all macroeconomic data are obtained from the Instituto Brasileiro de Geografia e Estatística—IBGE, Fundação Getulio Vargas—FGV and the Central Bank. Although we do not have any reason to believe any of this information is inaccurate in any material respect, we have not independently verified any such information.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act subject to risks and uncertainties, including our estimates, plans, forecasts and expectations regarding future events, strategies and projections. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or revise any forward-looking statements after we distribute this annual report because of new information, future events and other factors. Words such as “believe”, “expect”, “may”, “will”, “plan”, “strategy”, “prospect”, “foresee”, “estimate”, “project”, “anticipate”, “can”, “intend” and similar words are intended to identify forward-looking statements. We have made forward-looking statements with respect to, among other things, our:

 

   

strategy for marketing and operational expansion;

 

   

capital expenditures forecasts; and

 

   

development of additional sources of revenue.

 

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The risks and uncertainties described above include, but are not limited to:

 

   

general business, economic and political conditions, including the price of crude oil and other commodities, refining margins and prevailing foreign exchange rates and the effect of such conditions on the economies of Brazil and other Latin American countries;

 

   

risks beyond our control, including geopolitical crises, natural disasters, epidemics or pandemics (such as the ongoing outbreak of the novel strain of coronavirus, or COVID-19), acts of terrorism or other catastrophic events, including the economic, financial and business impacts of such events;

 

   

competition;

 

   

ability to produce and deliver products on a timely basis;

 

   

ability to anticipate trends in the LPG, fuels, chemicals, logistics and retail pharmacy industries, including changes in capacity and industry price movements;

 

   

changes in official regulations;

 

   

receipt of official authorizations and licenses;

 

   

political, economic and social events in Brazil and the other countries in which we have operations;

 

   

access to sources of financing and our level of indebtedness;

 

   

ability to integrate acquisitions;

 

   

regulatory issues relating to acquisitions;

 

   

instability and volatility in the financial markets;

 

   

availability of tax benefits; and

 

   

other factors contained in this annual report under “Item 3.D. Key Information—Risk Factors”.

Forward-looking statements involve risks and uncertainties and are not a guarantee of future results. Considering the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and our future results may differ materially from those expressed in or suggested by these forward-looking statements.

 

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PART I

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

 

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ITEM 3.

KEY INFORMATION

 

A.

Selected Consolidated Financial Data

We have selected the following consolidated financial data from our audited consolidated financial statements, for the periods indicated. You should read our selected consolidated financial data in conjunction with “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included in this annual report. Our consolidated financial statements are prepared in Reais and in accordance with IFRS. The consolidated Statements of Financial Position as of December 31, 2019 and 2018 and the consolidated Statements of Profit or Loss and Statements of Cash Flows as of and for the years ended December 31, 2019, 2018 and 2017 are derived from our audited consolidated financial statements included in this annual report. For the year ended December 31, 2016, the information is derived from our audited consolidated financial statements as previously reported with retrospective restatement in our annual report on Form 20-F for the year ended December 31, 2018. For the year ended December 31, 2015, the information is derived from our audited consolidated financial statements as previously reported in the respective years, without retrospective restatement. See “Presentation of Financial Information” and “Item 5.A. Operating and Financial Review and Prospects — Operating Results — Critical accounting policies”. The following table presents our selected financial information in accordance with IFRS at the dates and for each of the periods indicated.

 

     Years Ended December 31,  
     2019(1)     2019     2018     2017     2016     2015  
     (in millions, except per share data)  

Statements of Profit or Loss data:

   US$     R$     R$     R$     R$     R$  

Net revenue from sales and services

     22,154.5       89,298.0       90,698.0       79,230.0       76,740.0       75,655.3  

Cost of products and services sold

     (20,638.4     (83,187.1     (84,537.4     (72,431.5     (70,196.9     (68,933.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,516.1       6,110.9       6,160.6       6,798.5       6,543.1       6,721.6  

Operating income (expenses)

  

Selling and marketing

     (655.1     (2,640.4     (2,670.9     (2,486.4     (2,220.2     (2,516.6

General and administrative

     (428.3     (1,726.3     (1,625.8     (1,576.5     (1,445.9     (1,321.3

Gain (loss) on disposal of property, plant and equipment and intangibles

     (7.4     (30.0     (22.1     (2.2     (6.1     27.3  

Other operating income, net

     44.6       179.6       57.5       59.4       199.0       50.6  

Impairment of assets

     (147.2     (593.3                        

Financial result, net

     (125.7     (506.9     (113.5     (474.3     (842.6     (703.3

Share of profit (loss) of joint-ventures and associates

     (3.0     (12.1     (14.8     20.7       7.5       (10.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income and social contribution taxes

     193.9       781.6       1,771.0       2,339.1       2,234.8       2,247.3  

Income and social contribution taxes

            

Current

     (118.1     (476.1     (476.3     (922.5     (800.5     (719.5

Deferred

     24.2       97.5       (162.4     109.2       112.5       (14.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (93.9     (378.6     (638.7     (813.3     (688.0     (734.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income for the year

     100.0       402.9       1,132.3       1,525.9       1,546.8       1,513.0  

Net income for the year attributable to:

            

Shareholders of the Company

     92.7       373.5       1,150.4       1,526.5       1,537.8       1,503.5  

Non-controlling interests in subsidiaries

     7.3       29.4       (18.1     (0.6     9.0       9.5  

Earnings per share(2)

            

Basic

     0.09       0.34       1.06       1.41       1.42       1.38  

Diluted

     0.08       0.34       1.05       1.40       1.41       1.37  

Dividends per share(3)

     0.11       0.44       0.63       0.88       0.84       0.80  

 

(1) 

The figures in Reais for December 31, 2019 have been converted into U.S. dollars using the exchange rate of US$1.00 = R$4.0307, which is the commercial rate reported by the Central Bank on that date. This information is presented solely for the convenience of the reader. You should not interpret the currency conversions in this annual report as a statement that the amounts in Reais currently represent such values in U.S. dollars. Additionally, you should not interpret such conversions as statements that the amounts in Reais have been, could have been or could be converted into U.S. dollars at this or any other foreign exchange rates. See “Item 3.A. Key Information—Selected Consolidated Financial Data—Exchange Rates”.

(2) 

Earnings per share are calculated based on the net income attributable to Ultrapar’s shareholders and the weighted average shares outstanding during each of the years presented. For each of the years presented, the earnings per share was adjusted retrospectively due to the approval of the stock split on April 10, 2019 and the implementation of the stock split on April 24, 2019. The number of shares used in the earnings per share calculation has not been adjusted to reflect the issuance of 2,108,542 new common shares that occurred in February 2020 as a result of the partial exercise of the subscription warrants issued to the former Extrafarma shareholders. See “Item 4.A. Information on the Company—History and Development of the Company—Corporate Events” and Note 32 to our consolidated financial statements for further information on earnings per share.

(3) 

For each of the years presented, dividends per share take into account the stock split approved on April 10, 2019 and implemented on April 24, 2019. The number of shares used in the dividends per share calculation has not been adjusted to reflect the issuance of 2,108,542 new common shares that occurred in February 2020 as a result of the partial exercise of the subscription warrants issued to the former Extrafarma shareholders.

 

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The following table presents other financial data information at the dates and for each of the periods indicated.

 

     Years Ended December 31,  
     2019(1)     2019     2018     2017     2016     2015  
     (in millions, except share data)  

Other financial data

   US$     R$     R$     R$     R$     R$  

Net cash provided by operating activities

     725.6       2,924.9       2,889.0       1,739.0       1,988.9       3,201.7  

Net cash used in investing activities

     (455.3     (1,835.3     (3,177.6     (1,371.8     (1,324.0     (801.8

Net cash provided by (used in) financing activities

     (725.0     (2,922.2     (801.0     340.3       928.4       (2,520.7

Depreciation and amortization(2)

     209.6       844.6       812.5       704.5       628.2       1,002.6  

Amortization of contractual assets with customers – exclusive rights (Ipiranga and Ultragaz)(3)

     88.1       355.2       371.8       463.0       463.5        

Amortization of right-of-use assets(4)

     74.4       300.1                          

Adjusted EBITDA(5)

     694.7       2,800.3       3,068.9       3,981.0       4,169.0       3,953.3  

Net debt(6)

     (2,153.6     (8,680.6     (8,211.7     (7,220.7     (5,715.3     (4,928.4

Number of common shares (in thousands)(7)

     1,112,810.2       1,112,810.2       1,112,810.2       1,112,810.2       1,112,810.2       1,112,810.2  

 

 

(1) 

The figures in Reais for December 31, 2019 have been converted into U.S. dollars using the exchange rate of US$1.00 = R$4.0307, which is the commercial rate reported by the Central Bank on that date. This information is presented solely for the convenience of the reader. You should not interpret the currency conversions in this annual report as a statement that the amounts in Reais currently represent such values in U.S. dollars. Additionally, you should not interpret such conversions as statements that the amounts in Reais have been, could have been or could be converted into U.S. dollars at this or any other foreign exchange rates. See “Item 3.A. Key Information—Selected Consolidated Financial Data—Exchange Rates”.

(2) 

Represents depreciation and amortization expenses included in cost of products and services sold and in selling, marketing, general and administrative expenses.

(3) 

Represents amortization of contractual assets with customers – exclusive rights (Ipiranga and Ultragaz) recorded as a reduction of revenue in accordance with IFRS 15. See “Presentation of Financial Information”. In 2015, the amortization of contractual assets with customers—exclusive rights (Ipiranga) was classified as amortization from intangible assets. See Note 2.a, 2.f and 11 to our consolidated financial statements for further information.

(4) 

Represents amortization of right-of-use assets included in selling, marketing, general and administrative expenses. See “Presentation of Financial Information”. See Note 2.h and 13 to our consolidated financial statements for further information.

(5) 

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and Adjusted EBITDA (adjusted for cash flow hedge from bonds and amortization of contractual assets with customers—exclusive rights) are presented in this annual report in accordance with ICVM 527/12. The purpose of including EBITDA and Adjusted EBITDA information is to provide a measure used by management for internal assessment of our operating results, and because part of our employee profit sharing plan is linked directly or indirectly to EBITDA and Adjusted EBITDA performance. It is also a financial indicator widely used by investors and analysts to measure our ability to generate cash from operations and our operating performance. We also calculate EBITDA and Adjusted EBITDA in connection with covenants related to some of our financing, as described in Note 15 to our consolidated financial statements. We believe EBITDA and Adjusted EBITDA allow a better understanding not only of our financial performance but also of our capacity of meeting the payment of interest and principal from our debt and of obtaining resources for our investments and working capital. Our definition of EBITDA and Adjusted EBITDA may differ from, and, therefore, may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because EBITDA and Adjusted EBITDA exclude net financial expense (income), income and social contribution taxes, depreciation and amortization (and, in the case of Adjusted EBITDA, also excludes cash flow hedge from bonds and amortization of contractual assets with customers—exclusive rights), they provide an indicator of general economic performance that is not affected by debt restructurings, fluctuations in interest rates or changes in income and social contribution taxes, depreciation and amortization. EBITDA and Adjusted EBITDA are not measures of financial performance under IFRS and should not be considered in isolation, or as substitutes for net income, as measures of operating performance, as substitutes for cash flows from operations or as measures of liquidity. EBITDA and Adjusted EBITDA have material limitations that impair their value as a measure of a company’s overall profitability since they do not address certain ongoing costs of our businesses that could significantly affect profitability such as financial expense (income), income and social contribution taxes, depreciation and amortization, (and in the case of Adjusted EBITDA, also excludes cash flow hedge from bonds and amortization of contractual assets with customers—exclusive rights).

(6) 

Net debt is included in this annual report in order to provide the reader with information relating to our overall indebtedness and financial position. Net debt is not a measure of financial performance or liquidity under IFRS. In managing our businesses, we rely on net debt as a means of assessing our financial condition. We believe that this type of measurement is useful for comparing our financial condition from period to period and making related management decisions. Net debt is also used in connection with covenants related to some of our financings.

(7) 

The number of shares corresponds to all of shares issued by the Company, including those held in treasury. These numbers have been retrospectively adjusted to reflect the stock split that was approved on April 10, 2019 and implemented on April 24, 2019, but have not been adjusted to reflect the issuance of 2,108,542 new common shares that occurred in February 2020 as a result of the partial exercise of the subscription warrants issued to the former Extrafarma shareholders.

 

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The tables below provide a reconciliation of net income and operating income before financial income (expenses) and share of profit (loss) of joint-ventures and associates to EBITDA and Adjusted EBITDA for Ultrapar and a reconciliation of operating income before financial income (expenses) and share of profit (loss) of joint-ventures and associates to Adjusted EBITDA for Ipiranga, Oxiteno and Ultragaz segments and to EBITDA for Ultracargo and Extrafarma segments for the years ended December 31, 2019, 2018, 2017, 2016 and 2015.

 

     Ultrapar  
     Reconciliation of net income to EBITDA and Adjusted EBITDA  
     Years ended December 31,  
     2019      2018      2017      2016      2015  
     (in millions of Reais)  

Net income

     402.9              1,132.3              1,525.9              1,546.8        1,513.0  

Net financial expenses

     506.9        113.5        474.3        842.6        703.3  

Income and social contribution taxes

     378.6        638.7        813.3        688.0        734.3  

Depreciation and amortization

     844.6        812.5        704.5        628.2        1,002.6  

Amortization of right-of-use assets

     300.1                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA(1)

             2,433.1        2,697.1        3,518.0        3,705.5        3,953.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjustments

              

Cash flow hedge from bonds(2)

     11.9                              

Amortization of contractual assets with customers—exclusive rights (Ipiranga and Ultragaz)

     355.2        371.8        463.0        463.5         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     2,800.3        3,068.9        3,981.0        4,169.0        3,953.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Ultrapar  
     Reconciliation of operating income to Adjusted EBITDA  
     Years ended December 31,  
     2019     2018     2017      2016      2015  
     (in millions of Reais)  

Operating income before financial income (expenses) and share of profit (loss) of joint-ventures and associates

         1,300.6           1,899.4             2,792.7              3,069.9        2,961.5  

Depreciation and amortization

     844.6       812.5       704.5        628.2        1,002.6  

Amortization of right-of-use assets

     300.1                            

Share of profit (loss) of joint-ventures and associates

     (12.1     (14.8     20.7        7.5        (10.9
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA(1)

     2,433.1       2,697.1       3,518.0        3,705.5        3,953.3  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjustments

            

Cash flow hedge from bonds(2)

     11.9                            

Amortization of contractual assets with customers—exclusive rights (Ipiranga and Ultragaz)

     355.2       371.8       463.0        463.5         
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     2,800.3       3,068.9       3,981.0        4,169.0        3,953.3  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     Ultragaz  
     Reconciliation of operating income to Adjusted EBITDA  
     Years ended December 31,  
     2019     2018      2017      2016     2015  
     (in millions of Reais)  

Operating income before financial income (expenses) and share of profit (loss) of associates

     353.5       35.6        255.9        267.3       213.9  

Depreciation and amortization

     186.2       222.5        182.8        158.2       143.2  

Amortization of right-of-use assets

     31.3                            

Share of profit (loss) of associates

     (0.0     0.0        1.2        (0.0     (0.1
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA(1)

             571.0               258.1                440.0                425.4       357.0  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Adjustments

            

Amortization of contractual assets with customers – exclusive rights

     0.2                            
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted EBITDA(1)

     571.2       258.1        440.0        425.4       357.0  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Oxiteno  
     Reconciliation of operating income to Adjusted EBITDA  
     Years ended December 31,  
     2019     2018      2017      2016      2015  
     (in millions of Reais)  

Operating income before financial income (expenses) and share of profit (loss) of associates

     (26.3     457.1        141.4        311.5        579.5  

Depreciation and amortization

     212.3       167.4        153.1        149.7        158.3  

Amortization of right-of-use assets

     9.7                             

Share of profit (loss) of associates

     0.5       0.9        1.4        1.0        2.0  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA(1)

             196.2               625.4                295.9                462.2        739.8  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjustments

             

Cash flow hedge from bonds(2)

     11.9                             
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     208.2       625.4        295.9        462.2        739.8  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Ultracargo  
     Reconciliation of operating income to EBITDA  
     Years ended December 31,  
     2019      2018      2017      2016     2015  
     (in millions of Reais)  

Operating income (expenses) before financial income (expenses) and share of profit (loss) of joint-ventures and associates

     78.8        124.7        75.0        127.7       (16.1

Depreciation and amortization

     59.6        52.4        47.7        43.4       41.7  

Amortization of right-of-use assets

     20.7                             

Share of profit (loss) of joint-ventures and associates

     1.4        1.3        1.6        (0.0     0.7  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA(1)

             160.5                178.5                124.3                171.1               26.3  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Ipiranga  
     Reconciliation of operating income to Adjusted EBITDA  
     Years ended December 31,  
     2019      2018      2017      2016      2015  
     (in millions of Reais)  

Operating income before financial income (expenses) and share of profit (loss) of associates

     1,615.4        1,396.6        2,357.1        2,364.0        2,154.6  

Depreciation and amortization

     290.7        283.4        245.4        220.3        612.7  

Amortization of right-of-use assets

     164.5                              

Share of profit (loss) of associates

     1.8        0.6        1.2        1.2        1.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA(1)

         2,072.5            1,680.6            2,603.8            2,585.5        2,768.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjustment

              

Amortization of contractual assets with customers – exclusive rights

     355.1        371.8        463.0        463.5         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

     2,427.5        2,052.4        3,066.8        3,049.0        2,768.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Extrafarma  
     Reconciliation of operating income to EBITDA  
     Years ended December 31,  
     2019      2018      2017      2016      2015  
     (in millions of Reais)  

Operating income (expenses) before financial income (expenses)

     (724.4)        (118.3)        (37.7)        (3.8)        5.0  

Depreciation and amortization

     80.6        71.6        60.8        42.7        23.7  

Amortization of right-of-use assets

     73.8                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA(1)

         (570.1)              (46.8)              23.1              38.8        28.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

See footnote 5 under “Item 3.A. Key Information—Selected Consolidated Financial Data” for a more complete discussion of EBITDA and Adjusted EBITDA and its reconciliation to information in our consolidated financial statements.

(2) 

Cash flow hedge from bonds adjustment relates to the hedge accounting designation in 2016, whose object of protection was firm commitments and highly probable future export sales generated by Oxiteno and its subsidiaries. When a future sale of exported products occurs, it is recorded in the income statement at the exchange rate of the initial designation of the hedge (R$/US$ 3.2270).

 

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The reconciliation of Adjusted EBITDA to cash flows from operating activities for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 is presented in the table below:

 

     2019     2018     2017     2016     2015  
     (in millions of Reais)  

Net income for the year

     402.9       1,132.3       1,525.9       1,546.8       1,513.0  

Adjustments to reconcile net income to Adjusted EBITDA:

          

Depreciation and amortization

     844.6       812.5       704.5       628.2       1,002.6  

Amortization of right-of-use assets

     300.1                          

Amortization of contractual assets with customers—exclusive rights

     355.2       371.8       463.0       463.5        

Financial result, net

     506.9       113.5       474.3       842.6       703.3  

Cash flow hedge from bonds

     11.9                          

Income and social contribution taxes

     378.6       638.7       813.3       688.0       734.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

         2,800.3           3,068.9           3,981.0           4,169.0       3,953.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile Adjusted EBITDA to cash provided by operating activities:

          

Financial result that affected the cash flow from operating activities

     729.9       913.0       380.4       (78.8     879.2  

Current income and social contribution taxes

     (476.1     (476.3     (922.5     (800.5     (719.5

PIS and COFINS credits on depreciation

     14.9       15.7       13.1       12.6       12.1  

Assets retirement obligation

                             (3.9

Impairment of assets

     593.3                          

Others

     92.1       109.3       129.0       85.9       0.3  

(Increase) decrease in current assets

          

Trade receivables and reseller financing

     361.6       (355.9     (725.2     (372.9     (615.4

Inventories

     (357.6     168.7       (606.5     (267.5     (615.4

Recoverable taxes

     (550.8     (11.5     (334.2     87.0       (60.1

Dividends received from subsidiaries and joint-ventures

     4.1       42.4       29.4       7.9        

Insurance and other receivables

     21.7       (14.5     358.7       (309.7     13.6  

Prepaid expenses

     (15.5     (37.5     (23.0     (40.0     (14.2

Increase (decrease) in current liabilities

          

Trade payables

     (31.6     576.2       412.4       249.1       181.0  

Salaries and related charges

     (22.6     40.1       7.1       (41.6     109.7  

Taxes payable

     1.9       46.5       33.1       4.0       30.0  

Income and social contribution taxes

     250.5       166.5       783.7       567.3       504.5  

Post-employment benefits

     (16.7     15.6       5.1       11.2        

Provision for tax, civil and labor risks

     (37.4     13.3       11.9       7.4       (18.8

Insurance and other payables

     66.8       (59.2     (49.4     54.0       29.2  

Deferred revenue

     1.1       8.2       (3.9     (2.1     1.0  

(Increase) decrease in non-current assets

          

Trade receivables and reseller financing

     11.4       (99.6     (102.9     (74.8     (8.4

Recoverable taxes

     (19.5     (539.5     (130.2     (47.2     (60.0

Escrow deposits

     (39.9     (58.8     (39.8     (37.9     (44.0

Other receivables

     (0.8     6.4       (4.4     13.8       (10.7

Prepaid expenses

     (4.4     (58.7     (116.7     (65.8     (15.4

Increase (decrease) in non-current liabilities

          

Post-employment benefits

     (15.4     (8.5     (0.8     (7.7     10.9  

Provision for tax, civil and labor risks

     18.9       11.8       (68.2     42.4       61.4  

Other payables

     27.7       (4.4     88.0       (19.3     20.1  

Deferred revenue

     (11.9     (1.0     0.4       1.5       3.3  

Payments of contractual assets with customers—exclusive rights

     (330.1     (390.2     (529.7     (514.3      

Income and social contribution taxes paid

     (141.2     (197.9     (836.8     (644.2     (422.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     2,924.9       2,889.0       1,739.0       1,988.9       3,201.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See footnote 5 under “Item 3.A. Key Information—Selected Consolidated Financial Data” for a more complete discussion of EBITDA and Adjusted EBITDA and its reconciliation to information in our consolidated financial statements.

 

16


Table of Contents

The table below provides a reconciliation of our consolidated statement of financial position data to the net debt positions shown in the table:

 

     Ultrapar  
     As of December 31,  
     2019     2018     2017     2016     2015  
     (in millions of Reais)  

Current loans and hedging instruments

     (867.9     (2,010.3     (1,822.5     (1,824.0     (1,050.5

Current debentures

     (249.6     (263.7     (1,681.2     (651.6     (47.4

Non-current loans and hedging instruments

     (6,907.1     (6,530.6     (6,159.4     (6,846.2     (5,604.9

Non-current debentures

     (6,368.2     (6,401.5     (3,927.6     (2,095.3     (2,198.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross debt position

     (14,392.7     (15,206.1     (13,590.6     (11,417.1     (8,901.6

Cash and cash equivalents

     2,115.4       3,939.0       5,002.0       4,274.2       2,702.9  

Current financial investments

     3,090.2       2,853.1       1,283.5       1,412.6       803.3  

Non-current financial investments

     506.5       202.3       84.4       15.1       467.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net debt

     (8,680.6     (8,211.7     (7,220.7     (5,715.3     (4,928.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present our consolidated statements of financial position in accordance with IFRS as of the dates indicated.

 

     As of December 31,  
     2019(1)      2019      2018      2017      2016      2015  
     (in millions)  

Consolidated Statements of Financial Position Data:

   US$      R$      R$      R$      R$      R$  

Current assets

                 

Cash and cash equivalents

     524.8        2,115.4        3,939.0        5,002.0        4,274.2        2,702.9  

Financial investments and hedging instruments

     766.7        3,090.2        2,853.1        1,283.5        1,412.6        803.3  

Trade receivables

     902.0        3,635.8        4,069.3        3,861.3        3,177.1        3,167.2  

Reseller financing

     108.2        436.2        367.3        286.6        211.1         

Inventories

     921.8        3,715.6        3,354.5        3,513.7        2,781.4        2,495.2  

Recoverable taxes

     278.4        1,122.3        639.7        665.0        382.4        628.8  

Recoverable income and social contribution taxes

     80.7        325.3        257.2        216.6        159.4         

Other receivables

     10.0        40.4        59.6        55.2        395.9        32.5  

Prepaid expenses

     27.6        111.4        187.6        150.0        123.9        81.5  

Contractual assets with customers – exclusive rights

     115.5        465.5        484.5        456.2        448.3         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

         3,735.8        15,058.1        16,211.7        15,490.1        13,366.1        9,911.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-current assets

                 

Financial investments and hedging instruments

     125.7        506.5        202.3        84.4        15.1        467.0  

Trade receivables

     13.3        53.7        81.6        46.3        49.6        152.2  

Reseller financing

     90.5        364.7        348.3        283.7        177.5         

Related parties

     0.1        0.5        0.5        0.5        0.5        0.5  

Deferred income and social contribution taxes

     162.2        653.7        514.2        614.1        459.6        306.0  

Recoverable taxes, net

     190.4        767.4        747.2        234.7        146.8        135.4  

Recoverable income and social contribution taxes

     26.0        104.9        105.6        78.5        35.9         

Escrow deposits

     228.6        921.4        881.5        822.7        778.8        740.8  

Indemnity asset – business combination

     48.0        193.5        194.7        202.4                

Other receivables

     0.9        3.4        1.4        7.9        2.7        16.5  

Prepaid expenses

     17.2        69.2        399.1        346.9        222.5        146.7  

Contractual assets with customers – exclusive rights

     248.2        1,000.5        1,034.0        1,046.1        989.8         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,151.0      4,639.5      4,510.4      3,768.2      2,878.6      1,965.2  

 

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Table of Contents
     As of December 31,  
     2019(1)      2019      2018      2017      2016      2015  
     (in millions)  

 

   US$      R$      R$      R$      R$      R$  

Investments

                 

In joint-ventures

     38.0        153.1        102.0        122.1        116.1        79.4  

In associates

     6.4        25.8        24.3        25.3        22.7        21.5  

Other

     0.7        2.8        2.8        2.8        2.8        2.8  

Right-of-use assets

     491.5        1,980.9                              

Property, plant and equipment, net

     1,878.8        7,572.8        7,278.9        6,637.8        5,796.4        5,438.9  

Intangible assets, net

     437.3        1,762.6        2,369.4        2,238.0        1,891.6        3,293.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,852.6      11,497.9      9,777.3      9,026.1      7,829.7      8,836.6  

Total non-current assets

     4,003.6        16,137.4        14,287.7        12,794.2        10,708.4        10,801.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

         7,739.5        31,195.5        30,499.4        28,284.3        24,074.5        20,713.1  

 

     As of December 31,  
     2019(1)      2019      2018      2017      2016      2015  
     (in millions)  

Consolidated Statements of Financial Position Data:

   US$      R$      R$      R$      R$      R$  

Current liabilities

                 

Loans and hedging instruments

     215.3        867.9        2,007.4        1,819.8        1,821.4        1,048.1  

Debentures

     61.9        249.6        263.7        1,681.2        651.6        47.4  

Leases payable

     51.2        206.4        2.8        2.7        2.6        2.4  

Trade payables

     669.9        2,700.1        2,731.7        2,155.5        1,709.7        1,460.5  

Salaries and related charges

     100.6        405.6        428.2        388.1        362.7        404.3  

Taxes payable

     67.0        269.9        268.0        221.5        168.4        168.8  

Dividends payable

     4.1        16.7        284.0        338.8        320.9        298.8  

Income and social contribution taxes payable

     40.9        164.8        55.5        86.8        140.0        216.9  

Post-employment benefits

     7.2        29.0        45.7        30.1        24.9        13.7  

Provision for asset retirement obligation

     1.0        3.8        4.4        4.8        4.6        5.2  

Provision for tax, civil and labor risks

     10.0        40.5        77.8        64.6        52.7        45.3  

Other payables

     52.9        213.3        141.0        197.4        202.6        97.5  

Deferred revenue

     6.9        27.6        26.6        18.4        22.3        24.4  

Total current liabilities

         1,288.9        5,195.1        6,336.8        7,009.7        5,484.3        3,833.4  

Non-current liabilities

                 

Loans and hedging instruments

     1,713.6        6,907.1        6,487.4        6,113.5        6,800.1        5,561.4  

Debentures

     1,579.9        6,368.2        6,401.5        3,927.6        2,095.3        2,198.8  

Leases payable

     342.9        1,382.3        43.2        45.8        46.1        43.5  

Related parties

     1.0        3.9        4.1        4.2        4.3        4.4  

Deferred income and social contribution taxes

     1.9        7.5        9.3        83.6        7.6        13.0  

Provision for tax, civil and labor risks

     219.4        884.1        865.2        861.2        727.1        684.7  

Post-employment benefits

     60.5        243.9        204.2        207.5        119.8        112.8  

Provision for assets retirement obligation

     11.8        47.4        50.3        60.0        73.0        69.5  

Subscription warrants – indemnification

     32.4        130.7        123.1        171.5        153.4        112.2  

Other payables

     47.2        190.1        162.4        162.8        74.9        94.1  

Deferred revenue

     —          —          11.9        12.9        12.5        11.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     4,010.5        16,165.2        14,362.6        11,650.6        10,114.2        8,905.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

     5,299.4        21,360.3        20,699.4        18,660.3        15,598.5        12,738.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents
     As of December 31,  
     2019(1)     2019     2018     2017     2016     2015  
     (in millions)  
     US$     R$     R$     R$     R$     R$  

Equity

            

Share capital

     1,283.1       5,171.8       5,171.8       5,171.8       3,838.7       3,838.7  

Equity instrument granted

     3.0       12.0       4.3       0.5              

Capital reserve

     134.6       542.4       542.4       549.8       552.0       546.6  

Treasury shares

     (120.4     (485.4     (485.4     (482.3     (483.9     (490.9

Revaluation reserve on subsidiaries

     1.1       4.5       4.7       4.9       5.3       5.6  

Profit reserves

     991.2       3,995.4       4,099.1       3,629.9       4,384.0       3,802.0  

Additional dividends to the minimum mandatory dividends

     64.9       261.5       109.4       163.7       165.5       157.2  

Valuation adjustments

     (36.3     (146.3     (64.0     154.8       (24.0     19.0  

Cumulative translation adjustments

     25.4       102.4       65.9       53.1       7.5       66.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to:

            

Shareholders of the Company

     2,346.6       9,458.3       9,448.1       9,246.2       8,445.2       7,945.0  

Non-controlling interest in subsidiaries

     93.5       376.9       351.9       377.8       30.9       29.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL EQUITY

     2,440.1       9,835.2       9,800.0       9,624.0       8,476.1       7,974.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

     7,739.5       31,195.5       30,499.4       28,284.3       24,074.5       20,713.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The figures in Reais for December 31, 2019 have been converted into dollars using the exchange rate of US$1.00 = R$4.0307, which is the commercial rate reported by the Central Bank on that date. This information is presented solely for the convenience of the reader. You should not interpret the currency conversions in this annual report as a statement that the amounts in Reais currently represent such values in U.S. dollars. Additionally, you should not interpret such conversions as statements that the amounts in Reais have been, could have been or could be converted into U.S. dollars at this or any other foreign exchange rates. See “Item 3.A. Key Information—Selected Consolidated Financial Data—Exchange Rates”.

Exchange Rates

In 2015, the political instability, the downgrade of Brazil’s sovereign credit rating and the expectation for an interest rate rise by the Federal Reserve System contributed to a 47% depreciation of the Real against the U.S. dollar. In 2016, the Real appreciated 17% against the U.S. dollar, marking the first year that it has appreciated against the U.S. dollar since 2011, despite residual political instability and continuing signs that the Brazilian economy was shrinking. This was mostly due to improvements in the Brazilian political environment, following the impeachment of former president Dilma Rousseff and certain stabilizing measures proposed by former President Michel Temer as well as ongoing efforts by the government’s economic team to curb public spending and debt. In 2017, the Real depreciated 2% against the U.S. dollar, reflecting the continued political instability and diminished expectations of the pension reform despite a slight improvement in the Brazilian economic scenario. In 2018, the Real depreciated 17%, pressured mainly by the global instability, result of economic crises in developed countries, and the increase of interest rates by the Federal Reserve System. The domestic scenario, characterized by political instability due to the presidential elections and the slow progress of fiscal and pension reforms, also influenced the Real depreciation during the year. In 2019, the Real depreciated 4% against the U.S. dollar in a year marked by (i) worldwide trade tensions particularly between China and the United States, (ii) uncertainties relating to the Brazilian pension reform, and (iii) economic and political crisis in Argentina. Furthermore, the Real depreciation was also a consequence of interest rate cuts by the Central Bank.

On April 23, 2020, the exchange rate for Reais into U.S. dollars was R$5.447 to US$1.00, based on the commercial selling rate as reported by the Central Bank. From December 31, 2019 to April 23, 2020, the Real depreciated 35% against the U.S. dollar, mainly due to the low interest rate environment in Brazil and international market conditions, including the economic, political and other impacts of the ongoing COVID-19 pandemic.

The average Real/U.S. dollar of the monthly exchange rate in 2019 was R$3.945 per US$1.00 compared with R$3.654 per US$1.00 in 2018, a depreciation of 8%. The following table sets forth information on prevailing commercial foreign exchange selling rates for the periods indicated, as published by the Central Bank on its electronic information system, SISBACEN, using PTAX 800, Option 5.

 

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It is not possible to predict future changes in the Real-U.S. dollar exchange rate and what impact the Brazilian macroeconomic scenario and the Brazilian government’s exchange rate policies may have on us.

 

     Exchange rates of nominal Reais per US$1.00  
     High      Low      Average     Period-End  

Year Ended

          

December 31, 2015

     4.195        2.575        3.388 (1)      3.905  

December 31, 2016

     4.156        3.119        3.450 (1)      3.259  

December 31, 2017

     3.381        3.051        3.203 (1)      3.308  

December 31, 2018

     4.188        3.139        3.680 (1)      3.875  

December 31, 2019

     4.260        3.652        3.944 (1)      4.031  

Month Ended

          

November 30, 2019

     4.260        3.979        4.119 (2)      4.224  

December 31, 2019

     4.226        4.031        4.128 (2)      4.031  

January 31, 2020

     4.270        4.021        4.145 (2)      4.270  

February 29. 2020

     4.499        4.238        4.368 (2)      4.499  

March 31, 2020

     5.199        4.488        4.844 (2)      5.199  

April 23, 2020

     5.447        5.078        5.262 (2)      5.447  

 

(1) 

Average of the foreign exchange rates on the last day of each month in the period.

(2)

Average of the high and low foreign exchange rates for each month.

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

Investing in our shares and ADSs involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this annual report in evaluating an investment in our shares or ADSs. Our business, results of operations, cash flow, liquidity and financial condition could be harmed if any of these risks materializes and, as a result, the trading price of the shares or the ADSs could decline and you could lose a substantial part or even all your investment.

We have included information in these risk factors concerning Brazil based on information that is publicly available. Other risks that we do not presently know about or deem as immaterial could also cause adverse effects on our businesses, operations, financial condition and results of operations.

Risks Relating to Ultrapar and Its Industries

Petrobras is the main supplier of LPG and oil-based fuels in Brazil. Fuel and LPG distributors in Brazil, including Ipiranga and Ultragaz, have formal contracts with Petrobras for the supply of oil-derivatives. Any interruption in the supply of LPG or oil-based fuels from Petrobras would immediately affect Ultragaz or Ipiranga’s ability to provide LPG and oil-based fuels to their customers.

Prior to 1995, Petrobras held a constitutional monopoly for the production and importation of petroleum products in Brazil. Although this monopoly was removed from the Brazilian constitution, Petrobras effectively remains the main provider of LPG and oil-based fuels in Brazil. Currently, Ultragaz and all other LPG distributors in Brazil purchase all or nearly all LPG from Petrobras. Ultragaz’s net revenue from sales and services represented 8% of our consolidated net revenue from sales and services for the year ended December 31, 2019. The procedures for ordering and purchasing LPG from Petrobras are generally common to all LPG distributors—including Ultragaz. For more details, see “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Ultragaz—Supply of LPG”.

 

 

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With respect to fuel distribution, Petrobras also supplied the majority of Ipiranga and other distributors’ oil-based fuel requirements in 2019. Petrobras’ supply to Ipiranga is governed by an annual contract, under which the supply volume is established based on the volume purchased in the previous year. Ipiranga’s net revenue from sales and services represented 84% of our consolidated net revenue from sales and services for the year ended December 31, 2019. For further information, see “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Ipiranga—Supply of fuels”.

The last significant interruption in the supply of oil derivatives by Petrobras to LPG and fuel distributors occurred during 1995 due to a 15-day strike by Petrobras employees. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Industry and Regulatory Overview” and “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Industry and Regulatory Overview”.

Significant interruptions of LPG and oil-based fuel supply from Petrobras may occur in the future. Any interruption in the supply of LPG or oil-based fuels from Petrobras would immediately affect Ultragaz or Ipiranga’s respective ability to provide LPG or oil-based fuels to its customers. If we are not able to obtain an adequate supply of LPG or oil-based fuels from Petrobras under acceptable terms, we may seek to meet our demands through LPG or oil-based fuels purchased in the international market. The logistics infrastructure for LPG and oil-based fuel imports in Brazil is limited and is substantially all controlled by Petrobras. Any such interruption could increase our purchase costs and reduce our sales volume, consequently, adversely affecting our operating margins.

Petrobras is currently under investigation by the CVM, the Brazilian Federal Police and other Brazilian public authorities in connection with corruption allegations (so called Lava Jato investigations) consisting, among other things, of illegal payments made to officers, directors and other employees of Petrobras to influence commercial decisions. Petrobras was under investigation by the SEC and the US Department of Justice and announced a settlement of those investigations in September 2018. In addition, Petrobras was previously subject to a class action in the United States, which was also settled in 2018. As of December 31, 2019, as disclosed by Petrobras, it is currently party to a collective action commenced in the Netherlands, an arbitration proceeding in Argentina, and arbitration and judicial proceedings commenced in Brazil. In each case, the proceedings were brought by investors (or entities that allegedly represent investors’ interests) who purchased shares of Petrobras traded on the B3 or other securities issued by Petrobras outside of the United States, alleging damages caused by facts uncovered in the Lava Jato investigations. Such investigations and proceedings have had a destabilizing effect on Petrobras, and it is difficult to ascertain what further impact such matters will have on Petrobras’ supply of LPG and oil-based fuels to market players.

In addition, Petrobras has made several changes to the composition of its management team and has undertaken a long-term divestment plan that may change the structure and long-term outlook of the fuel market. We cannot predict the outcome that the Lava Jato investigations will have on the fuel market and, specifically, on the availability of, and our ability to access, the LPG and oil-based fuel supply from Petrobras.

Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics.

A novel strain of coronavirus, COVID-19, was first identified in China in December 2019 and became a global pandemic in March 2020. Our businesses may be materially and adversely affected by the ongoing COVID-19 pandemic or the outbreak of other communicable diseases, including epidemics and pandemics.

The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world, including ours, and the economic and political environments in which businesses operate. There are a number of factors associated with the ongoing COVID-19 pandemic and its impact on global economies that could have a material adverse effect on our business, financial condition, results of operations, cash flows, prospects and the market price of our securities.

 

 

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We currently expect that the immediate financial impact will include (i) lower revenue as a result of a decrease in demand for certain of our products, principally reduced demand for fuel as a result of the restrictions imposed by states of Brazil on movement of people and the operation of businesses in many parts of Brazil (which has also prompted us to relax certain contractual clauses with Ipiranga’s resellers), (ii) lower revenue from the sale of LPG, and (iii) an increase in credit losses and delays in the receipt of payments from our trade debtors as a result of customers experiencing financial difficulty or insolvency and as a result of any efforts that we may make to renegotiate payment terms with our customers that are impacted by COVID-19 (including accepting certain payments in installments). These impacts have had a negative effect on our cash flow from operations and our working capital position, and we expect this impact to continue at least in the short-term. We currently expect that these factors will impact our profitability in 2020, and possibly beyond, but we cannot currently predict the magnitude of such impact. Furthermore, we cannot predict the extent to which COVID-19 will impact industrial manufacturing, and consequently cannot predict the extent of the impact on the sale of specialty chemicals in our Oxiteno business, among other impacts. Our financial risk assessments and impairment testing carried out as at December 31, 2019 in connection with the preparation of our financial statements for the year ended December 31, 2019 do not reflect the now global impacts of the ongoing COVID-19 pandemic.

The COVID-19 pandemic has caused disruption to our customers, suppliers, personnel and resellers in Brazil and in all of the other countries in which we operate. A number of countries, states or areas in which we operate have implemented policies in response to the COVID-19 pandemic, including declaring states of emergency, implementing severe restrictions on the movement and activities of people and/or implementing restrictions on the operations of certain businesses. These restrictions are determined by the central or local governments of individual jurisdictions (including through the implementation of emergency powers) and impacts (including the timing of implementation and any subsequent lifting of restrictions) may vary from jurisdiction to jurisdiction. Restrictions on the movement of people and on business operations have a significant impact on economic activity in the relevant countries, states or areas and could adversely affect our operational capacity or productivity, could disrupt transportation networks and supply and distribution chains causing disruptions in our businesses operations, and could significantly reduce customer demand or result in unfavorable changes in consumer behavior. In addition, governmental and regulatory actions and support measures taken in response to the COVID-19 outbreak may impose restrictions or obligations on our businesses and may limit management’s flexibility in managing our business.

Pursuant to Federal Decree No. 10,282/20, which was issued in the context of Federal Law No. 13,979/20, the activities of the subsidiaries of Ultrapar are considered essential during the ongoing COVID-19 pandemic. As a result, as of the date of this annual report, our subsidiaries have continued to operate and have ensured a continuous supply of their products and services to their clients. However, we cannot assure that the Federal Government will continue to consider the activities of our subsidiaries as essential, nor that they will not be impacted by external factors, such as the limitation of access by our subsidiaries to operational inputs, clients, and financial resources.

In addition, the COVID-19 pandemic has affected business and economic sentiment, causing significant volatility in global markets and affecting the outlook of the economy of Brazil and of the other countries in which we operate. Such affects include significant volatility in the price of crude oil, the price of LPG and the price of other commodities, as well as significant volatility in foreign exchange rates, borrowing costs and the availability of credit. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access funding and on our ability to negotiate and agree any amendments that may be required in the future to the terms of our existing indebtedness, such as the financial covenants that are included in certain of our debt financings. The COVID-19 pandemic has led to a weakening in gross domestic product countries around the world, including in the countries in which we operate, and the probability of a more adverse economic scenario for at least the short term is substantially higher than the outlook that existed as at December 31, 2019.

As noted above, oil prices declined sharply, as a result of a significant and rapid decrease in demand for fuels caused by the ongoing COVID-19 pandemic. Brent crude oil prices dropped 57% from US$50 per barrel in the end of February to US$21 per barrel in the end of March 2020, thus reducing prices of gasoline and diesel worldwide. Gasoline and diesel sales prices in Brazil are directly influenced by international prices and, as such, during the first quarter of 2020 prices of diesel decreased 31% and prices of gasoline decreased 43% in Brazil. However, Petrobras’ average refinery price of diesel in March 2020 was US$342 per cubic meter compared with the average international price of US$310 per cubic meter. If our competitors have the ability to access imported diesel and gasoline at a lower cost than our average cost, our competitiveness may be impacted and, consequently, this could adversely affect our results of operations.

 

 

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It remains unclear how the COVID-19 pandemic will evolve through 2020 and beyond and there is significant uncertainty relating to the extent of the impact of the COVID-19 pandemic on our businesses and the global economy in general. The local, national and international response to the COVID-19 pandemic continues to be quickly developing, fluid and uncertain and we cannot predict the range of additional governmental policies that may be pursued to combat the COVID-19 pandemic or its effects, or the impact that such governmental policies may have on our business and operations. In addition, we cannot predict the potential severity of the economic downturn or recession and we cannot predict the post-crisis recovery environment which, from a commercial, economic, political, regulatory and risk perspective, could be significantly different to past crises and could persist for a prolonged period.

It is also unclear the extent to which our financial statements for periods after December 31, 2019 may be affected by the business, operational and financial impacts of the COVID-19 pandemic. Certain of our financial risk assessments and our impairment tests, in connection with the preparation of our financial statements, may be impacted by the COVID-19 pandemic, which may adversely impact our financial position. The following areas may be particularly affected, among others: accounts receivable deriving from possible increase in delinquency rates by our trade debtors, possible reduction in recognized amounts of deferred tax assets at Oxiteno and at Extrafarma as future profits may decrease and the possible reduction of the goodwill value at Extrafarma in light of lower forecasts of business profitability, any or all of which may potentially result in impairment charges. For instance, as a result of the restrictions imposed by states of Brazil on movement of people and the operation of businesses in many parts in the country, our Ipiranga segment has experienced a decrease in demand for fuel since these restrictions began. In addition, the increased volatility in financial markets may impact our financial results where a fair value approach is required.

Intense competition is generally inherent to distribution markets, including the LPG, the fuel distribution and the retail pharmacy markets and may affect our operating margins.

The Brazilian LPG market is very competitive in all segments—residential, commercial and industrial. Petrobras, our supplier of LPG, and other major companies participate in the Brazilian LPG distribution market. Intense competition in the LPG distribution market could lead to lower sales volumes and increased marketing expenses, which may have a material adverse effect on our operating margins. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Industry and Regulatory Overview—The role of Petrobras” and “Item 4.B. Information on the Company—Business Overview— Distribution of Liquefied Petroleum Gas — Ultragaz — Competition”.

The Brazilian fuel distribution market is highly competitive in both retail and wholesale segments. Petrobras, our supplier of oil-derivative products, and other major companies with significant resources participate in the Brazilian fuel distribution market. Furthermore, small, local and regional distributors, as well as some important international players have increased their market share in recent years. Intense competition in the fuel distribution market could lead to lower sales volumes and increased marketing expenses, which may have a material adverse effect on our operating margins. See “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Industry and Regulatory Overview—The role of Petrobras” and “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Ipiranga—Competition”.

Likewise, the Brazilian drugstore market is highly competitive. Extrafarma competes with national, regional and local drugstore chains, independent drugstores, phone marketing services, direct marketing companies, prescription-only pharmacies, internet purveyors of pharmaceutical and beauty products, and other retailers such as supermarkets, beauty products stores and convenience stores. In addition, new retailers may enter the market and compete with us. Competition in the retail pharmacy market is shaped by a variety of factors, such as location, range of products, advertising, commercial practices, price, quality of services and strength of brand name, among others. If we are unable to anticipate, predict and meet the preferences of our customers, we may lose revenues and market share to our competitors.

Anticompetitive practices in the fuel distribution sector may distort market prices.

In the recent past, anticompetitive practices have been one of the main problems affecting fuels distributors in Brazil, including Ipiranga. Generally, these practices have involved a combination of tax evasion and fuels adulteration, such as the dilution of gasoline by mixing solvents or adding anhydrous ethanol in an amount greater than that permitted by applicable law.

Taxes constitute a significant portion of the cost of fuels sold in Brazil. For this reason, tax evasion by some fuel distributors has been prevalent, allowing them to lower the prices they charge compared to large distributors such as Ipiranga. As the final prices for the products sold by distributors, including Ipiranga, are calculated based on, among other factors, the amount of taxes levied on the purchase and sale of these fuels, anticompetitive practices such as tax evasion may reduce Ipiranga’s sales volume and could have a material adverse effect on our operating margins. Should there be any increase in the taxes levied on fuel, tax evasion may increase, resulting in a greater distortion of the prices of fuels sold and further adversely affecting our results of operations.

 

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LPG and oil-based fuels compete with alternative sources of energy. Competition with and the development of alternative sources of energy in the future may adversely affect the LPG and oil-based fuels market.

LPG competes with alternative sources of energy, such as natural gas, wood, diesel, fuel oil and electricity. Natural gas is currently the principal source of energy that we compete with. Currently, natural gas is less expensive than LPG for large industrial consumers, but more expensive for most of residential consumers. Changes in relative prices or the development of alternative sources of energy in the future may adversely affect the LPG market and consequently our business, financial results and results of operations. Oil-based fuels also compete with alternative sources of energy, such as electricity. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Ultragaz—Competition”.

Ethylene, one of the principal raw materials used in our petrochemical operations, comes from limited supply sources. Any reduction in the supply of ethylene would have an immediate impact on Oxiteno’s production and results of operations.

All second-generation petrochemical producers in Brazil that use ethylene as their key raw material, including Oxiteno, purchase ethylene from Brazilian suppliers. Approximately 3% of our net revenue from sales and services were derived from the sale of chemical products manufactured in Brazil that require ethylene in 2019. Oxiteno purchases ethylene from two of Brazil’s three naphtha cracker units, which are the sole sources of ethylene in Brazil. Pursuant to long-term contracts, Braskem is the sole supplier of all ethylene required at our plants located in Camaçari and Mauá. For more detailed information about these contracts see “Item 4.B. Information on the Company—Business Overview—Petrochemicals and Chemicals—Oxiteno—Raw materials” and “Item 5.F. Operating and Financial Review and Prospects—Tabular Disclosure of Contractual Obligations”. Given its characteristics, ethylene is difficult and expensive to store and transport, and cannot be easily imported to Brazil. Therefore, Oxiteno is almost totally dependent on ethylene produced by Braskem. For the year ended December 31, 2019, Brazil’s ethylene imports totaled 21 tons, representing less than 0.01% of Brazil’s installed capacity.

Due to ethylene’s chemical characteristics, Oxiteno does not store any quantity of ethylene, and reductions or interruptions in supply from Braskem, Oxiteno’s sole supplier of ethylene in Brazil, would have an immediate impact on our production and results of operations. If we further expand our production capacity, there is no assurance that we will be able to obtain additional ethylene from Braskem. In addition, Petrobras is the principal supplier of naphtha to crackers in Brazil, and any interruption in the supply of naphtha from Petrobras to the crackers could adversely impact their ability to supply ethylene to Oxiteno.

In addition, members of the Brazilian federal government and of the legislative branch, as well as former senior officers of Petrobras, have faced allegations of political corruption from the ongoing Lava Jato and other investigations. These government officials and senior officers allegedly accepted bribes by means of kickbacks on contracts granted by Petrobras to several infrastructure, oil and gas and construction companies, including Odebrecht S.A., Braskem’s controlling shareholder. We cannot currently predict how the investigations and any future decisions and actions by authorities in relation to Braskem’s shareholders may impact Braskem or, consequently, Oxiteno’s supply of ethylene.

The prices of ethylene and palm kernel oil, Oxiteno’s main raw materials, are subject to fluctuations in international markets.

The price of ethylene, which is the principal component of Oxiteno’s cost of sales and services, is directly linked to the price of naphtha, which, in turn, is largely linked to the price of crude oil. Consequently, ethylene prices are subject to fluctuations in international oil prices. A significant increase in the price of crude oil and, consequently, naphtha and ethylene, could increase our costs, which could have a material adverse effect on Oxiteno’s results of operations, particularly in Brazil.

Palm kernel oil is one of Oxiteno’s main raw materials, used to produce fatty alcohols and its by-products in the oleochemical unit. Oxiteno imports the palm kernel oil from the main producing countries, especially Malaysia and Indonesia, and therefore palm kernel oil prices are subject to the effects of foreign exchange rate variation. Palm kernel oil is a vegetable oil, also commonly used by the food industry. Consequently, palm kernel oil prices are subject to the effects of environmental and climatic variations that affect the palm plantations, fluctuations of harvest periods, economic environment in major producing countries and fluctuations in the demand for its use in the food industry. A significant increase in the price of palm kernel oil combined with foreign exchange rate variations of the Real could increase our costs, which could have a material adverse effect on Oxiteno’s results of operations.

 

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New natural gas reserves, primarily in North America, may reduce the global prices of natural gas-based ethylene, which could affect Oxiteno’s competitiveness with imported petrochemical products.

The ethylene used in the chemical and petrochemical industries can be obtained either from ethane, which is derived from natural gas, or naphtha, which is derived from oil. During the last few years, naphtha-based ethylene has been more expensive than natural gas-based ethylene, as oil prices have been higher than those of natural gas. The discovery of new shale gas reserves in North America and improvements in the technology to extract natural gas from shale gas have intensified the difference between naphtha and natural gas-based ethylene prices. Most of the ethylene produced in Brazil is derived from naphtha. As Oxiteno competes in the Brazilian market largely with imported products, declining feedstock costs of international players could affect the competitiveness of Oxiteno, which could materially affect our results.

In respect of Oxiteno’s competition in the international market, since 2018, Oxiteno has operated an industrial facility in Pasadena, Texas, of ethylene oxide derivatives and purchases the raw material from local producers located in the Mexican Gulf, with ethylene oxide price referenced at the cost of natural gas in North America.

The Brazilian petrochemical industry is influenced by the performance of the international petrochemical industry and its cyclical behavior.

The international petrochemical market is cyclical by nature, with alternating periods typically characterized by tight supply, increased prices and high margins, or by overcapacity, declining prices and low margins. The decrease in Brazilian import tariffs on petrochemical products, the increase in demand for such products in Brazil, and the ongoing integration of regional and world markets for commodities have contributed to the increasing integration of the Brazilian petrochemical industry into the international petrochemical marketplace. As a consequence, events affecting the petrochemical industry worldwide could have a material adverse effect on our business, financial condition and results of operations.

The reduction in import tariffs on petrochemical products can reduce our competitiveness in relation to imported products.

Final prices paid by importers of petrochemical products include import tariffs. Consequently, import tariffs imposed by the Brazilian government affect the prices we can charge for our products. The Brazilian government’s negotiation of commercial and other intergovernmental agreements may result in reductions in the Brazilian import tariffs on petrochemical products, which range between 0% and 20% (mainly concentrated between 2% and 14%) and may reduce the competitiveness of Oxiteno’s products vis-à-vis imported petrochemical products. Additionally, Oxiteno’s competitiveness may also be reduced in case of higher import tariffs imposed by countries to which the company exports its products. Furthermore, governmental responses to periods of increased political and economic global uncertainty can increase the extent to which sudden and unpredictable changes may occur in trade policy and tariffs. Any of the factors described above could have a materially adverse effect on our business, results of operations, cash flows or financial condition.

Regulatory, political, economic and social conditions in the countries where we have operations or projects could adversely impact our businesses and the market price of our securities.

Our financial and operational performance may be negatively affected by regulatory, political, economic and social conditions in countries where we have operations or projects. In some of these jurisdictions, we are exposed to various risks such as potential renegotiation, nullification or forced modification of existing contracts, expropriation or nationalization of property, foreign exchange controls, changes in local laws, regulations and policies, trade controls and tariffs, global trade uncertainties and political instability. We also face the risk of having to submit to the jurisdiction of a foreign court or arbitration panel or having to enforce a judgment against a sovereign nation within its own territory. Furthermore, we operate in labor-intensive industries that are subject to the effects of instabilities in the labor market, including strikes, work stoppages, protests and changes in employment regulations, increases in wages and the conditions of collective bargaining agreements that, individually or in the aggregate, could have a material adverse effect on our results. The industries in which we operate have experienced these types of instabilities in the past and we cannot assure that these instabilities will not occur again.

Actual or potential political or social changes and changes in economic policy may undermine investor confidence, which may hamper investment and thereby reduce economic growth, and otherwise may adversely affect the economic and other conditions under which we operate in ways that could have a materially negative effect on our businesses.

We are also exposed to risks relating to the ongoing COVID-19 pandemic and the regulatory, political, economic and social impacts of that outbreak. See “—Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”.

 

 

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Our businesses would be materially adversely affected if operations at our transportation and distribution facilities experienced significant interruptions.

The distribution of LPG, fuels, petrochemicals and pharmaceutical products are subject to inherent risks, including interruptions or disturbances in the distribution system which may be caused by accidents or force majeure events, including the ongoing COVID-19 pandemic. Our operations are dependent upon the uninterrupted operation of our terminals, storage and distribution facilities and various means of transportation. We are also dependent upon the uninterrupted operation of certain facilities owned or operated by our suppliers. Operations at our facilities and at the facilities owned or operated by our suppliers could be partially or completely shut down, temporarily or permanently, as the result of any number of circumstances that are not within our control, such as:

 

   

catastrophic events, including hurricanes and floods;

 

   

epidemics and pandemics, such as the ongoing COVID-19 pandemic (see “—Our business may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”);

 

   

environmental matters (including environmental licensing processes or environmental incidents, contamination, and others);

 

   

labor difficulties (including work stoppages, strikes and other events); and

 

   

disruptions in our means of transportation, affecting the supply of our products.

Any significant interruption at these facilities or inability to transport products to or from these facilities or to our customers for any reason could subject us to liability in judicial, administrative or other proceedings, including for disruptions caused by events outside of our control, which could materially affect our businesses and results.

For example, on May 21, 2018, Brazilian truck drivers announced a nationwide strike, which lasted 10 days, demanding a reduction in taxes imposed on diesel and an amendment to the fuel pricing methodology adopted by Petrobras. The nationwide strike also involved the blockage of some of our facilities, obstruction of highways and other public roadways all over the country which have affected the delivery of various types of cargos and prevented us from carrying out our activities and operations in a normal manner. Amongst the impacts caused by the nationwide strike, the ANP issued a series of exceptional measures to remain in effect while the strike was ongoing to avoid fuel shortages. The Brazilian Federal Government also announced the implementation of measures to meet the demands made by the truck drivers to end the nationwide strike. Our results for 2018 were negatively impacted by the truck drivers’ strike, mainly due to losses of sales volume during the period of the strike in Ipiranga, Oxiteno, Ultragaz and Extrafarma and inventory losses at Ipiranga due to the reduction of R$0.46 on the price of diesel. At Ipiranga, blockades at the distribution terminals during the strike prevented delivery of products. At Oxiteno, the strike caused a temporary stoppage at four production units due to impossibility of delivering products. At Ultragaz, difficulties of product delivery centered round the bulk segment. At Extrafarma, there were logistical problems in receiving and distributing products.

We may be adversely affected by changes to specific laws and regulations in our operating sectors.

We are subject to extensive federal, state and local legislation and regulation by government agencies and sector associations in the industries we operate. Rules related to quality of products, days of product storage, staff working hours, among others, may become more stringent or be amended overtime, and require new investments or the increase in expenses to adequate our operations. Changes in specific laws and regulations in the sectors we operate may adversely affect the conditions under which we operate in ways that could have a materially negative effect on our businesses and our results.

For example, as a consequence of the nationwide truck drivers’ strike, the ANP issued a series of exceptional measures to remain in effect while the strike was ongoing to avoid fuel shortages. The Brazilian Federal Government also announced the implementation of measures to meet the demands made by the truck drivers to end the nationwide strike.

The nationwide strike and the measures adopted in response had a direct impact to our businesses and results. Further strikes and any additional measures to be implemented by the Brazilian Federal Government and regulatory agencies in response may also affect our operations and further adversely impact our results.

 

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We may be adversely affected by the imposition and enforcement of more stringent environmental laws and regulations.

We are subject to extensive federal and state legislation and regulation by government agencies responsible for the implementation of environmental and health laws and policies in Brazil, Mexico, the Unites States and Uruguay. Companies like ours are required to obtain licenses for their manufacturing facilities from environmental authorities who may also regulate their operations by prescribing specific environmental standards in their operating licenses. Environmental regulations apply particularly to the discharge, handling and disposal of gaseous, liquid and solid products and by-products from manufacturing activities.

Changes in these laws and regulations, or changes in their enforcement, could adversely affect us by increasing our cost of compliance or operations. In addition, new laws or additional regulations, or more stringent interpretations of existing laws and regulations, could require us to spend additional funds on related matters in order to stay in compliance, thus increasing our costs and having an adverse effect on our results. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Industry and Regulatory Overview—Environmental, health and safety standards”, “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Industry and Regulatory Overview—Environmental, health and safety standards” and “Item 4.B. Information on the Company—Business Overview—Petrochemicals and Chemicals—Industry and Regulatory Overview—Environmental, health and safety standards”.

The production, storage and transportation of LPG, fuels and petrochemicals are inherently hazardous.

The operations we perform at our plants involve safety risks and other operating risks, including the handling, production, storage and transportation of highly inflammable, explosive and toxic materials. These risks could result in personal injury and death, severe damage to or destruction of property and equipment and environmental damage. A sufficiently large accident at one of our plants, service stations or storage facilities could force us to suspend our operations in the facility temporarily and result in significant remediation costs, loss of revenues and contingent liabilities. In addition, insurance proceeds may not be available on a timely basis and may be insufficient to cover all losses. Equipment breakdowns, natural disasters and delays in obtaining imports or required replacement parts or equipment can also affect our manufacturing operations and consequently our results from operations.

For example, on April 2, 2015, part of the storage facilities operated by Ultracargo in Santos, in the State of São Paulo, endured a nine-day fire surrounding six ethanol and gasoline tanks. There were no casualties in this accident and, following an investigation by the Civil and Federal Police into the accident and its impact on the region, the cause of the accident was determined to be inconclusive. See “Item 4.A. Information on the Company—History and Development of the Company—Ultracargo – Fire at storage facilities in Santos”.

Our level of indebtedness may require us to use a significant portion of our cash flow to service such indebtedness.

As of December 31, 2019, our consolidated gross debt (consisting of loans and hedging instruments and debentures recorded as current and non-current liabilities) totaled R$14,392.7 million (US$3,570.8 million), our consolidated net debt (consisting of loans and hedging instruments and debentures recorded as current and non-current liabilities, net of cash and cash equivalents and financial investments and hedging instruments) was R$8,680.6 million (US$2,153.6 million) and our cash flow generated from operating activities was R$2,924.9 million (US$725.6 million). See “Selected Consolidated Financial Data”. The level and composition of our indebtedness could have significant consequences for us, including requiring a portion of our cash flow from operations to be committed to the payment of principal and interest on our indebtedness, thereby reducing our available cash to finance our working capital and investments.

Our insurance coverage may be insufficient to cover losses that we might incur.

The operation of any chemical manufacturing plant and the specialized distribution and retail, as well as the operations of logistics of oil, chemical products, LPG, fuel and pharmaceuticals distribution involve substantial risks of property damage and personal injury and may result in material costs and liabilities. Although we maintain insurance policies, the occurrence of losses or other liabilities that are not covered by insurance or that exceed the limits of our insurance coverage could result in significant unexpected additional costs.

 

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The suspension, cancellation or non-renewal of certain federal tax benefits may adversely affect our results of operations.

Currently, we are entitled to federal tax benefits providing for income tax reduction for our activities in the Northeast region of Brazil, subject to certain conditions. Conversely, if the corresponding tax authorities understand that we have not complied with any of the tax benefit requirements or if the current tax programs from which we benefit are modified, suspended, cancelled, not renewed or renewed under terms that are substantially less favorable than expected, we may become liable for the payment of related taxes at the full tax rates and our results of operations may be adversely affected. Income tax exemptions amounted to R$43.2 million, R$107.7 million and R$48.6 million, for the years ended December 31, 2019, 2018 and 2017, respectively. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Ultragaz—Income tax exemption status”, “Item 4.B. Information on the Company—Business Overview—Petrochemicals and Chemicals—Oxiteno—Income tax exemption status” and “Item 4.B. Information on the Company—Business Overview—Storage services for liquid bulk —Ultracargo—Income tax exemption status”.

No single shareholder or group of shareholders holds more than 50% of our capital stock, which may increase the opportunity for alliances between shareholders and other events that may occur as a result thereof.

No single shareholder or group of shareholders holds more than 50% of our capital stock. Due to the absence of a controlling shareholder, we may be subject to future alliances or agreements between our shareholders, which may result in the exercise of a relevant influence over our Company by them. In the event a controlling group is formed and decides to exercise its influence over our Company, we may be subject to unexpected changes in our corporate governance and strategies, including the replacement of key executive officers. Any unexpected change in our management team, business policy or strategy, any dispute between our shareholders, or any attempt to acquire control of our Company may have an adverse impact on us. The term of office of our current members of our Board of Directors, who were elected at the annual general shareholders’ meeting held on April 10, 2019, will expire in the annual general shareholders’ meeting to be held in 2021.

As a result of the significant acquisitions of Ipiranga, União Terminais, Texaco, the Extrafarma Transaction, as well as other smaller acquisitions and possible future acquisitions, Ultrapar has assumed and may assume in the future certain liabilities related to the businesses acquired or to be acquired and risks associated with the transactions, including regulatory risks.

Ultrapar has assumed certain liabilities of previously acquired businesses; therefore, certain existing financial obligations, legal liabilities or other known and unknown contingent liabilities or risks of the businesses acquired have become Ultrapar´s responsibility. Ultrapar may acquire new businesses in the future and, as a result, it may be subject to additional liabilities, obligations and risks. See “Item 4.A. Information on the Company—History and Development of the Company” for more information in connection with these acquisitions.

In addition, Ultrapar is subject to risks relating to acquisitions that it enters into from time to time. Such risks include that the approval of such transactions may ultimately be refused by the relevant regulatory bodies, including CADE. See “Item 8.A. Financial Information Consolidated Statements and Other Financial Information—Legal Proceedings”.

These liabilities may cause Ultrapar to be required to make payments, incur charges or take other actions that may adversely affect Ultrapar’s financial position and results of operations and the price of Ultrapar’s shares.

Our founding family and part of our senior management, through their ownership interest in Ultra S.A. and Parth, own a significant portion of our shares and may influence the management, direction and policies of Ultrapar, including the outcome of any matter submitted to a vote of shareholders.

Although there is no controlling shareholder of Ultrapar, our founding family and part of our senior management, through their ownership interest in Ultra S.A., beneficially own 20% of our outstanding common stock. Ultra S.A., together with Parth, another branch of the Igel family, entered into a shareholders’ agreement on May 2, 2018. Such agreement binds a total of shares representing 29% of the Company’s capital stock. See “Item 4.A. Information on the Company—History and Development of the Company” and “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders’ Agreements”. Accordingly, these shareholders, acting together through Ultra S.A. and Parth, may exercise significant influence over all matters requiring shareholder approval, including the election of our directors.

 

 

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Our status as a holding company may limit our ability to pay dividends on the shares and consequently, on the ADSs.

As a holding company, we have no significant operating assets other than the ownership of shares of our subsidiaries. Substantially all of our operating income comes from our subsidiaries, and therefore we depend on the distribution of dividends or interest on shareholders’ equity from our subsidiaries. Consequently, our ability to pay dividends depends solely upon our receipt of dividends and other cash flows from our subsidiaries.

If we fail to successfully implement our organic growth strategy in Extrafarma, our future results of operations may not meet the expectations of investors, which could adversely affect the market price of our shares and ADSs.

Our main growth strategy for Extrafarma consists of the opening of new drugstores in Brazil. Our ability to open new drugstores could be affected if we are unable to find enough appropriate outlets for new drugstores, or if the necessary investments to adapt the property to our needs are too high. Stricter regulations, including those relating to land use and zoning laws in the regions in which we operate may also result in increased expenses and make it more difficult to find suitable outlets for opening our drugstores.

In addition, new or recently opened drugstores may not achieve maturity of its sales within the period we estimate. Also, our new or recently opened stores may adversely affect the profitability of our drugstores, what could adversely affect our business and our consolidated results.

Moreover, personnel are a key success factor in the retail pharmacy business, and we may be adversely affected if we are unable to hire, train or retain employees. Our business strategy will require the opening of new drugstores, heightening the need to hire, train and retain employees. Failure to do so may impair the process of opening new stores and our operating and financial results. Additionally, a shortage of pharmacists in Brazil as a result of continued robust market growth may result in increased wages or limit our ability to retain or recruit new pharmacists and, consequently, limit our ability to open new drugstores in the long term.

Other risks associated with the opening of new drugstores include (i) entry of new competitors in the retail pharmacy business, (ii) greater competition with market leaders in the North and Northeast regions of Brazil, (iii) limited knowledge about the new regions where we may open new drugstores and (iv) decrease in demand for our products as a result of restrictions in consumer spending or other factors. Any of these risks could adversely affect our ability to implement our organic growth strategy with respect to Extrafarma and, therefore, our business and operating and financial results. This could lead to our failure to meet the expectations of investors and to meet our goals for the operating and financial results of our drugstore business.

As of December 31, 2019, the Company recorded an impairment charge in the amount of R$593 million related to the goodwill from the acquisition of Extrafarma, with no impact in cash. The impairment of this goodwill in our statement of financial position reflects lower than expected results compared to the original plan. See notes 2.u and 15 of our consolidated financial statements.

Rising climate change concerns could lead to additional regulatory measures that may result in increased costs of operation and compliance, as well as a decrease in demand for our products.

Due to concern over the risk of climate change, a number of countries, including Brazil, have adopted or are considering the adoption of regulatory frameworks to, among other things, reduce greenhouse gas emissions. These include adoption of cap and trade regimes, carbon taxes, increased efficiency standards, prohibition of oil-based fuels vehicles, and incentives or mandates for renewable energy. These requirements could reduce demand for hydrocarbons, as well as shifting hydrocarbon demand toward relatively lower-carbon sources. In addition, many governments are providing tax advantages and other subsidies and mandates to make alternative energy sources more competitive against oil and gas. Governments are also promoting research into new technologies to reduce the cost and increase the scalability of alternative energy sources, all of which could lead to a decrease in demand for our products. In addition, current and pending greenhouse gas regulations may substantially increase our compliance costs and, as a result, increase the price of the products we produce or distribute.

 

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Our governance and compliance processes may fail to prevent regulatory penalties and reputational harm.

We are committed to conduct our businesses in a legal and ethical manner in compliance with the local and international statutory requirements and standards applicable to our activities. However, our governance and compliance processes, which include reviewing internal controls over financial reporting, may not prevent future violations of applicable legal, regulatory (including anti-corruption, antitrust and ethics and conflicts of interest laws and regulations), accounting or governance standards. Although we have implemented what we understand to be a robust compliance and anti-corruption program to detect and prevent violations of applicable anti-corruption, antitrust and conflicts of interest laws, we may be subject to breaches of our Code of Ethics, anti-corruption policies and business conduct protocols, and to instances of fraudulent behavior, corrupt, anticompetitive and unethical practices and dishonesty by our employees, contractors or other agents. In the recent past, anticompetitive practices have been one of the main problems affecting fuels and LPG distributors in Brazil, including Ipiranga and Ultragaz. There are allegations of cartels involved in price fixing in the fuel distribution and LPG sectors, and CADE has been targeting players of these sectors in different regions of Brazil. CADE has recently been actively investigating these sectors and the outcome of the ongoing investigations, administrative proceedings and lawsuits could have a material adverse effect on Ipiranga and Ultragaz. Our failure to comply with applicable laws and other standards could subject us to, among others, litigation, investigations, expenses, fines, loss of operating licenses and reputational harm.

Information technology failures could disrupt our operations.

We increasingly rely on information technology systems to process, transmit, and store electronic information. A significant portion of the communication between our personnel, customers, and suppliers depends on information technology. In addition, our billing systems rely heavily on technology infrastructure. As with all large systems, our information systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hacker attacks or other security issues.

We depend on information technology to enable us to operate efficiently and interface with customers, as well as to maintain in-house management and control. We also collect and store non-public personal information that customers provide to purchase products or services, including personal information and payment information.

In addition, the concentration of processes in shared services center means that any technology disruption could impact a large portion of our business within the operating regions we serve. Any transitions of processes to, from or within shared services centers as well as other transformational projects, could lead to business disruptions. If we do not allocate, and effectively manage, the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, loss of customers, operations disruptions, or the loss of or damage to intellectual property through a security breach. As with all information technology systems, our system could also be penetrated by outside parties with the purpose of extracting information, corrupting information or disrupting business processes.

We take various actions with the aim of minimizing potential technology disruptions, such as tools, controls and procedures in the management and monitoring of internal and perimeter security, periodic analysis of vulnerabilities performed by an independent external company, an information security and cybersecurity awareness program, a secondary environment for disaster recovery and respective periodic tests, tools for continuous monitoring and correlation of events, a dedicated team responsible for maintaining and continuously improving the information security management system, currently certified by ISO 27001 (Information Security Management standards) and other best practices and tools, but all of these protections may be compromised as a result of third-party security breaches, burglaries, cyberattack, errors by employees or employees of third-party vendors, of contractors, misappropriation of data by employees, vendors or unaffiliated third parties, or other irregularities that may result in persons obtaining unauthorized access to company data or otherwise disrupting our business.

These or other similar interruptions could have a material adverse effect on our business, results of operations, cash flows or financial condition.

 

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Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions, including ongoing political instability and perceptions of these conditions in the international markets, could adversely affect our businesses and the market price of our shares and ADSs.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes substantial changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies and regulations have involved price and wage controls, currency devaluations, capital controls, strong fiscal adjustments and limits on imports, among other measures. Our businesses, financial condition and results of operations may be adversely affected by changes in policy or regulations involving or affecting tariffs, exchange controls and other matters, as well as factors such as:

 

   

currency fluctuations;

 

   

inflation;

 

   

interest rates;

 

   

exchange rate policies;

 

   

liquidity available in the domestic capital, credit and financial markets;

 

   

oil and gas sector regulations, including price policies;

 

   

petrochemical and chemical sectors regulations;

 

   

retail pharmacy business regulations;

 

   

the impact of epidemics and pandemics, such as the ongoing COVID-19 pandemic;

 

   

price instability;

 

   

social and political instability;

 

   

energy and water shortages and rationing;

 

   

liquidity of domestic capital and lending markets;

 

   

fiscal policy; and

 

   

other political, economic, social, trade and diplomatic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government may implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers, as well as heightened volatility in the Brazilian Real. These and other future developments in the Brazilian economy or government policies may adversely affect us and our businesses as well as our results of operations and may adversely affect the trading price of our ADSs and shares. Furthermore, the Brazilian government may enact new regulations that may adversely affect our businesses and us.

Political instability in Brazil has been growing in recent years and can adversely affect the economy. Brazilian president Dilma Rousseff was reelected for a second four-year term in October 2014, which began in January 2015. Following the reelection, wide scale protests throughout Brazil called for the impeachment of Dilma Rousseff. On April 17, 2016, Brazil’s lower house of Congress voted in favor of sending an impeachment motion against Mrs. Rousseff to the Brazilian Senate. In May 2016, the Brazilian Senate voted to approve the commencement of an impeachment trial, which was concluded on August 31, 2016 with approval by the Senate of the impeachment of Mrs. Rousseff. As a result, Michel Temer, the former Vice-President, assumed the presidency of Brazil following Rousseff’s ouster. In January 2019, Mr. Jair Messias Bolsonaro, a former member of the lower house of Congress, took office as president for a 4-year term, from 2019 to 2022. We have no control over and cannot predict what policies or actions the Brazilian government may take. Since February 2020, Mr. Bolsonaro has been critized for his handling of the Brazilian response to the ongoing COVID-19 pandemic, which led to protests against Mr. Bolsonaro in several cities and an impeachment request being submitted to Congress. Any of these factors may have an adverse impact on the Brazilian economy, our business, financial condition, results of operations and the market price of our ADSs and shares.

 

 

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Brazilian markets experienced heightened volatility due to the uncertainties derived from the ongoing Lava Jato investigation. The potential outcomes from Lava Jato and other similar corruption investigations, being conducted by Law Courts in Paraná and other states, and the Office of the Brazilian Federal Prosecutor, could continue to adversely affect the Brazilian economy and political landscape, our businesses, financial condition, results of operations and the market price of our ADSs and shares. The Brazilian government may be subject to internal pressure to change its current macroeconomic policies in order to achieve higher rates of economic growth. Despite the lowest interest rates in Brazilian monetary history, the Brazilian government may, in the future, be pressured to increase them, thereby restricting the availability of credit and reducing economic growth.

Brazil’s federal budget has been in deficit since 2014. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to their high debt burdens, declining revenues and inflexible expenditures. The Brazilian Congress has approved a ceiling on government spending that limits primary public expenditure growth to the prior year’s inflation for a period of at least 10 years. In 2019, Congress approved the reform of Brazil’s pension system, which is expected to contribute towards complying with the spending limit. However, discussions in the Brazilian Congress relating to a tax reform remain ongoing as of the date of this annual report. In addition, governmental responses to the ongoing COVID-19 pandemic may have significant effect on the fiscal position in Brazil, including reduced tax revenue and increased governmental spending to combat COVID-19 and its impacts. The Brazilian Congress has approved a legislative decree that recognizes the state of public calamity in Brazil due to the COVID-19 pandemic and such state of calamity is currently effective until December 31, 2020. Due to the state of public calamity, the government is not required to meet the fiscal primary balance target for 2020. In addition, a constitutional amendment is currently under consideration by the Brazilian Senate to allow for the separation of expenses incurred to combat COVID-19 from the budget of the Federal Government, creating an extraordinary regime to allow the increase in public expenditures during the ongoing COVID-19 pandemic without the constitutional barriers that currently restrict federal spending. The proposed constitutional amendment exempts the Federal Government from the so-called fiscal “golden rule” of balancing the budget through the end of 2020 and proposals under consideration may also include significant financial support to the budgets of states and municipalities, further increasing government spending, which is expected to further increase the fiscal deficit in Brazil.

Diminished confidence in the Brazilian government’s budgetary condition and fiscal stance could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to further depreciation of the Real and an increase in inflation and interest rates. In addition, negative ratings actions could be taken by rating agencies as a result of economic and political uncertainties or other factors in connection with the COVID-19 pandemic (see “—Risks Relating to Ultrapar and Its Industries— Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”, and other risk factors included herein). The occurrence of any of these factors could adversely affect our businesses, results of operations and financial condition.

We cannot predict which policies will be adopted by the Brazilian government. Moreover, in the past, the Brazilian economy has been affected by the country’s political events, which have also affected the confidence of investors and the public in general, thereby adversely affecting the performance of the Brazilian economy. Furthermore, any indecisiveness by the Brazilian government in implementing changes to certain policies or regulations may contribute to economic uncertainty in Brazil and heightened volatility for the Brazilian securities markets and securities issued abroad by Brazilian companies. We are not able to fully estimate the impact of global and Brazilian political and macroeconomic developments on our businesses. In addition, there is substantial uncertainty regarding future economic policies and we cannot predict which policies will be adopted by the Brazilian government and whether these policies will negatively affect the economy or our businesses or financial performance. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect our securities and us. Any continued economic instability and political uncertainty which results in reduced availability of credit and reduced economic growth may materially and adversely affect our businesses.

 

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Inflation and certain governmental measures to curb inflation may contribute significantly to economic uncertainty in Brazil and could harm our businesses and the market value of the ADSs and our shares.

In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have had significant negative effects on the Brazilian economy. Since the introduction of the Real in 1994, Brazil’s inflation rate has been substantially lower than that in previous periods. However, during the recent past, the economy has experienced increasing inflation rates and actions taken in an effort to curb inflation, coupled with speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. According to the Índice Geral de Preços-Mercado, or IGP-M, an inflation index, the Brazilian general price inflation rates were 7.3% in 2019, 7.5% in 2018, -0.5% in 2017, 7.2% in 2016 and 10.5% in 2015. According to the Índice Nacional de Preços ao Consumidor Amplo, or IPCA, an inflation index to which Brazilian government’s inflation targets are linked, inflation in Brazil was 4.3% in 2019, 3.7% in 2018, 2.9% in 2017, 6.3% in 2016 and 10.7% in 2015. Brazil may experience high levels of inflation in the future. Our operating expenses are substantially in Reais and tend to increase with Brazilian inflation. Inflationary pressures may also hinder our ability to access foreign financial markets or may lead to further government intervention in the economy, including the introduction of government policies that could harm our businesses or adversely affect the market value of our shares and, as a result, our ADSs.

Exchange rate instability may adversely affect our financial condition, results of operations and the market price of the ADSs and our shares.

During the last decades, the Brazilian government has implemented various economic plans and a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over long periods depreciation of the Brazilian currency has been generally correlated with the rate of inflation in Brazil, there have historically been observed shorter periods of significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies, in particular in the last 10 years.

In 2015, the political instability, the downgrade of Brazil’s sovereign credit rating and the expectation for an interest rate rise by the Federal Reserve System contributed to a 47% depreciation of the Real against the U.S. dollar. In 2016, the Real appreciated 17% against the U.S. dollar, marking the first year that it has appreciated against the U.S. dollar since 2011, despite residual political instability and continuing signs of shrinking of the Brazilian economy. This was due mostly to improvements in the Brazilian political environment, following the impeachment of former president Dilma Rouseff and certain stabilizing measures proposed by current President Michel Temer as well as ongoing efforts by the government’s economic team to curb public spending and debt. In 2017, the Real depreciated 2% against the U.S. dollar reflecting the continued political instability and deterioration of the expectation of the pension reform approval, despite the slight improvement in the Brazilian macroeconomic scenario. In 2018, the Real depreciated 17%, pressured mainly by the global instability, result of economic crises in developed countries and the increase of interest rates by the Federal Reserve System in the United States. The domestic scenario, characterized by political instability due to the presidential election and the slow progress of fiscal and pension reforms, also influenced the Real depreciation during the year. In 2019, the Brazilian Central Bank reduced the interest rate to boost economic momentum after indications of low inflation. The reduction in interest rates, along with geopolitical instability – mainly the commercial conflict between the United States and China, led to pressures on the Real exchange rate in 2019. Despite the pension reform approval by the Brazilian Congress and other events that caused periods of appreciation during the year, the Real depreciated 4% against the U.S. dollar in 2019. From December 31, 2019 to April 23, 2020, the Real depreciated 35% against the U.S. dollar, mainly due to the low interest rate environment in Brazil and international market conditions, including the economic, political and other impacts of the ongoing COVID-19 pandemic. See “Item 3.A. Key Information—Selected Consolidated Financial Data—Exchange Rates”.

There are no guarantees that the exchange rate between the Real and the U.S. dollar will stabilize at current levels, and the Real and the U.S. dollar exchange rate may be adversely impacted by the economic and fiscal scenario caused by the ongoing COVID-19 pandemic and governmental responses to this. Although we have contracted hedging instruments with respect to our existing U.S. dollar debt obligations, in order to reduce our exposure to fluctuations in the dollar/Real exchange rate, we cannot guarantee that such instruments will be adequate to protect us fully against further devaluation of the Real, and we could in the future experience monetary losses as a result. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk” for information about our foreign exchange risk hedging policy.

 

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Depreciations of the Real relative to the U.S. dollar can create additional inflationary pressures in Brazil that may negatively affect us. Depreciations generally curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciations also reduce the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our shares and, as a result, the ADSs. On the other hand, appreciation of the Real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth.

Although a large part of our sales is denominated in Reais, prices and certain costs in the chemical business (including but not limited to ethylene and palm kernel oil, purchased by our subsidiary Oxiteno) are benchmarked to prices prevailing in the international markets. Therefore, we are exposed to foreign exchange rate risks that could materially adversely affect our business, financial condition and results of operations as well as our capacity to service our debt. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

Economic and market conditions in other countries, including in the United States and emerging market countries, may materially and adversely affect the Brazilian economy and, therefore, our financial condition and the market price of the shares and ADSs.

The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil, and, to varying degrees, market conditions in other countries, including the United States, other Latin American and emerging market countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or conditions in other countries, including the United States and other emerging market countries, have at times significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil, as well as limited access to international capital markets, all of which may materially and adversely affect our ability to borrow funds at an acceptable interest rate or to raise equity capital when and if we should have such a need.

In 2017, 2018 and 2019, the Brazilian market remained volatile due to, among other factors, uncertainties about the political, commercial and trading relationships between the United States and China, the increasing risk aversion to emerging market countries, and the uncertainties regarding Brazilian macroeconomic and political conditions. These uncertainties adversely affected us and the market value of our securities. In addition, we continue to be exposed to disruptions and volatility in the global financial markets because of their effects on the financial and economic environment, particularly in Brazil, such as a slowdown in the economy, an increase in the unemployment rate, a decrease in the purchasing power of consumers and the lack of credit availability. In addition, since the start of 2020, the ongoing COVID-19 pandemic has resulted in significant financial market volatility and uncertainty around the globe, which volatility significantly increased in March and April 2020. See “ —Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”.

Disruption or volatility in the global financial markets could further increase negative effects on the financial and economic environment in Brazil, which could have a material adverse effect on our businesses, results of operations and financial condition.

Our businesses, financial condition and results of operations may be materially and adversely affected by a general economic downturn and by instability and volatility in the financial markets.

The turmoil of the global financial markets and the scarcity of credit in 2008 and 2009, and to a lesser extent, the European crisis deteriorated in 2011, led to lack of consumer confidence, increased market volatility and widespread reduction of business activity. An economic downturn could materially and adversely affect the liquidity, businesses and/or financial conditions of our customers, which could in turn result not only in decreased demand for our products, but also increased delinquencies in our accounts receivable. Furthermore, an eventual new global financial crisis could have a negative impact on our cost of borrowing and on our ability to obtain future borrowings. The disruptions in the financial markets could also lead to a reduction in available trade credit due to counterparties’ liquidity concerns. If we experience a decrease in demand for our products or an increase in delinquencies in our accounts receivable, or if we are unable to obtain borrowings our businesses, financial condition and results of operations could be materially adversely affected.

The rapid escalation of COVID-19 pandemic across the world since the beginning of 2020 has had, and will continue to have, a number of negative impacts on our businesses, financial condition and results of operations. See “—Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”.

 

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Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other relevant persons.

We are a company incorporated under the laws of Brazil. All members of our Board of Directors, executive officers and experts named in this annual report are residents of Brazil or have business address in Brazil. All or a substantial part of the assets pertaining to these individuals and to Ultrapar are located outside the United States. As a result, it is possible that investors may not be able to effect service of process upon these individuals or us in the United States or other jurisdictions outside Brazil, or enforce judgments against us or these other persons obtained in the United States or other jurisdictions outside Brazil, including for civil liability based upon United States federal securities laws or otherwise. In addition, because judgments of United States courts for civil liabilities based upon the United States federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions against us or our Board of Directors or executive officers than would shareholders of a United States corporation.

Risks Relating to the Shares and the American Depositary Shares

Asserting limited voting rights as a holder of ADSs may prove more difficult than for holders of our common shares.

Under the Brazilian Corporate Law, only shareholders registered as such in our corporate books may attend shareholders’ meetings. All common shares underlying the ADSs are registered in the name of the depositary bank. A holder of ADSs, accordingly, is not entitled to attend shareholders’ meetings. A holder of ADSs is entitled to instruct the depositary bank as to how to exercise the voting rights of its common shares underlying the ADSs in accordance with procedures provided for in the Deposit Agreement, but a holder of ADSs will not be able to vote directly at a shareholders’ meeting or appoint a proxy to do so. In addition, a holder of ADSs may not have sufficient or reasonable time to provide such voting instructions to the depositary bank in accordance with the mechanisms set forth in the Deposit Agreement and custody agreement, and the depositary bank will not be held liable for failure to deliver any voting instructions to such holders.

Holders of our shares or ADSs may not receive dividends.

Under our bylaws, unless otherwise proposed by the Board of Directors and approved by the voting shareholders at our annual shareholders’ meeting, we must generally pay our shareholders a mandatory distribution equal to at least 50% of our adjusted net profit, after the allocation of 5% of the net profit to the legal reserve. However, our net income may be used to increase our capital stock, used to set off losses and/or otherwise retained in accordance with the Brazilian Corporate Law and may not be available for the payment of dividends, including in the form of interest on shareholders’ equity. Therefore, whether or not you receive a dividend depends on the amount of the mandatory distribution, if any, and whether the Board of Directors and the voting shareholders exercise their discretion to suspend these payments. See “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Dividend and Distribution Policy—Dividend Policy” for a more detailed discussion of mandatory distributions.

Holders of our shares may be unable to exercise preemptive rights with respect to the shares.

In the event that we issue new shares pursuant to a capital increase or offer rights to purchase our shares, shareholders would have preemptive rights to subscribe for the newly issued shares or rights, as the case may be, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholder percentage.

However, our bylaws establish that the Board of Directors may exclude preemptive rights to the current shareholders or reduce the time our shareholders have to exercise their rights, in the case of an offering of new shares to be sold on a registered stock exchange or otherwise through a public offering.

The holders of our shares or ADSs may be unable to exercise their preemptive rights in relation to the shares represented by the ADSs, unless we file a registration statement for the offering of rights or shares with the SEC pursuant to the United States Securities Act or an exemption from the registration requirements applies. We are not obliged to file registration statements in order to facilitate the exercise of preemptive rights and, therefore, we cannot assure ADS holders that such a registration statement will be filed. As a result, the equity interest of such holders in our Company may be diluted. If the rights or shares, as the case may be, are not registered as required, the depositary will try to sell the preemptive rights held by holder of the ADSs and you will have the right to the net sale value, if any. However, the preemptive rights will expire without compensation to you should the depositary not succeed in selling them.

 

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If shareholders exchange ADSs for shares, they may lose certain foreign currency remittance and Brazilian tax advantages.

The ADSs benefit from the depositary’s certificate of foreign capital registration, which permits the depositary to convert dividends and other distributions with respect to the shares into foreign currency and remit the proceeds abroad. In order to surrender ADSs for the purpose of withdrawing the shares represented thereby, investors are required to comply with National Monetary Council (“CMN”) Resolution 4,373 of September 29, 2014 (“CMN Resolution 4,373”), which requires, among other things, that investors appoint a legal representative in Brazil. If the investors fail to comply with CMN Resolution 4,373, or the legal representative appointed by the investors fail to comply with CMN Resolution 4,373 or to take action when required to do so, it could affect the investors’ ability to receive dividends or distributions relating to our shares or the return of their capital in a timely manner. Investors that are registered as CMN Resolution 4,373 investors may buy and sell their shares on the Brazilian stock exchanges without obtaining separate certificates of registration. If investors do not qualify under CMN Resolution 4,373, they will generally be subject to less favorable tax treatment on distributions with respect to the shares. The depositary’s certificate of registration or any certificate of foreign capital registration obtained by the investor may be affected by future legislative or regulatory changes, and additional Brazilian law restrictions applicable to their investment in the ADSs may be imposed in the future. For a more complete description of Brazilian tax regulations, see “Item 10.E. Additional Information—Taxation—Brazilian Tax Consequences”.

Controls and restrictions on the remittance of foreign currency could negatively affect your ability to convert and remit dividends, distributions or the proceeds from the sale of our shares, Ultrapar’s capacity to make dividend payments to non-Brazilian investors and the market price of our shares and ADSs.

Brazilian law provides that, whenever there is a serious imbalance in the Brazilian balance of payments or reasons for believing that there will be a serious imbalance in the future, the Brazilian government can impose temporary restrictions on remittances of proceeds from investments to foreign investors, including ADS holders and holders of Ultrapar shares that reside outside Brazil. The probability that the Brazilian government might impose such restrictions is related to the level of the country’s foreign currency reserves, the availability of currency in the foreign exchange markets on the date a payment is due, the amount of the Brazilian debt servicing requirement in relation to the economy as a whole, and the Brazilian policy towards the International Monetary Fund, among other factors. We are unable to give assurances that the Central Bank will not modify its policies or that the Brazilian government will not introduce restrictions or cause delays in payments by Brazilian entities of dividends relating to securities issued in the overseas capital markets. Such restrictions or delays could negatively affect your ability to convert and remit dividends, distributions or the proceeds from the sale of our shares, Ultrapar’s capacity to make dividend payments to non-Brazilian investors and the market price of our shares and the ADSs.

Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our ADSs.

According to Law No. 10,833, enacted on December 29, 2003, the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposal occurs outside or within Brazil. In the event that the disposal of assets is interpreted to include a disposal of our ADSs, this tax law could result in the imposition of the withholding income tax on a disposal of our ADSs between non-residents of Brazil. See “Item 10.E. Additional Information—Taxation—Brazilian Tax Consequences—Taxation of Gains”.

 

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Substantial sales of our shares or our ADSs could cause the price of our shares or our ADSs to decrease.

Shareholders of Ultra S.A. and Parth, which own 29% of our outstanding shares, have the right to exchange their shares of Ultra S.A. and Parth for shares of Ultrapar and freely trade them in the market as more fully described under “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders’ Agreements”. Other shareholders, who may freely sell their respective shares, hold a substantial portion of our remaining shares. A sale of a significant number of shares could negatively affect the market value of the shares and ADSs. The market price of our shares and the ADSs could drop significantly if the holders of shares or the ADSs sell them or the market perceives that they intend to sell them.

There may be adverse U.S. federal income tax consequences to U.S. Holders if we are or become a PFIC under the Code.

If we were characterized as a PFIC, in any year during which a U.S. Holder holds our shares or ADSs, certain adverse U.S. federal tax income consequences could apply to that person. Based on the manner in which we currently operate our businesses, the projected composition of our income and valuation of our assets, and the current interpretation of the PFIC rules, including the Commodity Exception, we do not believe that we were a PFIC in 2019 and we do not expect to be a PFIC in the foreseeable future. However, because PFIC classification is a factual determination made annually and is subject to change and differing interpretations, there can be no assurance that we will not be considered a PFIC for the current taxable year or any subsequent taxable year. U.S. Holders should carefully read “Item 10.E. Additional Information — Taxation — U.S. Federal Income Tax Considerations” for a description of the PFIC rules and consult their tax advisors regarding the likelihood and consequences of us being treated as a PFIC for U.S. federal income tax purposes.

 

ITEM 4.

INFORMATION ON THE COMPANY

 

A.

History and Development of the Company

We were incorporated on December 20, 1953, with our origins going back to 1937, when Ernesto Igel founded Ultragaz and pioneered the use of LPG as cooking gas in Brazil, using bottles acquired from Companhia Zeppelin. The gas stove began to replace the traditional wood stove and, to a lesser degree, kerosene and coal, which dominated Brazilian kitchens at the time.

Ultrapar is a Brazilian company with more than 80 years of history, with leading positions in the markets in which it operates: the Oil & Gas value chain, through Ipiranga, Ultragaz and Ultracargo, specialty chemicals through Oxiteno and retail pharmacy with Extrafarma.

We are a company incorporated under the laws of Brazil. Our principal executive office is located at Brigadeiro Luis Antônio Avenue, 1343, 9th Floor, 01317-910, São Paulo, SP, Brazil. Our telephone number is +55 (11) 3177 7014. Our internet website address is http://ri.ultra.com.br. Unless expressly incorporated by reference into this annual report, including the exhibits and schedules filed herewith, the contents of our website are not incorporated by reference into this annual report. Our agent for service of process in the United States is C.T. Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

Ultragaz

When Ultragaz began its operations, it served only the Southeast region of Brazil. Currently, Ultragaz operates nationwide in the distribution of both bottled and bulk LPG, including the most highly populated states in Brazil, such as São Paulo, Rio de Janeiro and Bahia, and may sell bottled LPG through independent dealers. Bulk LPG is serviced through Ultragaz own infrastructure.

In 1995, Ultragaz introduced UltraSystem – a small bulk distribution system – to residential, commercial and industrial segments, and started the process of geographical expansion through the construction of new LPG filling and satellite plants.

In August 2003, Ultragaz acquired Shell Gás, Royal Dutch Shell plc’s LPG operations in Brazil. With this acquisition, Ultragaz became the Brazilian market leader in LPG, with a 24% share of the Brazilian market on that date. In October 2011, Ultragaz acquired Repsol’s LPG distribution business in Brazil.

 

 

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Oxiteno

We were also one of the pioneers in developing the Brazilian petrochemicals industry with the creation of Oxiteno in 1970, whose first plant was located in the Mauá petrochemical complex in São Paulo metropolitan area. In 1974, Oxiteno inaugurated its second industrial unit, in the Camaçari petrochemical complex in Bahia. In 1986, Oxiteno established its own research and development center in order to respond to specific customer needs. In April 2002, Oxiteno completed a tender offer for the acquisition of the shares of its subsidiary Oxiteno Nordeste, through the acquisition of approximately 73.3% of the shares held by minority shareholders. Oxiteno increased its share ownership in Oxiteno Nordeste from 97% to 98.9%.

In December 2003, we concluded the acquisition of Canamex, later renamed Oxiteno Mexico, a Mexican specialty chemicals company. In June 2004, we acquired the operational assets of Rhodia Especialidades S.A. de C.V. in Mexico. Both acquisitions had the target of establishing a stronger presence in the Mexican petrochemical market and to create a production and distribution platform to serve the United States market.

In September 2007, Oxiteno acquired Arch Andina, a subsidiary of the U.S. company Arch Chemicals, Inc. At such time, Arch Andina was the sole producer of ethoxylates in Venezuela, which had been the only ethylene oxide producing country in Latin America where Oxiteno did not have operations. The company was later renamed Oxiteno Andina. In October 2019, Oxiteno Andina was sold to a buyer in Venezuela, motivated by the operational and economic environment in the country.

In April 2012, Oxiteno acquired a specialty chemicals plant in the United States. The plant is located in Pasadena, Texas, one of the most important chemical hubs in the world, benefiting from attractive feedstock conditions, including competitive natural gas-based raw materials, and highly efficient logistics infrastructure. In September 2018, Oxiteno completed the construction of the new alkoxylation unit in the same site in Texas, US. The unit expands Oxiteno’s footprint in the United States, focusing on local markets of agrochemicals, personal care, household and industrial cleaning, coatings and oil and gas.

In November 2012, Oxiteno acquired American Chemical (currently Oxiteno Uruguay), a Uruguayan specialty chemicals company. Oxiteno Uruguay’s production capacity is 81 thousand tons per year, particularly sulfonate and sulfate surfactants for the home and personal care industries.

As of December 2019, Oxiteno Nordeste was merged into Oxiteno. All activities of Oxiteno Nordeste were assumed by Oxiteno.

Oxiteno continued the expansion of its international activities, initiated in 2003 with the opening of commercial offices outside Brazil. In August 2006, Oxiteno opened its first commercial office outside Brazil, in Buenos Aires, Argentina – Oxiteno Argentina S.R.L. In July 2008, Oxiteno inaugurated its first sales office in Europe and the third outside Brazil in Brussels, Belgium, as part of Oxiteno’s internationalization strategy. In May 2012, Oxiteno opened a commercial office in Shanghai, China – Oxiteno Shanghai Trading LTD.

Ultracargo

The market demand, in the decade of 1960, for high-quality and safe transportation services led to our entrance in the transportation of chemicals, petrochemicals and LPG segment. In 1978, Tequimar was founded for the specific purpose of operating the storage business. Later, Tequimar was acquired by Ultracargo, which is currently the largest provider of liquid bulk storage in Brazil.

In July 2005, Ultracargo started up a new terminal in Santos, its second port terminal that integrates road, rail and maritime transportation systems. In June 2008, Ultracargo signed the sale and purchase agreement for the acquisition of 100% of the shares of União Terminais held by Unipar. In October 2008, the acquisition of the port terminals in Santos and Rio de Janeiro were concluded. In November 2008, Ultracargo completed the acquisition of 50% of the total capital stock held by Unipar in União Vopak, which owned a port terminal in Paranaguá. The combination of its operations with those of União Terminais doubled the size of Ultracargo in terms of EBITDA and made it the largest liquid bulk storage company in Brazil, strengthening its operating scale. With this acquisition, Ultracargo increased its presence at the port of Santos, the largest Brazilian port, and is now strategically positioned in the ports of Rio de Janeiro and Paranaguá, where the company did not previously have operations.

In December 2009, Ultracargo acquired Puma Storage do Brasil Ltda., a storage terminal for liquid bulk located at the port of Suape, in the state of Pernambuco. In July 2012, Ultracargo acquired Temmar from Temmar Netherlands B.V. and Noble Netherlands B.V., subsidiaries of Noble Group. Temmar owned a terminal in the port of Itaqui, in the state of Maranhão.

 

 

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In January 2018, Tequimar entered into a sale and purchase agreement for the acquisition of 100% of the quotas of TEAS, owned by Raízen Energia S.A. and Raízen Araraquara Açúcar e Álcool Ltda., whose assets had already been operated by Tequimar in the port of Santos. On March 29, 2018, the acquisition was concluded.

In April 2019, Ultracargo was awarded the concession of a specific area in the port of Vila do Conde, in Barcarena (PA), with the commitment that Ultracargo builds and operates a minimum storage capacity of 59 thousand cubic meters. The new terminal is currently expected to start its operations in 2023, developing our services in the North region with strategic location and privileged infrastructure. Ultracargo is expected to invest approximately R$300 million in the construction of the Vila do Conde terminal.

Ipiranga

In March 2007, Ultrapar, Petrobras and Braskem announced their intent to acquire the Ipiranga Group, and Ultrapar entered into, and Petrobras and Braskem acknowledged, the Ipiranga Group SPA with the Key Shareholders of the principal companies comprising the Ipiranga Group. In April 2007, Ultrapar acquired the control of the Southern Distribution Business, EMCA and a one-third stake in RPR, in connection with the acquisition of the Ipiranga Group. Following the acquisition, Ultrapar, which was already Brazil’s largest LPG distributor, became the second largest fuel distributor in the country, with a 14% market share in 2007, according to ANP.

After the completion of the acquisition of Ipiranga Group, its businesses were divided among Petrobras, Ultrapar and Braskem. Ultrapar retained the fuel and lubricant distribution businesses located in the South and Southeast regions of Brazil; Petrobras received the fuel and lubricant distribution businesses located in the North, Northeast and Midwest regions of Brazil; Petrobras and Braskem received the Petrochemical Business, in the proportion of 60% for Braskem and 40% for Petrobras. For a more detailed discussion of the acquisition of Ipiranga Group, see our Form F-4 filed with the Commission on December 17, 2007.

In August 2008, Ipiranga entered into a sale and purchase agreement with Chevron for the acquisition of 100% of the shares of CBL and Galena. The combination with Texaco created a nationwide fuel distribution business, strengthening its competitiveness through a larger operational scale. After completion of the acquisition, Ipiranga implemented its business plan, which consisted of two main work streams (i) the integration of operations, administrative and financial functions of Texaco, and (ii) the implementation of Ipiranga’s business model in the expanded network, with a wider range of products and services and a differentiated approach to its resellers. As of December 31, 2012, Ipiranga had also converted all the acquired Texaco branded stations into the Ipiranga brand.

In February 2009, a capital increase of R$15 million was approved at an extraordinary general shareholders’ meeting of RPR through the issuance of 15 million new common and preferred shares and the admission of new shareholders in its capital stock, as part of the acquisition of the Ipiranga Group. As a result, RPR ceased to be a wholly-owned subsidiary of Ultrapar. Ultrapar retains a non-controlling equity interest of 33% in RPR.

In October 2010, Ipiranga acquired 100% of the shares of DNP. DNP distributed fuels in the states of Amazonas, Rondônia, Roraima, Acre, Pará and Mato Grosso through a network of 110 service stations, with 4% market share in 2009 in the North of Brazil.

In November 2012, Ipiranga entered the segment of electronic payment for tolls, parking and fuels through ConectCar. ConectCar fits into Ipiranga’s strategy of differentiation, offering more products and services in its service station network focused on convenience and practicality, generating benefits for its clients, retailers and for the company itself. In October 2015, Redecard S.A. acquired 50% of ConectCar from a former partner. This new partner provided opportunities to ConectCar expand its services to new markets, continuing with its purpose of offering customers mobility, convenience, flexibility and, above all, differentiated benefits.

In August 2016, Ipiranga entered into an association agreement with Chevron to create a new company in the lubricants business, Iconic; of which Ipiranga and Chevron hold 56% and 44%, respectively. Operations commenced on December 1, 2017.

In March 2019, Ipiranga was awarded the concession of specific areas in Vitória (ES) and Cabedelo (PB) through the consortia Nordeste and Navegantes, in which Ipiranga holds one third of the total participation, together with BR and Raízen. The concessions require the consortia to build and operate a minimum storage capacity for the Nordeste consortium of 64 thousand cubic meters and initial operations are currently expected to commence during 2020, while the minimum storage capacity of the Navegantes consortium is 66 thousand cubic meters, with initial operation currently expected during 2022. In April 2019, Ipiranga won two concessions in the port of Miramar, in Belém (PA): (i) area BEL02A, through a consortium 50% owned by Ipiranga and 50% owned by Raízen, with a minimum storage capacity of 41 thousand cubic meters, and (ii) area BEL04A, which is currently operated by Ipiranga, therefore maintaining its operation in the region, with minimum storage capacity of 23 thousand cubic meters. These were strategic moves for Ipiranga, which improves logistics efficiency of fuels distribution through its own storage capacity and contributes to better quality services in the respective regions.

 

 

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Extrafarma

Benefitting from over 50 years of activity in the wholesale and retail of pharmaceutical products, Extrafarma is a leading drugstore chain in the main regions in which it operates. In September 2013, Ultrapar and the former shareholders of Extrafarma entered into an association agreement with Extrafarma, one of Brazil’s top ten drugstores chains, marking our entry in the retail pharmacy business. According to the terms of the agreement, Ultrapar and Extrafarma entered into a merger of shares, pursuant to which Ultrapar acquired 100% of the shares of Extrafarma in exchange for up to 2.9% of shares issued by Ultrapar to Extrafarma’s shareholders. Extrafarma became a wholly-owned subsidiary of Ultrapar from February 1, 2014 onwards. The total consideration of the Extrafarma transaction consisted of the issuance of up to 32,056,262 shares of Ultrapar and the assumption by Ultrapar of Extrafarma’s net debt of R$106 million as of December 31, 2012.

Ultrapar received from the former seven shareholders of Extrafarma all of the shares of Extrafarma in exchange for 24,042,200 newly issued shares of Ultrapar, in accordance with Art. 252 of the Brazilian Corporate Law, increasing our issued share capital to 1,112,810,192 shares. In addition, as a mechanism for possible adjustments related to contingencies whose triggering events occurred prior to the closing of the transaction, we issued subscription warrants to the former Extrafarma shareholders that, if exercised, could potentially lead to the issuance of up to 8,014,062 shares until 2020, subject to adjustment based on numerous factors. Of the total possible shares that could be issued to the former Extrafarma shareholders upon exercise of the subscription warrants, they could receive up to 1,602,818 additional shares of Ultrapar based on working capital adjustments and 6,411,244 shares of Ultrapar based on absence of indemnification obligations. In 2015, after a final agreement between Ultrapar and Extrafarma, the subscription warrants related to the working capital adjustments were cancelled. In February 2020, the subscription warrants were partially exercised, with an issuance of 2,108,542 common shares to former Extrafarma shareholders. Therefore, as of the date of this annual report, the exercise of the remaining subscription warrants by the former Extrafarma shareholders could potentially lead to issuance of up to 4,302,702 additional shares of Ultrapar. All number of shares were adjusted to reflect the stock split issued by the Company on April 10, 2019.

Corporate events

On October 6, 1999, we concluded our initial public offering, listing our shares simultaneously on B3 and NYSE. In March 2000, Ultra S.A.’s shareholders signed an agreement, assuring equal treatment of all shareholders (holders of both common and/or preferred shares) in the event of any change in control – tag along rights. The agreement determined that any transfer of control of Ultrapar, either directly or indirectly, would only be executed in conjunction with a public offer by the acquiring entity to purchase the shares of all shareholders in the same proportion and under the same price and payment terms as those offered to the controlling shareholders. In December 2002, we completed a corporate restructuring process that had begun in October 2002. The effects of the corporate restructuring were (i) the merger of Gipóia Ltda., a company which held a 23% direct stake in Ultragaz and was owned by Ultra S.A., into Ultrapar, increasing our ownership in Ultragaz to 99.6% and (ii) the exchange of shares issued by Oxiteno for shares issued by Ultrapar.

In January 2008, Ultrapar significantly increased the liquidity of its shares through the issuance of 55 million preferred shares, as a consequence of the Share Exchange. The Share Exchange increased Ultrapar’s free float from 32 million shares to 87 million shares, with the free float reaching 64% of the Company’s total capital. The significant increase in the size of the free float helped Ultrapar to become part of Ibovespa, one of B3 index.

In April 2011, our Board of Directors approved the submission to our shareholders a proposal to (a) convert any and all shares of preferred stock issued by the Company into common shares, on a 1:1 conversion ratio; (b) amend the Company’s bylaws, modifying several of its provisions, aiming to strengthen the Company’s corporate governance; and (c) adhere to the Novo Mercado segment rules. Our shareholders approved all the proposals and, in August 2011, Ultrapar’s shares began trading on the Novo Mercado under ticker symbol UGPA3. Simultaneously, Ultrapar’s ADSs, formerly represented by preferred shares, began representing Ultrapar’s common shares and began trading on the NYSE under this new format.

In May 2018, Ultra S.A.’s and Parth’s shareholders entered into a new shareholders’ agreement which became effective as of that date and replaced the shareholders’ agreement that was executed in 2014. The abovementioned companies are holding companies of the two branches of the Igel family, as well as of former executives of the Company. The agreement sets forth a set of rules to govern the relationship between these two shareholders and binds a total of shares representing 29.4% of the Company’s capital stock. The agreement aims to reinforce, without any change, the principles that have been governing the actions of two reference shareholders of Ultrapar, in favor of all shareholders’ interests and the guarantee that the Company is managed in a professional and independent manner. See “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholders—Shareholders’ Agreements”.

 

 

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In April 2019, the Company’s Extraordinary and Annual General Meeting approved a stock split of Ultrapar’s common shares, whereby one existing share now represents two shares of the same class and type. The stock split did not alter in Ultrapar’s total share capital and was effective on April 24, 2019.

In February 2020, due to the partial exercise of the subscription warrants issued by the Company as of the approval of the Extrafarma transaction, 2,108,542 common shares were issued within the limits of the authorized capital. As a consequence of this issuance, the Company’s capital stock is represented by 1,114,918,734 common shares, all nominative, with no par value. Since no additional payment for exercising the subscription warrants is due, the issuance did not result in any change in the amount of the capital stock.

Leadership

In May 2012, the Board of Directors approved the nomination of Thilo Mannhardt to succeed Pedro Wongtschowski as Chief Executive Officer starting January 1, 2013. Pedro Wongtschowski replaced Thilo Mannhardt on the Board of Directors consistent with Ultrapar’s philosophy of adequately planning changes in its management.

In June 2015, Ultrapar announced changes in its executive board approved by its Board of Directors. After eight years as Chief Financial and Investor Relations Officer of Ultrapar, André Covre took over as Chief Executive Officer of Extrafarma. André Covre succeeded Paulo Lazera, who continued involved with Ultrapar as a shareholder and special consultant to Extrafarma. The Chief Financial and Investor Relations Officer position was assumed by André Pires de Oliveira Dias.

In June 2017, Ultrapar announced changes to its executive officers approved by its Board of Directors. As of October 2017, Frederico Curado replaced Thilo Mannhardt and assumed the position of Chief Executive Officer.

As part of a planned succession process and consistent with the Company’s governance, in May 2018, Paulo Guilherme Aguiar Cunha, after three decades of contributions, resigned as a member of the Board of Directors and Pedro Wongtschowski, Vice-Chairman of the Board of Directors and Chief Executive Officer of Ultrapar between 2007 and 2012, was elected Chairman. Mr. Lucio de Castro Andrade Filho, who joined the Company in 1977 and has been a member of the Board of Directors since 1998, was appointed for the position of Vice-Chairman of the Board of Directors.

Other important succession movements took place at the senior management level, with the nomination of Mr. Rodrigo de Almeida Pizzinatto, Mr. Tabajara Bertelli Costa and Mr. Marcelo Pereira Malta de Araújo as Presidents of Extrafarma, Ultragaz and Ipiranga, respectively, equally aligned to a planned succession process which blended internal promotions with the attraction of external talents.

In October 2019, Mr. Décio de Sampaio Amaral was appointed President of Ultracargo by the Board of Directors, starting his activities in January 2020.

Ultracargo—Fire at storage facilities in Santos

In April 2015, a fire occurred in six ethanol and gasoline tanks operated by Ultracargo in Santos, which represented 4% of the subsidiary’s overall capacity as of December 31, 2014. The Civil and Federal Police investigated the accident and its impacts, and concluded that it was not possible to determine the cause of the accident or to individualize active or passive conduct related to the cause, and there was no criminal charge against either any individual or Ultracargo, by both authorities. Notwithstanding, on February 21, 2018, the Federal Public Court accepted a criminal indictment filed by the Federal Public Prosecutor’s Office against Tequimar, which has already presented its defense against these charges, after being summoned in June 2018.

In June 2017, Ultracargo obtained the licensing required for the return to operation of 67.5 thousand cubic meters of the total of 151.5 thousand cubic meters affected by the fire. The remaining tanks (84 thousand cubic meters) resumed operations between July and September 2019.

In 2019, Ultracargo signed a partial Conduct Adjustment Agreement (“TAC”) with the Federal Public Prosecutor’s Office and the State Public Prosecutor’s Office in the amount of R$67.5 million for the implementation of actions to offset the impacts caused to the Santos estuary following the fire at the Ultracargo terminal in 2015. Negotiations of indemnification for other alleged environmental damages are still in progress with the Federal Public Prosecutor’s Office and the State Public Prosecutor’s Office and, once finalized, Ultracargo may need to make future disbursements that are not currently provisioned, which may adversely affect our results of operations.

 

 

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In addition, Ultracargo agreed to a deferred prosecution agreement on September 12, 2019. Pursuant to the terms of the deferred prosecution agreement, the prosecution by the 5th Federal Criminal Court of Santos was initially suspended until September 2021 and Ultracargo agreed to an additional compensation of R$13 million to a social project in Santos. At the end of the suspension period ending in September 2021, if the conditions specified in the deferred prosecution agreement are complied with (comprising compliance with the TAC and the payment of the R$13 million in respect of the social project), then the criminal proceeding will be closed by the court.

Therefore, as of the date of this annual report, a suspension of the criminal proceeding is in effect, and the measures pursuant to an agreement signed between Ultracargo and the Public Prosecutor´s Office in relation to certain alleged environmental damages are in the process of being implemented.

As a result of the evolution of the regulation process with insurers, as of December 31, 2016, the Company recorded insurance receivables in the amount of R$366.7 million and indemnities to customers and third parties in the amount of R$99.9 million in its balance sheet. In the first quarter of 2017, Ultracargo received the full amount from the insurers. On December 31, 2019, there was no remaining amount for indemnities to customers and third parties recorded in its balance sheet (R$3.5 million as of December 31, 2018). In addition, on December 31, 2019, there were contingent liabilities not recognized related to lawsuits in the amount of R$11.4 million (R$62.9 million as of December 31, 2018), and no remaining amount of contingent liabilities related to extrajudicial lawsuits (R$3.4 million as of December 31, 2018).

See “Item 8.A. Financial Information Consolidated Statements and Other Financial Information—Legal Proceedings”.

Recent Developments

Ongoing COVID-19 pandemic

A novel strain of coronavirus, COVID-19, was first identified in China in December 2019 and became a global pandemic in March 2020. The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world, including ours, and the economic and political environments in which businesses operate. Our results of operations may be negatively impacted by the ongoing COVID-19 pandemic. See “Item 3.D. Key Information—Risk Factors—Risks Relating to Ultrapar and Its Industries— Our businesses may be materially and adversely affected by the outbreak of communicable diseases, such as the ongoing COVID-19 pandemic, or other epidemics or pandemics”, and other risk factors included herein and “ Item 5.D. Operating and Financial Review and Prospects—Trend Information” below.

Funding obtained in March 2020

In view of the uncertainty generated by the ongoing COVID-19 pandemic, in March and April 2020, Ultrapar and its subsidiary Ipiranga obtained R$1.48 billion of additional funding with one year maturity, comprising R$1.3 billion of promissory notes issued in the Brazilian capital markets and a bank credit note of R$180 million, all of which has been fully funded. The purpose of these funding transactions was to strengthen our liquidity and cash position. For further information, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness— Funding Obtained in March 2020”.

Issuance of common shares

On February 19, 2020, our Board of Directors approved the issuance of 2,108,542 common shares within the limits of the authorized capital stock pursuant to Article 6 of the Company’s Bylaws, due to the partial exercise of the subscription warrants issued by the Company to the former Extrafarma shareholders in connection with the merger of shares of Extrafarma in 2014. As of the date of this annual report, the Company’s capital stock is represented by 1,114,918,734 common shares, all of them nominative and with no par value.

 

 

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Implementation of a Shared Services Center

During 2019, we created a Shared Services Center to centralize certain activities that were previously executed by our holding company operations and to include new activities that were previously executed by our businesses. This Shared Services Center, located in the city of Campinas (SP), started operating in January 2020 and will help us develop a mindset of services rendered (with Service Level Agreements) to the businesses, as well as reducing the costs of our back-office activities.

Creation of Ultra Venture Capital

In March 2020, we announced the creation of Ultra Venture Capital that will provide innovative and faster solutions through investments in startups. Ultrapar intends to invest R$150 million, to be called over a 5 year period, and we believe that Ultra Venture Capital will help us to have greater access to disruptive technologies, entrepreneurial mindset, more agile governance and attracting talent, among other benefits.

Investments

We have made substantial investments in our operations over the last three fiscal years. Investments at Ipiranga have been directed to (i) maintenance and expansion of the Ipiranga network of service stations, convenience stores and lubricant service shops, and (ii) the expansion of its logistics infrastructure to support the growing demand. Oxiteno has invested in the maintenance of its production units, mainly for specialty chemicals in Brazil, Mexico and the United States, and in the new specialty chemicals plant in the United States. At Ultragaz, we have invested mainly in the bulk LPG distribution, the purchase and renewal of LPG bottles and maintenance of its structure. Ultracargo has mainly invested in the expansion and maintenance of its storage facilities in response to strong demand for logistics infrastructure in Brazil. Extrafarma has invested mainly in the new distribution center in São Paulo and opening and remodeling of its drugstores. See “Item 4.A. Information on the Company—History and Development of the Company”.

The following table shows our total additions to property, plant, equipment, and intangible assets for the years ended December 31, 2019, 2018 and 2017:

 

    

Year ended December 31,

    

2019

  

2018

  

2017

     (in millions of Reais)

Ipiranga

   341.1    387.6    519.5

Oxiteno

   248.6    466.6    462.6

Ultragaz

   227.5    225.0    214.9

Ultracargo

   206.4    161.8    86.4

Extrafarma

   89.1    118.0    170.5

Others(1)

   20.2    18.3    22.6

Total – additions to property, plant, equipment and intangible assets

   1,132.8    1,377.3    1,476.5

 

(1) 

Includes mainly capital expenditures related to corporate information technology.

In 2019, Ultrapar’s allocation of resources net of divestments and receipts were R$1,578 million.

 

   

Ipiranga had R$738 million allocated to maintenance and expansion of the service station and franchise network as well as expansion of the company’s logistics infrastructure. Out of which R$341 million was allocated to property, plant and equipment and intangible assets, R$327 million to contractual assets with clients (exclusive rights) and R$26 million to acquisitions, R$22 million to initial direct costs of right-of-use assets and R$21 million to drawdowns of financing to clients and advance payments of rentals, net of receipts.

 

   

Oxiteno had R$249 million allocated to investments in the new specialty chemicals plant in the United States and to maintenance of its productive units.

 

   

Ultragaz had R$230 million allocated mainly to clients in the bulk segment, replacement and acquisition of gas bottles and maintenance of the logistics infrastructure and filling stations.

 

   

Ultracargo had R$252 million mainly allocated to the expansion of the Itaqui and Santos terminals, the Vila do Conde terminal concession grant, the acquisition of land in Santos and the adaptation and maintenance of existing infrastructure.

 

   

Extrafarma had R$89 million allocated in large part to the new distribution center in São Paulo—opened in August 2019—translating into reduced logistics expenses and a better level of service for operations in the state. Investment was also allocated to store opening and remodeling together with IT projects.

 

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Prior to the onset of the COVID-19 pandemic, Ultrapar’s investment plan for 2020 totaled R$1,771 million and was indicative of the Company’s commitment to the sustainable growth of its businesses and selectivity in capital allocation. In light of the ongoing COVID-19 pandemic, on April 1, 2020, Ultrapar announced that its investment plan for 2020 will be reduced by approximately 30% in order to preserve cash. It remains unclear how the COVID-19 pandemic will evolve through 2020 and beyond and there is significant uncertainty relating to the extent of the impact of the ongoing COVID-19 pandemic on our businesses and the global economy in general. Therefore, we will continue to monitor the situation as it evolves, and our investment plan may be further modified in response to the impacts of the ongoing COVID-19 pandemic.

Prior to the 30% reduction in our 2020 investment plan, the distribution of our investment plan among our businesses was as follows:

 

   

At Ipiranga, the approved investment limit is R$873 million, approximately 60% of which is directed towards expansion of: (i) the service station network, (ii) the logistics infrastructure, with the construction of two logistics facilities and the concessions awarded in Belém (PA), Cabedelo (PB) and Vitória (ES), and (iii) company-operated stores and new franchises at am/pm and Jet Oil. The remaining 40% will be invested in maintenance and modernization of its activities, mainly in the renewal of contracts with clients, logistics infrastructure and technology to support the operations.

 

   

The approved investment of R$228 million for Oxiteno will be mainly allocated to maintenance and safety of its industrial units, R&D and improvements of information technology systems.

 

   

Investments at Ultragaz will amount to R$314 million to attract new clients in the bottled and bulk segments, for replacement and acquisition of LPG bottles to support the volume growth, expansion and maintenance of the filling plants and information technology.

 

   

Ultracargo is expected to invest R$238 million, mainly in the construction of the Vila do Conde (PA) terminal as well as expansion of the Itaqui (MA) and Suape (PE) terminals together with investments in ongoing improvements in safety, infrastructure and maintenance at the terminals.

 

   

Extrafarma plans on investing R$53 million mainly in technology platform, in the network expansion and logistics infrastructure, notably with the opening of a new distribution center in the Northeast region, as well as drugstore maintenance and renovation.

Equity investments

We have also made several acquisitions and related investments to maintain and create new opportunities for growth and to consolidate our position in the markets in which we operate.

Equity investments consist of acquisition of subsidiaries and capital increases, net of capital reductions in subsidiaries, joint-ventures and associates. The table below shows our equity investments for the years ended December 31, 2019, 2018 and 2017:

 

     Year ended December 31,  
     2019      2018     2017  
     (in millions of Reais)  

Ipiranga(1)

     79.1        31.9       16.0  

Oxiteno

     0.0               

Ultragaz

                   

Ultracargo(2)

            103.4        

Extrafarma

                   

Others

            (1.2      

Total equity investments(3)

     79.1        134.0       16.0  

 

(1)

Capital invested in ConectCar and in the concessions awarded in 2019.

(2)

Acquisition of 100% of quotas of TEAS.

(3)

Equity investments consist of acquisition of subsidiaries and capital increases, net of capital reductions in joint-ventures and associates.

 

 

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B.

Business Overview

Ultrapar is a Brazilian company with more than 80 years of history, with leading positions in the markets in which it operates: Oil&Gas sector through Ipiranga, Ultragaz and Ultracargo, specialty chemicals through Oxiteno and retail pharmacy through Extrafarma.

 

   

Ultragaz is the leader in LPG distribution in Brazil, which is one of the largest markets worldwide. Ultragaz had a 23.4% market share in 2019, according to ANP, and was one of the largest independent LPG distributors in the world in terms of volume sold. See “Item 4.B. Information on the Company—Business Overview—Distribution of Liquefied Petroleum Gas—Ultragaz—Competition”. As of December 31, 2019, we delivered LPG to an estimated 11 million households through a network of approximately 5.3 thousand independent retailers in the bottled segment and to approximately 55 thousand customers in the bulk segment.

 

   

Ipiranga is one of the largest fuel distributors in Brazil, with a network of 7,090 service stations and 19.3% market share in 2019 according to ANP. See “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Ipiranga—Competition”.

 

   

Oxiteno is a major producer of specialty chemicals and one of the largest producers of ethylene oxide and its principal derivatives in Latin America, according to IHS Chemical. Oxiteno has eleven industrial units: six in Brazil, three in Mexico, one in the United States and one in Uruguay and commercial offices in Argentina, Belgium, China and Colombia. For the year ended December 31, 2019, Oxiteno sold 734 thousand tons of chemical products.

 

   

Ultracargo is the largest provider of liquid bulk storage in Brazil, with six terminals and storage capacity of 814 thousand cubic meters as of December 31, 2019, and leading positions in the main ports in Brazil in which it operates.

 

   

Extrafarma is the sixth largest drugstore chain in Brazil, according to ABRAFARMA, with 416 drugstores and 3 distribution centers as of December 31, 2019.

The following chart simplifies our organizational structure as of the date hereof, showing our principal business units. For more detailed information about our current organizational structure, see “Item 4.C. Information on the Company—Organizational Structure”.

 

LOGO

Our Strengths

Leading market positions across all businesses

Ultragaz is the largest LPG distributor in Brazil. In 2019, Ultragaz’s national market share was 23.4%, according to ANP, and served approximately 11 million homes in the bottled segment and 55 thousand customers in the bulk segment. For the year ended December 31, 2019, Ultragaz’s total volume of LPG sold was 1.7 million tons.

Ipiranga is one of the largest fuel distributors in Brazil with a 19.3% market share in 2019, according to ANP, and a network of 7,090 service stations as of December 31, 2019. See “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Ipiranga—Competition”. In addition to the service stations, Ipiranga’s network has 2,377 am/pm convenience stores and 1,492 Jet Oil franchises. In 2019, Ipiranga’s strategy was focused on strengthening its resale operations and increasing its performance. The implementation of Ipiranga’s business model—including its network of convenience stores and loyalty programs—in its network of service stations allows it to offer a wide range of products and services, benefiting consumers and resellers. The volume of fuel sold by Ipiranga in 2019 was 23.5 million cubic meters.

 

 

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Oxiteno is a major producer of specialty chemicals and one of the largest producers of ethylene oxide and its principal derivatives in Latin America, according to IHS Chemical. Our chemical operations supply a broad range of market segments, particularly crop protection chemicals, food, cosmetics, detergents, packaging for beverages, thread and polyester filaments, brake fluids, Oil & Gas and paints and coatings. For the year ended December 31, 2019, Oxiteno sold 734 thousand tons of chemical products. In Brazil, Oxiteno competes principally against imports.

Ultracargo is the largest provider of liquid bulk storage in Brazil, with six terminals and storage capacity of 814 thousand cubic meters as of December 31, 2019, and leading positions in the main ports in Brazil in which it operates.

Extrafarma is the sixth largest drugstore network in the country, according to ABRAFARMA’s ranking, with 416 drugstores and 3 distribution centers as of December 31, 2019.

Robust business portfolio

Our operations encompass LPG and fuel distribution, operation of a drugstore chain, the production of ethylene oxide and its derivatives and liquid bulk storage services. We believe our businesses provide us with increased financial capability and flexibility. Our businesses mix makes us less vulnerable to economic fluctuations and allows us to pursue growth opportunities as they arise in any of our business segments.

Ultrapar’s businesses are simultaneously resilient and leveraged on Brazilian economic growth. Some of Ultrapar’s businesses, such as the sale of LPG for residential use and fuels for light vehicles, are relatively resilient due to their inelastic demand profile and, therefore, are less volatile in economic downturns. Bottled LPG is an essential good, as it is mainly used for cooking, and, therefore, is generally less correlated to economic performance. Volume of fuels for light vehicles tends to grow linked to the number of light vehicles in Brazil. The Brazilian light vehicle fleet grew at rates ranging from 1% to 6% per year during the last five years, despite the volatility in the economic growth during this period, leading to a similar level of growth in the volume of fuels for light vehicles.

On the other hand, other of Ultrapar’s businesses, such as sales of diesel fuel, specialty chemicals and bulk LPG are linked to economic performance and tend to experience higher sales volumes during periods of strong economic growth. Sales growth of these products have been historically correlated to the performance of the Brazilian economy.

Highly efficient LPG distribution network

Ultragaz maintains an exclusive network of independent dealers, which has enabled Ultragaz to control the quality and productivity of its dealers leading to a recognition that we believe is associated with quality, safety and efficiency, and also to have frequent contact with LPG customers. This network constituted approximately 5,300 dealers that sell Ultragaz LPG bottles. In addition, in April 1995, Ultragaz was the first player to introduce LPG small bulk delivery in Brazil, with lower distribution costs than bottled distribution. Over the years, it has built a strong client base in this segment.

Flexibility across the petrochemical cycle

Oxiteno is one of the largest producers of ethylene oxide and its principal derivatives in Latin America. In 2019, 98% of its ethylene oxide production was used internally in the production of ethylene oxide derivatives, which can be roughly classified in two groups: specialty and commodity chemicals. Oxiteno is a major producer of specialty chemicals, which have traditionally higher margins and less exposure to petrochemical cycles than commodity chemicals. Oxiteno has also been heavily investing in the development of products derived from renewable raw materials, aiming at reducing its dependence on oil-based feedstock and expanding its product portfolio.

Efficiencies in retail network logistics in addition to resale management know-how

We believe that the expertise in logistics and resale management that we have gained at Ultragaz is complemented by Ipiranga’s know-how in the same areas, thus maximizing efficiency and profitability at both companies.

Distinguished positioning in the fuel distribution sector

We believe that Ipiranga differentiates itself from its competition in the sector by having a more diverse array of products and services and thereby being a more convenient choice for customers. These services and products include convenience stores, lubricant-changing service shops, electronic payment, bakeries, loyalty program, Ipiranga-branded credit cards, and a set of initiatives that aim at enhancing customer’s convenience and loyalty.

 

 

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Cost-efficient operations

Oxiteno’s operations have a high degree of production efficiency derived from a scale that we believe is similar to that of the largest producers in the world. Ultragaz has significant market presence in densely populated areas, which allows it to operate its filling plants and distribution system with a high level of capacity utilization and efficiency with depth and capillarity. Ipiranga also has a significant market presence in the South and Southeast regions of Brazil, which allows it to operate its extensive network of primary and secondary storage terminals and its distribution system in a cost-efficient manner. After the consolidation of Texaco and DNP and the network expansion through the opening of new gas stations and the conversion of unbranded service stations, the increased scale of Ipiranga allowed improved efficiency and competitiveness in the distribution and sales processes, dilution of advertising, marketing and new product development expenses, and gains from economies of scale in administrative functions. Ultracargo is the largest independent liquid bulk storage company in Brazil and the only player in the liquid bulk storage sector present in more than three major ports. Such position provides Ultracargo with increased operational flexibility, operational efficiency and economies of scale.

Experienced management team

We are led by a strong and experienced management team with a proven track record in the LPG and fuel distribution, retail, petrochemical and specialized logistics industries. Our senior management team has on average more than 15 years of experience in the Company.

All members of the Board of Directors have previous experience serving on boards of other renowned companies such as Embraer S.A., Itaú Unibanco Holding S.A., Caixa Econômica Federal and others. Among the ten members of the Board of Directors, three have more than 10 years with the Company.

In 2019, we reviewed the composition of the Board of Directors and elected four new members to provide renewed vision to the development of the Company.

Alignment of interests

Members of Ultrapar’s management received variable short-term compensation linked to performance and value generation to shareholders measured by Economic Value Added (EVA®) until the end of 2019 and will receive variable short-term compensation linked to performance and value generation to shareholders measured by EBITDA and operating cash flow after investments targets from 2020 onwards. The Economic Value Added (EVA®) continues to be our key metric for long-term compensation plan. Moreover, Ultrapar has consistently implemented improvements in corporate governance, such as being the first Brazilian company to grant 100% tag along rights to all its shareholders, the segregation of the roles of Chief Executive Officer and Chairman of the Board of Directors and its emphasis on maintaining transparency and consistency in its interactions with investors. Ultrapar is also a founding member of the Latin American Corporate Governance Roundtable Companies Circle, a group dedicated to promoting corporate governance in Latin America.

In 2011, Ultrapar completed the implementation of a new corporate governance structure, further aligning our shareholders’ interests by converting all preferred shares into common voting shares. The conversion resulted in all of our shares having identical voting rights, which allows our shareholders to actively participate in the decisions of shareholders’ meetings, without (i) any limitations on voting rights, (ii) special treatment to current shareholders, (iii) mandatory public tender offers at a premium to market prices once a certain beneficial ownership threshold is crossed or (iv) any other poison pill provisions.

Strong operational track record

Our Company has exhibited a solid operational track record. Our EBITDA presented an average compound annual growth of 14% from 1998 to 2019, despite the overall macroeconomic volatility in Brazil and in the world during this same period. See “Item 3.A. Key Information—Selected Consolidated Financial Data” for more information about EBITDA. Our net income attributable to shareholders of the Company presented an average compound annual growth of 11% from 1998 to 2019.

 

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Our Strategies

Build on the strength of our brands

We believe that our businesses have a high brand recognition associated with quality, safety and efficiency that we continually strive to deliver. We intend to reinforce this market perception by continuing to supply high-quality products and services and to introduce new services and distribution channels.

Invest in building a succession pipeline for key business positions

We remain committed to building a pipeline of enterprise leaders both at Ultrapar as well as in our businesses. Through a combination of promoting internal talent, internal horizontal transfers and external hires, there has been a relevant renovation in senior management positions, covering all the senior management. These movements have been carried out in a gradual, planned and constructive manner. During 2019, we worked to strengthen our management structure and governance, consolidating the pillars supporting the growth and longevity of Ultrapar.

Maintain a strong relationship with our resellers in the LPG and fuel distribution businesses

We intend to preserve our strong relationship with dealers by keeping their distribution exclusivity and continuing to implement our differentiated incentive programs in Ultragaz and Ipiranga. We plan to continue to invest in training our dealers, in order to maximize efficiency, to further strengthen our relationship and to promote the high standards of our distribution network. In parallel, we plan to continue to increase our operational efficiency and productivity at Ultragaz and Ipiranga.

Continuously improve cost and capital efficiency in the LPG and fuel distribution businesses

We plan to continue to invest in the cost and capital efficiency of our distribution systems. Current initiatives include enhanced discipline with respect to our capital allocations and other programs designed to control our costs in both the LPG and fuel distribution businesses units.

Increase market share in fuel distribution

Our sales strategy is to increase Ipiranga’s market by improving the performance of the existing resale and expanding its network of service stations with high profitability and lower market share. Ipiranga’s strategy also includes expanding its logistics infrastructure to support the growing demand for fuels in Brazil and initiatives aiming at differentiating our products and services.

Promote and benefit from the formalization of the fuel distribution market

We plan to continue to collaborate with the competent authorities to promote improvements to legislation and to enhance regulatory enforcements in the fuel distribution sector as means of creating a level playing field in the market, increasing sales volume in the formal market and improving our gross margin, thus reducing the competitiveness of players which benefited from cost advantages derived from unfair practices.

Enhance retail network

Ultrapar’s strategy for its retail operations is strongly focused on differentiation and innovation. At Ipiranga, this focus has translated to the creation of new market niches through its reseller network characterized by customer service and convenience, thus contributing to high levels of customer loyalty. We believe these initiatives result in a better value proposition for customers and resellers, creating benefits for the whole chain – the client has access to differentiated, more convenient products and services; the reseller has a more attractive business; and the service station has a differentiated positioning, contributing to the evolution of the company’s results.

Ipiranga’s Posto Ecoeficiente project (Eco-Efficient service station) is one of the initiatives that reflect Ultrapar’s innovation philosophy. It aggregates, in a single project, innovative solutions and sustainable technologies, in harmony with the profitability of the service station for the reseller. This project offers solutions in the construction and operation of service stations that result in better use of resources, such as water and electricity, and reduction of wastage and residues. Ipiranga ended 2019 with 910 eco-efficient services stations.

In 2009, Ipiranga launched Km de Vantagens (“KMV”), a loyalty program through which customers and resellers may redeem rewards and benefits in areas of entertainment, tourism, magazines, airline tickets, car rental and others. With over 32 million participants in 2019, KMV has served as an important platform, strengthening relationships with Ipiranga’s customers and resellers.

 

 

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Also, as part of its differentiation strategy, Ipiranga launched in 2010 bakeries within its am/pm stores and became Brazil’s largest bakery franchise chain. Our bakeries serve fresh products – like bread, coffee, snacks and hot meals – through more than 100 items, including am/pm branded products. As of December 31, 2019, there were 934 bakeries.

In 2012, among the initiatives of Ipiranga, we highlight the entrance in the segment of electronic payment for tolls, parking and fuels through ConectCar. Once installed on a vehicle’s windshield, ConectCar’s tag automatically opens toll gates through a monthly payment system. At the end of 2019, ConectCar reached 468 thousand active customers and is available in all toll roads in Brazil, as well as in several malls, parking lots and airports.

In 2014, Ipiranga launched a vertical and integrated supply solution, concentrating logistics, sales and service of am/pm convenience stores under a single umbrella structure: am/pm Suprimentos. This initiative aims to streamline am/pm operations, improve the franchisees’ competitiveness and ensure a higher quality product assortment, creating value for clients and franchisees. As of December 31, 2019, am/pm Suprimentos operated four distribution centers located in the states of Rio de Janeiro, São Paulo, Paraná and Rio Grande do Sul, which supply am/pm convenience stores in those states with the main categories of products, except tobacco and ice cream.

Also in 2014, Ipiranga launched Beer Cave, a new beer purchase experience at its am/pm convenience stores. The Beer Cave is a walk-in refrigerated container aimed at the retail consumer that stores more than 100 national and international brands of cold beers ready for consumption. As of December 31, 2019, there were 561 Beer Caves installed in Ipiranga’s franchisees premises.

In addition, in 2015, Ipiranga opened a new configuration of am/pm in São Paulo: an expanded concept of convenience comparable to small neighborhood supermarkets for urban service stations, with supply of fresh products – like fruits, vegetables, meats, flowers and a wider range of fast meals. Ipiranga also launched a flagship store, am/pm Estação, in the State of São Paulo, a model developed for highway service stations to provide long distances travelers with a broader array of convenience and personal care products.

In 2016, Ipiranga developed and launched Abastece Aí (Portuguese for Fill Up Here), a mobile payment service app that seeks to maximize advantages from the integration of platforms to offer even greater convenience and benefits to customers. Through the Abastece Aí app, customers can obtain discounts in exchange for KMV points. In addition, they can receive rewards of their preference and finalize the refueling process by using a unique KMV password in a safe payment method. In 2019, more than 3.2 million customers used the app as a mean of payment and 3.7 times more payments were made through Abastece Aí as compared to 2018.

Ipiranga also launched a new gasoline called DT Clean in 2016, using one of the most modern fuel additive technologies that aims to restore the engine’s performance to its original state, while at the same time increasing the car’s useful life and efficiency. In addition, in 2017, Ipiranga launched Octapro, a high-octane gasoline that features a combination of cutting-edge additives and, among other benefits, helps engines reach their top power and improves driving performance. In 2019, Ipiranga’s high performance additive S10 diesel called RendMax was launched, which is a fuel savings of over 3%, and also increases engine life and reduces maintenance costs.

In 2017, Ipiranga further strengthened the products offered at its am/pm stores with the launch of Wine Cave. In an air-conditioned wine cellar, customers can find a wide variety of wines, from 60 to 80 different labels, at the right temperature. As of December 31, 2019, there were 15 Wine Cave units installed in the states of Minas Gerais, São Paulo, Rio de Janeiro, Santa Catarina, Paraná and Amazonas.

Invest in niche segments for LPG distribution

Ultragaz is strengthening its presence in the North and Northeast regions of Brazil by focusing on expanding to states where it previously did not have significant operations.

For the bulk segment, Ultragaz strategy is focused on two areas. The first area is offering its clients mainly in industrial and agribusiness segments new applications for LPG. As a result, Ultragaz aims at expanding its participation in the use of LPG for home and personal care and localized heating, such as preheating of industrial furnaces, especially in steel, lead, asphalt manufacturing and metallurgical plants; and in new applications in agribusiness, such as drying grains and seeds, with greater operational and economic efficiency. The second area is to invest in the expansion of the bulk LPG distribution to small-and-medium-sized businesses, such as laundry shops, restaurants, bakeries, residential condominiums and steam car wash, through agile and convenience services.

 

 

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Expand capacity at Oxiteno to maintain our capacity ahead of domestic demand

We intend to maintain Oxiteno’s production capacity ahead of demand in Brazil. Between 2008 and 2011, Oxiteno invested heavily to significantly increase its production capacity, thereby allowing it to maintain production capacity ahead of domestic demand. We also plan to continue our efforts to apply the best global practices to Oxiteno’s plants and production processes with a view to remain technologically competitive.

On November 4, 2015, Ultrapar’s Board of Directors approved the expansion of Oxiteno’s specialty chemicals’ capacity in Pasadena (Texas) in the United States, by building an alkoxylation unit at its current site, which started operating in September 2018. The plant is located in one of the world’s most important chemical hubs, taking advantage of attractive conditions of raw materials, as well as highly efficient logistics infrastructure. The investment expands Oxiteno’s footprint in the United States, focusing on local markets of agrochemicals, personal care, household and industrial cleaning, coatings and oil and gas. The new unit’s capacity is 120,000 tons per year at its initial stage. Until December 31, 2019, the total amount invested in this plant was US$191 million.

Continue to enhance product mix at Oxiteno

We increased Oxiteno’s capacity to produce a variety of value-added ethylene oxide derivatives and other specialty chemicals in order to optimize its sales mix across petrochemical cycles. Oxiteno’s

investments in research and development have resulted in the introduction of 94 new products during the last three years. Oxiteno will continue to invest in research and development focused on developing new products to meet clients’ needs across all target markets. In 2019, Oxiteno’s research and development expenditures were R$60 million.

Maintain financial strength

We seek to maintain a solid financial position to allow us to pursue investment opportunities and enhance our shareholders’ return on their investment in our Company. As of December 31, 2019, our net debt (consisting of loans and hedging instruments and debentures recorded as current and non-current liabilities, net of cash and cash equivalents and financial investments and hedging instruments) was R$8,680.6 million, representing a 2.87 times net debt to EBITDA ratio. We have been consistently distributing dividends to our shareholders. During the five years ended December 31, 2019, we have declared yearly dividends representing an average of approximately 60% of our net income.

Key Financial Information

The table below sets forth certain financial information for us:

 

     Year ended December 31,  
     2019     2018     2017     2016     2015  
     (in millions of Reais)  

Net revenue from sales and services

     89,298.0       90,698.0       79,230.0       76,740.0       75,655.3  

Net income attributable to Ultrapar’s shareholders

     373.5       1,150.4       1,526.5       1,537.8       1,503.5  

Gross debt

     (14,392.7     (15,206.1     (13,590.6     (11,417.1     (8,901.6

Cash, cash equivalents and financial investments and hedging instruments

     5,712.1       6,994.4       6,369.9       5,701.8       3,973.2  

Net debt(1)

     (8,680.6     (8,211.7     (7,220.7     (5,715.3     (4,928.4

 

(1) 

See footnote 6 under “Item 3.A. Key Information—Selected Consolidated Financial Data” for a more complete discussion of net debt and its reconciliation to information in our financial statements.

 

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The table below sets forth the net revenue from sales and services for our principal businesses:

 

     Year ended December 31,  
     2019      2018      2017      2016      2015  
     (in millions of Reais)  

Net revenue from sales and services(1)

     89,298.0        90,698.0        79,230.0        76,740.0        75,655.3  

Ultragaz

     7,094.8        7,043.2        6,071.0        5,365.1        4,621.2  

Ipiranga

     75,452.5        76,473.4        66,950.5        65,793.7        65,349.8  

Oxiteno

     4,254.2        4,748.4        3,959.4        3,701.4        4,082.5  

Ultracargo

     540.8        493.6        438.4        355.4        315.5  

Extrafarma

     2,060.6        2,028.0        1,868.9        1,578.6        1,336.3  

 

(1) Segment information for Ultragaz, Ipiranga, Oxiteno, Ultracargo and Extrafarma is presented on an unconsolidated basis. See “Presentation of Financial Information” for more information.

The tables below set forth Adjusted EBITDA for Ipiranga, Oxiteno and Ultragaz and EBITDA for Ultracargo and Extrafarma:

 

     Year ended December 31,  
     2019     2018     2017      2016      2015  
     (in millions of Reais)  

Adjusted EBITDA(1)

            

Ipiranga

     2,427.5       2,052.4       3,066.8        3,049.0        2,768.8  

Oxiteno

     208.2       625.4       295.9        453.9        739.8  

Ultragaz

     571.2       258.1       440.0        425.4        357.0  

EBITDA(1)

            

Ultracargo

     160.5       178.5       124.3        171.1        26.3  

Extrafarma

     (570.1     (46.8     23.1        38.8        28.7  

 

(1) 

See footnote 5 under “Item 3.A. Key Information—Selected Consolidated Financial Data” for a more complete discussion of EBITDA and Adjusted EBITDA and its reconciliation to information in our financial statements.

Distribution of Liquefied Petroleum Gas

Industry and Regulatory Overview

Liquefied petroleum gas (LPG) is a fuel derived from the oil or natural gas refining process. In Brazil, 71% of local demand in 2019 was produced in local refineries and the remaining 29% was imported. LPG has the following primary uses in Brazil:

 

   

Bottled LPG — used primarily by residential consumers for cooking; and

 

   

Bulk LPG — used primarily for cooking and water heating in shopping malls, hotels, residential buildings, restaurants, laundries, hospitals and industries, with several other specific applications to each industrial process, such as furnace heating, asphalt production, among others.

 

 

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The following chart shows the process of LPG distribution:

 

LOGO

Historically, bottled LPG has represented a substantial portion of the LPG distributed in Brazil and is primarily used for cooking. The use of LPG for domestic heating in Brazil is immaterial compared with its use in other developed and emerging countries, primarily because of Brazil’s generally warm climate. Consequently, demand seasonality throughout the year is relatively small. In addition, because LPG is not used to a significant extent for domestic heating in Brazil, overall consumption of LPG per capita is lower in Brazil compared to countries where domestic heating is a major element of LPG demand, making low distribution costs a major competitive differential in the Brazilian LPG market.

Prior to 1990, extensive governmental regulation of the LPG industry essentially limited the use of LPG to domestic cooking. Since 1990, regulations have permitted the use of LPG for certain commercial and industrial uses, and the use of LPG has increased accordingly.

The primary international suppliers of LPG are major oil companies and independent producers of both liquefied natural gas and oil. However, due to Petrobras’ market dominance over the production and import of petroleum and petroleum products, a result of its legal monopoly that was abolished only in 1997, following Constitutional Amendment No. 09/1995 and the enactment of Federal Law No. 9,478/97, Petrobras is currently the de facto sole supplier of LPG in Brazil.

 

 

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Currently, the LPG distribution industry in Brazil consists of 16 LPG distribution companies or groups of companies and is regulated by the National Petroleum Agency (ANP). The LPG distribution industry includes purchasing nearly all its LPG requirements from Petrobras, filling LPG bottles and bulk delivery trucks at filling stations, selling LPG to dealers and end users, controlling product quality and providing technical assistance to LPG consumers. See “— Industry and Regulatory Overview — The role of the ANP” and “— Industry and Regulatory Overview — The role of Petrobras”. LPG produced by Petrobras, which represented 71% of total LPG sold in Brazil in 2019, is transported in pipelines and by trucks from Petrobras’ production and storage facilities to filling stations maintained by LPG distributors. The balance is imported by Petrobras into Brazil and stored in large storage facilities mostly maintained by Petrobras. The imported LPG is then transported from the storage facilities by pipeline and truck to the LPG distributors’ filling stations.

LPG can be delivered to end users either in bottles or in bulk. The bottles are filled in the LPG distributors’ filling stations. Distribution of bottled LPG is conducted through the use of bottles via two main channels:

 

   

home delivery of LPG bottles; and

 

   

the sale of LPG bottles in retail stores and at filling stations.

In both cases, the bottles are either delivered by the LPG distributors themselves or by independent dealers.

Bulk delivery is the principal delivery method to large volume consumers, such as residential buildings, hospitals, small-and-medium-sized businesses and industries. In the case of bulk delivery, LPG is pumped directly into tanker trucks at filling stations, transported to customers and pumped into a bulk storage tank located at the customer’s premises.

The role of the Brazilian government. The Brazilian government historically regulated the sale and distribution of LPG in Brazil. The period from 1960 to 1990 was characterized by heavy governmental regulation, including price controls, regulation of the geographical areas in which each LPG distributor could operate, regulation of the services offered by distributors and governmental quotas for the LPG sold by distributors, thus restricting the growth of larger LPG distributors. In 1990, the Brazilian government started a deregulation process of the LPG market. This process included easing the requirements for the entry into the market of new distribution companies, reducing certain administrative burdens and removing restrictions on the areas in which distributors could conduct their business and on sales quotas. There are currently no restrictions on foreign ownership of LPG companies in Brazil.

Since 2001, distributors have been allowed to freely establish retail prices, which were previously set by the Brazilian government. Until the end of 2001, the LPG refinery price charged by Petrobras to all LPG distributors was determined by the Brazilian government and was the same for all LPG distributors in all regions of Brazil. Historically, refinery prices have been subsidized by the Brazilian government. In January 2002, the Brazilian government abolished subsidies to refinery prices and Petrobras started to freely price LPG in the domestic market, adopting the international price plus surcharges as its benchmark. However, the Petrobras refinery price of LPG is still subject to the Brazilian government influence when the government deems appropriate. Refinery prices of LPG in Reais remained unchanged from May 2003 to the end of 2007, despite increases in oil and LPG prices in the international markets, which were partially offset by the appreciation of the Real compared to the U.S. dollar, reducing the difference between LPG prices in Brazil and in the international markets. From 2008 to 2016, Petrobras increased LPG refinery prices for commercial and industrial usage sporadically. From 2017 to 2019, LPG refinery prices were adjusted more frequently.

The LPG refinery price for residential use remained unchanged from May 2003 to September 2015, when Petrobras increased prices by 15%. In the recent past, Petrobras’ practice was not to immediately reflect in its oil derivatives prices in Brazil the volatility of international prices of oil and oil derivatives. However, in June 2017, the dynamic of LPG prices supplied to the distributors was modified to reflect international price volatility and exchange rate variation.

In January 2018, the pricing policy for LPG acquisition at refineries was adjusted to soften the transfer of price volatility in the international market to the domestic price. The monitoring period for international prices and currency rates, which dictate the percentages of price adjustment, was the average of the preceding twelve months, rather than monthly variation, and price adjustments became quarterly, rather than monthly. In August 2019, Petrobras terminated the existing policy and price differentiation was ended in November 2019, which resulted in domestic prices for all segments being converted into one single price.

For further information, see “—Supply of LPG”.

 

 

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The role of Petrobras. Petrobras, Brazil’s national oil and oil products company, had a legal monopoly in the exploration, production, refining, importing and transporting of crude oil and oil products in Brazil and Brazil’s continental waters since its establishment in 1953. This monopoly was confirmed in Brazil’s federal constitution enacted in 1988. As a result, Petrobras was historically the sole supplier in Brazil of oil and oil-related products, including LPG.

In November 1995, Petrobras’ monopoly was removed from the federal constitution by the aforementioned Constitutional Amendment No. 09/1995 approved by the Brazilian Congress. According to this amendment, other state and private companies would be able to compete with Petrobras in virtually all fields in which Petrobras operated. This amendment was implemented through Law No. 9,478, dated August 6, 1997, which effectively allowed Petrobras’ monopoly over the prices for oil, gas and oil products to continue for a maximum period of three years. Law No. 9,478, also known as Lei do Petróleo, (the “Petroleum Law”), prescribed that the termination of Petrobras’ monopoly would be accompanied by the deregulation of prices for oil, gas and oil products, and created a new regulatory agency, the ANP, to oversee oil-related activities. However, in practice, Petrobras still remains the sole LPG supplier in Brazil, even though there are no legal restrictions to the operation of other suppliers or to imports.

On June 25, 2004, Petrobras entered the LPG distribution market in Brazil through the acquisition of Liquigás, one of the main players in the market.

With the discovery of the pre-salt reservoirs, the Brazilian Government created an inter-ministerial committee to analyze the various alternatives and suggest modifications to Brazil’s exploration and production concession regime, which has been in force since the enactment of the Petroleum Law. The Brazilian Government decided to develop the oil and natural gas deposits in the pre-salt region by means of production sharing contracts (“PSC”), resulting in the new regulatory regime for the pre-salt reservoirs, which was finally implemented through Federal Law No. 12,351/2010 (the “Pre-salt Law”).

The role of the ANP. The ANP is responsible for the control, supervision and implementation of the government’s oil, gas and biofuels policies. The ANP regulates all aspects of the production, distribution and sale of oil and oil products in Brazil, including product quality standards and minimum storage capacities required to be maintained by distributors.

In order to operate in Brazil, an LPG distributor must be licensed with the ANP and must comply with certain minimum operating requirements, including:

 

   

maintenance of sufficient LPG storage capacity;

 

   

maintenance of an adequate quantity of LPG bottles;

 

   

use of bottles stamped with the distributor’s own brand name;

 

   

possession of its own filling plant;

 

   

appropriate maintenance of LPG filling units;

 

   

distribution of LPG exclusively in areas where it can provide technical assistance to the consumer either directly or indirectly through an authorized dealer; and

 

   

full compliance with the Unified Suppliers Registration System (Sistema de Cadastramento Unificado de Fornecedores – SICAF).

LPG distributors are required to provide the ANP with monthly reports showing their sales in the previous month and the volume of LPG ordered from Petrobras for the next four months. The ANP limits the volume of LPG that may be ordered by each distributor based on the number of bottles and infrastructure owned by the distributor. Based on the information provided by the distributors, Petrobras supplies the volume of LPG ordered, provided its production and imports of LPG are sufficient to meet the demand.

 

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LPG distribution to the end consumer may be carried out by independent dealers or exclusive dealers, according to ANP Resolution 49/2016 and 51/2016. Each LPG distributor must provide the ANP with information regarding its contracted independent dealers on a monthly basis. The construction of LPG filling plants and storage facilities is subject to the prior approval of the ANP, and filling plants and storage facilities may only begin operations after ANP inspection.

The self-regulatory code/ANP Resolution 49/2016 and 51/2016. In August 1996, most of the Brazilian LPG distributors, representing more than 90% of the market, bottle manufacturers, LPG transportation companies and certain LPG retail stores, under the supervision of the Brazilian government, entered into a statement of intent regarding the establishment of a program for “requalifying” LPG bottles (a process under which they undergo safety and quality checks) and other safety procedures, known as the “Self-Regulatory Code” or “Código de Autorregulamentação”. See “—Ultragaz—Bottle swapping centers” and “— Ultragaz—Requalification of bottles”. Before the Self-Regulatory Code came into effect, certain LPG distributors, not including Ultragaz, would fill bottles stamped with another distributor’s brand. This practice resulted in a low level of investment in new bottles, giving rise to concerns regarding the safety of older bottles. The Self-Regulatory Code provides, among other things, that:

 

   

each LPG distributor may only fill and sell bottles that are stamped with its own trademark;

 

   

each LPG distributor is responsible for the quality and safety control of its bottles; and

 

   

each LPG distributor must maintain a sufficient number of bottles to service its sales volume.

Under the Ministry of Mines and Energy Normative Ruling No. 334 of November 1, 1996, or Ruling 334, any party that defaults on its obligations under the Self-Regulatory Code will be subject to the legal penalties, ranging from payment of a fine and suspension of supply of LPG to such party to suspension of such party’s LPG distribution operations.

Ruling 334 set forth the following timetable for the implementation of the measures adopted under the Self-Regulatory Code:

 

   

the construction of at least 15 bottle swapping centers, starting in November 1996 (see “—Ultragaz—Bottle swapping centers” and “—Ultragaz—Requalification of bottles”);

 

   

the filling of third-party bottles which ceased in October 1997;

 

   

the requalification of 68.8 million bottles manufactured up to 1991 starting in November 1996; and

 

   

the requalification of 12.8 million bottles manufactured between 1992 and 1996 starting in November 1996.

The Self-Regulatory Code was replaced by ANP Resolution 49/2016 and 51/2016, which regulates the distribution of LPG activities.

Ultragaz had to requalify 2.6 million bottles, 2.4 million bottles and 2.6 million bottles in 2017, 2018 and 2019, respectively. In 2020, Ultragaz expects to requalify approximately 2.5 million bottles.

Environmental, health and safety standards. LPG distributors are regulated by ANP and subject to Brazilian federal, state and local laws and regulations relating to the protection of the environment, public health and safety. The CONAMA, the Ministry of Economy (Ministério da Economia), and the Ministry of Infrastructure (Ministério da Infraestrutura) are the primary regulators of LPG distribution at the federal level.

The Brazilian regulations require LPG distributors to obtain operating permits from the environmental agencies, from municipal authorities and from the fire department. In order to obtain and maintain the validity of such permits, distributors must satisfy regulatory authorities that the operation of facilities are in compliance with regulations and are not prejudicial to the environment and the community. In addition, regulations establish standard procedures for transporting, delivering and storing LPG and for testing and requalification of LPG bottles. Civil, administrative and criminal sanctions, including fines and the revocation of licenses, may apply to violations of regulations. Under applicable law, distributors are strictly and jointly liable for environmental damages.

The LPG industry and market are also subject to occupational health and safety standards, including labor laws, social security laws and consumer protection laws. In addition, the company also has a sustainability policy that describes the good management practices for health, safety and the environment (HSE).

 

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In 2019, Ultragaz has conducted several programs in order to improve its HSE performance. The programs focused on leadership engagement, safety behavior and internal safety procedures improvement. As part of a governance system, HSE local committee and a HSE executive committee were created to sustain and follow up the results of these programs as well as the overall safety performance.

Ultragaz also conducts annual HSE audits to verify the performance and compliance with HSE legislation, HSE internal standards and its sustainability policy.

Ultragaz

We distribute LPG through Ultragaz. Founded in 1937, we were the first LPG distributor in Brazil. At that time, Brazilians used wood stoves and, to a lesser extent, alcohol, kerosene and coal stoves. Ultragaz was the leading company by sales volume in the Brazilian LPG market as of December 31, 2019, according to ANP.

Ultragaz operates nationwide in the distribution of both bottled and bulk LPG, including the most highly populated states in Brazil, such as São Paulo, Rio de Janeiro and Bahia, and may sell bottled LPG through independent dealers. Bulk LPG is serviced through Ultragaz own infrastructure.

In August 2003, Ultragaz acquired Shell Gás, Royal Dutch Shell’s LPG operations in Brazil, for a total price of R$171 million. Shell Gás had about a 4.5% market share in Brazilian LPG distribution according to ANP, selling 287.4 thousand tons of LPG in 2002. With this acquisition, Ultragaz became the national market leader in LPG, with a 24% share of the Brazilian market in 2003. In October 2011, Ultragaz acquired Repsol, which sold approximately 22 thousand tons of LPG in 2011.

Ultragaz is comprised of the following operating subsidiaries:

 

   

Cia. Ultragaz, the company that pioneered our LPG operations;

 

   

Bahiana, which primarily operates in the Northeast region of Brazil; and

 

   

Utingás, a storage services provider that operates two facilities in São Paulo and Paraná. Utingás was incorporated in 1967 when Ultragaz and other LPG distributors joined to construct LPG storage facilities based in the states of São Paulo and Paraná. Ultragaz currently indirectly owns 57% of Utingás. See “—Storage of LPG”.

Markets and marketing. When Ultragaz began its operations, it served only the Southeast region of Brazil. Currently, Ultragaz is present in almost all of Brazil’s significant population centers. In recent years, Ultragaz strengthened its presence in the North and Northeast of Brazil, where it did not have significant operations. Distribution of bottled LPG includes mainly retail stores, carried out by Ultragaz’s dealership network mainly using 13 kg ANP approved bottles. In the case of Ultragaz, the bottles are painted blue. Ultragaz’s operating margins for bottled LPG vary from region to region and reflect the distribution channel in the region.

Before Shell Gás’ acquisition, Ultragaz’s sales strategy for bottled LPG delivery was to increase market share through geographical expansion as well as protecting and incrementing market participation in regions where it already operated. With the acquisition of Shell Gás, Ultragaz became the Brazilian market leader in LPG, and the focus of its marketing strategy evolved to protecting market share and strengthening its position in certain regions where it does not have a significant presence. The LPG bottled market in Brazil is a mature one and Ultragaz believes that growth in demand in the long term will be a function of an increasing number of households consuming the product as well as an increasing level of household income.

Distribution of bulk LPG is largely carried out through 190 kg storage tanks installed on the clients’ premises. Since 1995, Ultragaz operates small-and-medium-sized bulk delivery facilities with bob-tail trucks, known together as UltraSystem, which deliver LPG in bulk mainly to residential buildings, commercial and industrial clients. Ultragaz’s clients in the commercial sector include shopping centers, hotels, residential buildings, restaurants, laundries and hospitals. Ultragaz’s trucks supply clients’ stationary tanks using a system that is quick, safe and cost effective.

Ultragaz’s bulk sales include large industrial clients, including companies in the food, metallurgical, steel and home and personal care sectors that have large fixed tanks at their plants. In the case of large volume consumers, Ultragaz is competing with other highly competitive energy sources such as natural gas, diesel, wood, fuel oil and electricity.

 

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Ultragaz supplies its bulk clients on the basis of supply contracts with terms ranging typically from two to five years. This type of contract limits fluctuations in sales given that the installation of the tanks is carried out by Ultragaz, and any change in supplier would imply the client’s reimbursing Ultragaz’s investments. The contract also requires that any tank supplied by Ultragaz may only be filled with LPG delivered by the company. When the bulk delivery contract expires, it can be renegotiated or the tank is removed. Since the installation of the tank represents a significant investment for Ultragaz, it seeks to achieve a return on its investment within the term of the contract.

Ultragaz’s strategy for bulk LPG distribution is to continue its process of product and service innovation. Ultragaz has a team to identify the needs of each bulk LPG client and to develop technical solutions for using LPG as an energy source. Furthermore, in 2015 Ultragaz started operating under a new concept for the small and medium business clients, named Ultrapronto. As an innovative concept in the LPG industry, Ultrapronto represents a more agile and complete service to the client, including prospecting of clients, setup of equipment, logistics and after-sale service. It permeates the entire value chain of the bulk segment, based on: (i) differentiated value proposition for the client, (ii) standardization of processes, in order to enable the service to client, and (iii) rationalization of the installation process.

The table below shows Ultragaz’s sales of LPG to clients of bottled and bulk LPG:

 

     Year ended December 31,  

Client category

   2019      2018      2017  
     (in thousands of tons)  

Bottled LPG

        

Residential delivery by Ultragaz / Ultragaz owned retail stores

     52.4        56.3        61.1  

Independent dealers(1)

     1,121.8        1,141.5        1,139.8  
  

 

 

    

 

 

    

 

 

 

Total bottled LPG

     1,174.2        1,197.7        1,201.0  

Total bulk LPG

     531.7        527.2        544.8  
  

 

 

    

 

 

    

 

 

 

Total tons delivered

     1,706.0        1,724.9        1,745.7  
  

 

 

    

 

 

    

 

 

 

 

(1) 

Includes residential deliveries and distribution through retailers’ stores.

Residential delivery has evolved during the last years from primarily door-to-door to a scheduled, order by phone or app.

LPG distribution is a very dynamic retail market where consumers’ habits change constantly, thus creating opportunities for the company. In order to track market developments more closely and differentiate itself from its competitors, Ultragaz has developed and enhanced sales channels and payment methods. In the last decade, the company expanded the participation of Disk Gás (sale of LPG bottles by telephone) and, more recently, introduced ordering through a smartphone app (Ultragaz Connect), through a website (Pedido Online) and Whatsapp. These initiatives provide customers with greater convenience, add further value and generate logistic optimization to Ultragaz. The same principles have been extended to the bulk segment, in which Ultragaz is a pioneer and has a leading position. Ultragaz has been developing new technologies for different markets, such as factories, agribusiness, small and medium business and residential buildings. For industries, such as the craft breweries, Ultragaz has developed a new system to control the whole process using Internet of Things (IoT) connectivity to provide high levels of quality standards. Ultragaz has also expanded LPG uses portfolio to agribusiness, such as a solution for cotton moisture control, increasing productivity. Finally, tracking consumption trends in the bulk segment, Ultragaz has created a steam car wash solution, which reduces 90% of water consumption in the vehicle cleaning process.

 

 

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Given Ultragaz’s network and reach to the most remote communities in Brazil, it has engaged in a series of initiatives and partnerships to promote social inclusion, education and culture. The table below shows the most relevant ones:

 

Project

   Year of
launch
  

Brief description

Ultragaz Cultural

   2000   

•   Series of shows, movies, theater, literature, music and educational workshops

•   2000-2019: served more than 279 thousand children in 22 states in Brazil

Partnership with Ministry of Health

   2008   

•   Awareness and educational campaigns to address diseases prevention, such as dengue, Zika virus, H1N1 and yellow fever, as well as other basic health concerns

•   2009 – 2019: reached more than 146 million people

United Nations Partnership

   2009   

•   Ultragaz is a signatory of the UN Global Compact

•   In 2016, Ultragaz joined the 17 Objectives of Sustainable Development

Junior Achievement

   2009   

•   The largest and oldest organization in Brazil dedicated to educating youth in business

•   2019: 359 volunteers were involved in 13 states in Brazil

Pega Pilhas, Baterias e Celulares

   2012   

•   Collection and disposal of used batteries in Ultragaz’s consumers’ households

•   2019: 450 kg of batteries collected in 5 states in Brazil

Campanha Junte Óleo: Ultragaz Coleta e Soya Recicla” – Partnership with Bunge and Triângulo Institute, a NGO

   2013   

•   Cooking oil recycle campaign to avoid its disposal into drinkable water sources

•   2015: the project won the 14th Marketing Best Sustainability Award

•   2019: Only in this year, over 150 thousand liters of oil collected, reaching 700 thousand Brazilian households with approximately 400 resellers involved

Somar Sustentabilidade

   2014   

•   A project that aims to foster sustainability concept and practices among its resellers

•   By the end of 2019, more than 480 resellers had participated

CDP Partnership

   2015   

•   With the support of CDP, Ultragaz promotes training with its critical suppliers about CO2 emissions, encouraging them to develop inventories for greenhouse gas emissions

•   2019: 40 suppliers were involved

Female Empowerment

   2018   

•   Partnership with the Feminine Association for Social and University Studies (Afesu) focused in supporting socially vulnerable women by offering training schemes for entry into the labor market. 2019: 40 girls (between 12-17 years old) were benefited

•   With the support of Woman Entrepreneur Network (Rede Mulher Empreendedora), Ultragaz offers opportunities and fosters entrepreneurship and redeeming self-esteem among women who are victims of domestic violence. 2018-2019: 92 women were involved

Memória Local – Partnership with “Museu da Pessoa

   2019   

•   The project aims to preserve the memory of communities, through integrated activities between elementary and high school students, teachers and communities.

•   2019: 1,474 people benefited

Ler é Presente

   2019   

•   Develop the creativity and imagination of children from public institutions and schools, through voluntary reading

•   2019: 62 volunteers involved

Distribution infrastructure. Ultragaz’s distribution strategy includes having its own distribution infrastructure for bulk LPG, since it believes proximity to customers is a significant factor in successful distribution and sales strategies. Ultragaz also maintains a large independent dealer network for the bottled LPG. See “ —Independent dealers”. For both bottled and bulk LPG, deliveries are made by a staff wearing Ultragaz uniforms and driving vehicles with Ultragaz’s logo. Ultragaz has also invested in information technology for improving its process, such as logistics optimization and production efficiency. Ultragaz delivers bottled LPG, using a distribution network, which included 5.3 thousand independent dealers and a fleet of 59 vehicles for the delivery of gas bottles and 286 for bulk delivery as of December 31, 2019.

 

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Bottled sales capacity derives from the number of bottles bearing Ultragaz’s brands. Ultragaz estimates that, as of December 31, 2019, there were 26.6 million 13 kg bottles stamped with Ultragaz’s brands in the market.

Independent dealers. Ultragaz’s independent distribution network ranges from large dealers, which carry out extensive home delivery, to single retail stores, which sell small quantities of LPG bottles. ANP Rule 51, enacted on November 30, 2016, that repealed the ANP Rule 297, sets that the independent dealers must be registered with ANP and comply with a list of prerequisites contained in such rule, as well as those required by law for the storage of bottles up to 90 kg. Also, each municipality sets forth its own safety regulations applicable to stores that sell LPG, including a minimum distance from certain locations, such as schools. For the year ended December 31, 2019, 96% of Ultragaz’s bottled LPG sales were made through independent dealers. The agreements entered into between Ultragaz and independent dealers require the use of the Ultragaz brand and the display of the Ultragaz logo in the delivery vehicles and on the uniforms worn by delivery personnel. Proprietary rights of the trademark and the logo are retained by Ultragaz and are duly registered with the National Institute of Industrial Property (INPI – Instituto Nacional de Propriedade Industrial). All contracted dealers are Ultragaz’s exclusive representatives. Under the terms of the respective contracts, each dealer agrees not to deliver non-Ultragaz LPG bottles.

Ultragaz understands that investing in the efficiency of its reseller network is key for staying ahead of competition and at the same time aligned with market demand for LPG. Accordingly, Ultragaz has developed several programs aimed at improving resellers’ management quality and standards.

The main tool is the Programa de Qualificação de Revendas (Reseller Qualification Program), which seeks to standardize Ultragaz’s resellers’ best management practices, including brand standardization, management quality, and strict compliance with the laws applicable to the industry. Through an assessment process, resellers are classified into categories (blue diamond, diamond, golden, bronze and opportunity), allowing the participants to check their performance compared to Ultragaz’s excellence standards and stimulating constant improvement. In 2019, approximately 3.9 thousand resellers participated in the program – a significant increase compared to 2008, when the program began with approximately 750 resellers evaluated. Out of the resellers that participated in the program in 2019, 65% (or 2.6 thousand) were qualified as bronze or above, attesting their compliance with most of Ultragaz’s quality requirements. In addition to the Reseller Qualification Program, Ultragaz has been deploying new initiatives to improve the efficiency of its resellers, such as the pre-operation training programs, aiming to accelerate their maturing process and anticipate financial results, increasing success rates among the new resellers, comprised of courses focused on key aspects of LPG operations, marketing and cash flows, among others.

Ultragaz offers to its new dealers a complete training program: Pré-Operação (Pre-operation), for dealers with no previous experience in LPG, and Cultura Azul (Blue Culture), which aims to insert dealers who already have experience in the segment, in the Company’s culture. The objective is to accelerate the process of maturing new dealers, by sharing best market practices, financial, operating and marketing knowledge and team management. Before starting operating, our dealers receive a complete branding guideline package in order to guarantee the visual standard of the brand, in addition to a good experience for our customers.

Another training program that we offer to our partners is Ultratop, a program dedicated to the dealer’s employees, including online trainings and campaigns focused on customer services. This program seeks to provide our dealers and their employees with critical skills to ensure an effective management in the LPG retail market and strengthen the qualification of the dealers’ network.

Distribution channels to bulk consumers. Large bulk distribution, constituted mostly of industrial users, is made by tanker trucks that deliver the LPG directly to the storage tanks located at the customers’ premises. Small bulk distribution, comprised of residential buildings and commercial users, and smaller industrial users, is made primarily by bob-tail trucks. Ultragaz uses the UltraSystem trade name in connection with its small bulk distribution through bob-tail trucks. Ultragaz makes bulk sales directly to customers using its own infrastructure and transportation provided by third-party transportation companies.

Payment terms. Ultragaz’s sales through its retail stores and through home delivery are made mainly on a cash basis. Ultragaz’s sales to independent dealers and to industrial and commercial users have payment terms of 22 days on average.

Bottle swapping centers. Pursuant to the Self-Regulatory Code, established in 1996 and approved by ANP, the LPG distributors have established 9 operating swapping centers to facilitate the return of the bottles to the appropriate distributor. Under the Self-Regulatory Code, while LPG distributors may pick up any empty LPG bottles tendered by customers in exchange for full LPG bottles, whether or not such empty bottles were put in circulation by that distributor, after October 1997, LPG distributors were not permitted to refill third-party bottles. Accordingly, LPG distributors may deliver third-party bottles to a swapping center where such bottles may be exchanged for bottles placed in circulation by such LPG distributor. The swapping centers currently charge a fee of R$ 0.60 per exchanged LPG bottle.

 

 

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Requalification of bottles. The useful life of a bottle varies depending on a number of factors, the most important of which are the extent to which the bottle has been exposed to corrosion from the atmosphere and whether the bottle has been damaged. The Self-Regulatory Code and ANP regulation provides that all bottles must be requalified after their first 15 years of use, and every ten years thereafter. Each bottle is visually inspected for damage and corrosion to determine if it can be requalified or if it should be scrapped. In the case of bottles which pass the quality and safety checks, several procedures are followed before the bottles are stamped with the year of requalification and the next term in which they are due for requalification.

Supply of LPG. Currently, Ultragaz and all other LPG distributors in Brazil purchase all or nearly all LPG from Petrobras. Ultragaz has a formal contract with Petrobras for the supply of LPG. The procedures for ordering and purchasing LPG from Petrobras are generally common to all LPG distributors, including Ultragaz, which basically consist of sending an estimate of our needs to Petrobras four months in advance and a more precise estimate of our needs one month in advance. There have been no significant interruptions in the supply of LPG by Petrobras to the distributors since an interruption in 1995 due to a 15-day strike by Petrobras employees.

Since 2001, distributors have been allowed to freely establish retail prices, which were previously set by the Brazilian government. Until the end of 2001, the LPG refinery price charged by Petrobras to all LPG distributors was determined by the Brazilian government and was the same for all LPG distributors in all regions of Brazil. Historically, refinery prices have been subsidized by the Brazilian government. In January 2002, the Brazilian government abolished subsidies to refinery prices and Petrobras started to freely price LPG in the domestic market, adopting the international price plus surcharges as its benchmark. However, the Petrobras refinery price of LPG is still subject to the Brazilian government influence when the government deems appropriate. Refinery prices of LPG in Reais remained unchanged from May 2003 to the end of 2007, despite increases in oil and LPG prices in the international markets, which were partially offset by the appreciation of the Real compared to the U.S. dollar, reducing the difference between LPG prices in Brazil and in the international markets. Since 2008, Petrobras has increased LPG refinery prices for commercial and industrial usage sporadically. From 2017 to 2019, LPG refinery prices were adjusted more frequently, as shown below:

 

     Jan-08      Apr-08      Jul-08      Jan-10      Dec-14      Sep-15      Dec-15      Dec-16      Apr-17      Jul-17    Aug-17  

Commercial and Industrial LPG (% adjustment)

     15%        10%        6%        6%        15%        11%        4%        12%        -4.0%      -5.2% and
8.0%
     7.2%  

 

     Sep-17    Nov-17    Dec-17    Jan-18    Feb-18    Mar-18    May-18    Jul-18    Sep-18    Nov-18    Dec-18

Commercial and Industrial LPG (% adjustment)

   2.3% and
7.9%
   6.5%    5.3%    -6.3%    -4.6%    -4.2% and
4.7%
   7.1% and
3.6%
   4.4%    5.0%    -5.6% and
-9.2%
   -4.7%

 

     Jan-19      Feb-19      Mar-19      Apr-19      Jul-19      Aug-19      Oct-19      Nov-19      Dec-19  

Commercial and Industrial LPG (% adjustment)

     -3.4%        -3,0%        6.0%        6.0%        -9.8%        -13.5%        3.0%      0.6%      5.0%  

The LPG refinery price for residential use remained unchanged from May 2003 to September 2015, when Petrobras increased prices by 15%. In the last few years, Petrobras’ practice has been not to immediately reflect in its oil derivatives prices in Brazil the volatility of international prices of oil and oil derivatives. However, in June 2017, the dynamic of LPG prices supplied by the distributors was modified to reflect international price volatility and exchange rate variation, as shown below:

 

     Mar-17      Jun-17      Jul-17      Aug-17      Sep-17    Oct-17      Nov-17      Dec-17  

Residential LPG (% adjustment)

     9.8%        6.7%        -4.5%        6.9%      10.7% and 6.9%      12.9%        4.5%        8.9%  

In January 2018, the pricing policy for LPG acquisition at refineries was adjusted to soften the transfer of price volatility in the international market to the domestic price. The monitoring period for international prices and currency rates, which dictate the percentages of price adjustment, was the average of the preceding twelve months, rather than monthly variation, and price adjustments became quarterly, rather than monthly. In August 2019, Petrobras terminated the existing policy and price differentiation was ended in November 2019, which resulted in domestic prices for all segments being converted into one single price, as shown below.

The following table shows residential LPG adjustments:

 

     Jan-18      Apr-18      Jul-18      Nov-18      Feb-19      May-19      Aug-19      Oct-19      Nov-19      Dec-19  

Residential LPG (% adjustment)

     -5.0%        -4.4%        4.4%        8.5%        1.0%        3.5%        -8.2%        5.0%        4.0%        5.0%  

 

 

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In 2017 and 2018, Petrobras’ average refinery price was US$484 per ton and US$560 per ton, respectively, compared with the average international price of US$409 per ton and US$459 per ton, respectively. In 2019, Petrobras’ average refinery price was US$528 per ton compared with the average international price of US$287 per ton.

As a result of the ongoing COVID-19 pandemic, there has been significant volatility in oil prices, and in March 2020, Petrobras’ average refinery price was US$416 per ton compared with the average international price of US$148 per ton.

Storage of LPG. On December 31, 2019, Ultragaz’s storage capacity was approximately 19.7 thousand tons, including Utingás’ storage capacity. Based on its 2019 average LPG sales, Ultragaz could store approximately 3.5 days of LPG supply. Accordingly, an interruption in the production of LPG may result in shortages, such as the one that occurred during the Petrobras strike in 1995. See “Item 3.D. Key Information — Risk Factors — Risks Relating to Ultrapar and Its Industries”.

Ultragaz stores its LPG in large tanks at each of its filling plants located throughout the regions in which it operates. Primary filling plants receive LPG directly from Petrobras by pipeline; secondary filling plants are supplied by truck; and satellite plants primarily hold LPG which is used to fill bob-tail trucks for small bulk distribution to customers that are not located near a primary or secondary filling plant. See “Item 4.D. Information on the Company — Property, Plants and Equipment”.

Competition. Ultragaz’s main competitors are:

 

   

Liquigás, which was acquired by Petrobras in June 2004 from the ENI Group and has been operating in the Brazilian LPG distribution sector for more than 60 years;

 

   

Supergasbras, formed by the merger of Minasgás S.A., founded in 1955, and Supergasbras S.A., founded in 1946, and controlled by SHV Energy, a major multinational LPG distributor, which operates through its two separate brands, Minasgás and Supergasbras; and

 

   

Nacional Gás Butano, a Brazilian LPG distributor, which has been present in the market for more than 60 years.

The following table sets forth the market share of Ultragaz and its competitors in terms of volume according to ANP:

 

     Year ended December 31,  

LPG Distributor

   2019      2018      2017  

Ultragaz

     23.4%        23.5%        23.6%  

Liquigás

     21.1%        21.4%        21.6%  

Supergasbras

     20.0%        20.1%        20.2%  

Nacional Gás Butano

     18.9%        19.4%        19.5%  

Others

     16.6%        15.6%        15.1%  
  

 

 

    

 

 

    

 

 

 

Total

     100.0%        100.0%        100.0%  
  

 

 

    

 

 

    

 

 

 

Prior to 1990, the Brazilian government specified the areas in which LPG distributors were permitted to operate and each LPG distributor was allocated a limit in its LPG sales for each Brazilian geographic region in which it operated. These limits impacted the growth of larger LPG distributors and limited competition among LPG distributors. These restrictions were removed as part of the deregulation process, resulting in a substantial increase in competition among domestic LPG distributors.

Considering that the bottled market for LPG is a mature market with relatively low consumption growth, the competition is largely based upon attempts by LPG distributors to increase market share at the expense of their competitors. Since per capita consumption is small, low distribution cost is the critical factor in dictating profitability. Therefore, LPG distributors largely compete on the basis of efficiencies in distribution and delivery as all LPG distributors currently purchase nearly all of their LPG requirements from Petrobras, and as Petrobras’ refinery price charged to the distributors is the same to all LPG distributors. Ultragaz’s principal markets, including the cities of São Paulo, Salvador and Recife, are highly populated areas and therefore distribution to this market can be carried out with great economies of scale resulting in lower distribution costs to Ultragaz. Additionally, Ultragaz enjoys low bulk LPG distribution costs through UltraSystem.

In addition to competing with other LPG distributors, Ultragaz competes with companies that offer alternative energy sources to LPG, mainly natural gas, and other sources such as wood, diesel, fuel oil and electricity. Natural gas is currently the principal source of energy against which we compete. The supply of natural gas requires significant investments in pipelines. While fuel oil is less expensive than LPG, LPG has performance and environmental advantages over fuel oil in most uses.

 

 

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In 2016, the Brazilian LPG market increased by 1.2% compared to 2015, driven by an increase in both segments. The bottled segment grew by 1.2% over 2015, given its resilient nature as an essential good and the bulk segment grew by 1.1% compared to 2015, due to new clients entering this market in 2016. In 2017, the Brazilian LPG market remained stable compared to 2016. The bottled segment increased by 0.6%, and the bulk segment decreased by 1.8%. In 2018, the Brazilian LPG market decreased by 1.0% compared to 2017, mainly driven by the decrease of 1.4% in the bottled segment. In 2019, the Brazilian LPG market decreased by 0.3% compared to 2018. The bottled segment decreased by 0.5%, and the bulk segment increased by 0.4%.

The following graph shows LPG sales volume for the Brazilian market and Ultragaz for the periods indicated:

 

LOGO

 

Source: ANP (volume for 2007 according to Sindigás)

Quality. We were the first Brazilian LPG distributor to receive ISO (International Standards Organization) certification for excellence in quality management, the first LPG distributor in Brazil to receive the State of São Paulo Quality Award (Prêmio Paulista de Qualidade), a recognized quality award in Brazil, and the Best in Management, the highest quality management award in Brazil. We started the search for continuous improvement of processes more effectively, delivering value to the customer through a lean culture.

Income tax exemption status. Brazilian legislation provides a 75% income tax reduction for businesses located in the Northeast region of Brazil, which depends of SUDENE’s formal and previous approval. Ultragaz is entitled to this tax benefit at its filling plants located at Mataripe, Caucaia, Juazeiro, Aracaju and Suape until 2024, 2025, 2026, 2027 and 2027, respectively. The total amount of SUDENE’s income tax exemption for Ultragaz for the years ended December 31, 2019 and 2018 was R$17.1 million and R$12.8 million, respectively. For further information, see Note 9.c to our 2019 consolidated financial statements.

Fuel Distribution

Industry and Regulatory Overview

The Brazilian fuels market comprises the distribution and marketing of gasoline, ethanol, diesel, fuel oil, kerosene and natural gas for vehicles (NGV). In 2019, diesel represented 47% of the fuels distributed in Brazil, followed by gasoline, ethanol, NGV, fuel oils and kerosene, each of which represented 31%, 18%, 2%, 2% and less than 0.01%, respectively.

Growth in the fuel distribution sector has been directly influenced by GDP growth rates and size of light vehicle fleet. GDP growth is the main driver for diesel volume, given that diesel in Brazil is highly used for buses, trucks and agricultural engines. The size of the light vehicle fleet influences the growth in the combined volumes of gasoline, ethanol and NGV, which are basically used for light vehicles. The growth in the size of the car fleet in turn, is highly correlated with credit availability and disposable income. Since 2005, the Brazilian economy has been passing through a structural change with the creation of a larger credit market for consumer goods. However, in recent years, the economic recession has affected the credit availability and levels of disposable income in Brazil. See “Item 5.D. Operating and Financial Review and Prospects—Trend Information”.

In December 2019, credit in Brazil reached 48% of GDP, compared to 47% in December 2018, 47% in December 2017, 49% in December 2016, and 54% in December 2015, which, combined with a growth in disposable income in Brazil in 2019 (although with continued high unemployment rates), had a positive effect on the sales of vehicles in the year. According to ANFAVEA, approximately 2.7 million new light vehicles were registered in Brazil in 2019, an increase of 8% compared to 2018. The average light vehicle fleet increased by 2% in 2019, reaching more than 43 million at the end of the year. Among the total vehicles sold in 2019, 87% were flex-fuel vehicles, which have engines adapted to operate using either gasoline or ethanol, or by any combination of the two, 3% were gasoline-only fueled vehicles, 9% were diesel-only and less than 0.5% were electric vehicles. Since the launching of flex-fuel vehicles in Brazil in 2003, 35 million flex-fuel cars were sold in Brazil.

 

 

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Moreover, recent changes to legislation and inspection in the fuel distribution sector have helped to progressively curb unfair competition, creating a level playing field. These improvements should benefit the formal market by capturing the volume from the grey market.

According to ANP, the distribution of fuels (gasoline, ethanol and diesel) is made mainly through three channels, as follows:

 

   

Service stations, which serve final retail consumers;

 

   

Large consumers, mainly industries and fleets; and

 

   

Retail—wholesale resellers—TRR, specialized resellers that distribute diesel to medium and small volume end-users.

The following chart shows the oil-derivative fuel distribution process in Brazil:

 

LOGO

The following chart shows the ethanol distribution process in Brazil:

 

LOGO

Distribution of oil-derivative products is carried out through an extensive network of primary and secondary storage terminals. Primary storage terminals are generally located near refineries and are used to store products to be sold to customers (service stations, large consumers and TRRs) and to be transported to secondary storage terminals.

 

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Oil-derivative products are transported from refineries and port terminals to storage terminals via pipelines, coastal or river shipment and trucks. Transportation of oil-derivative products between primary and secondary storage terminals is provided by pipeline, railroads, trucks and coastal or river barges. Ethanol is transported from the many distilleries to primary and secondary storage bases by trucks and railroads. Delivery to service stations, large consumers and TRRs is made exclusively by trucks.

All gasoline sold in Brazil must contain a certain proportion of anhydrous ethanol that can vary from 18% to 27%. In May 2013, the Brazilian Mines and Energy Ministry increased the required percentage of anhydrous ethanol mixed with gasoline again to 25%. In March 2015, the Brazilian Agriculture Ministry increased the required percentage of anhydrous ethanol mixed with gasoline from 25% to 27%. Currently, the percentage of anhydrous ethanol mixed with gasoline is 27%. The Brazilian Sugar and Alcohol Interministerial Council (Conselho Interministerial do Açúcar e Álcool) establishes the percentage of anhydrous ethanol that must be used as an additive to gasoline (currently, at 27% in regular gasoline and 25% in additive/premium gasoline).

Gasoline “A”, as it is known in its unmixed form, is mixed with anhydrous ethanol at primary storage terminals or at secondary storage terminals. Gasoline “A”, mixed with anhydrous ethanol, forms gasoline “C”, which is delivered directly to service stations and large consumers by truck.

Since January 2008, under the Biodiesel Program, distributors have been required to include a percentage of biodiesel in the volume of diesel sold, in order to reduce greenhouse gas emissions. In addition, this program has also the social purpose of encouraging and developing small agriculture producers of biodiesel raw materials. From January 2008 to June 2008, the biodiesel mix requirement was 2%. On July 1, 2008 and 2009, the biodiesel mix requirement was increased to 3% and to a further 4%, respectively. On January 1, 2010, the biodiesel mix requirement was increased to 5%, on July 1, 2014 to 6% and on November 1, 2014 to 7%. In March 2016, the government enacted Law No. 13,263, which increased the required percentage of biodiesel mix to diesel to 8% until March 2017, reaching 10% in 2019. On October 29, 2018, the National Council of Energy Policy published CNPE 16/2018 Resolution authorizing ANP to increase the biodiesel mix requirement to 15% until 2023, subject to technical testing of engines. As of February 4, 2020, there were 155 fuel distributors authorized by the ANP to operate in Brazil.

Supply. Petrobras is currently the only relevant domestic supplier of oil derivatives, accounting for 99% of Brazilian production. There are currently 17 oil refineries in Brazil, of which Petrobras owns 13. Petrobras’s total refining capacity in 2019 was 344 thousand cubic meters per day. Brazilian refineries are located predominantly in the South and Southeast regions of Brazil. The overall product yield for these refineries in 2019 was 39% diesel, 23% gasoline, 11% fuel oil, 7% LPG and 20% other products, including naphtha. In 2019, 89% of oil derivates was supplied by local refineries and the remaining 11% was imported.

Ethanol is purchased from various producers. In 2019, approximately 35.3 million cubic meters of ethanol were produced, 29% of which was anhydrous ethanol and the rest of which was hydrated ethanol. Brazil’s supply of anhydrous and hydrated ethanol is seasonal and depends mostly on the sugarcane harvest.

Biodiesel is purchased from the many producers of biofuels in Brazil, and its main raw materials are tallow and soy seeds. As of December 31, 2019, there were 41 biodiesel producers, located predominantly in the Midwestern region. Brazil’s biodiesel production in 2019 was 5.9 billion of liters. Since January 2008, which was the first year of the Biodiesel Program, Petrobras has been required to purchase biofuels in auctions promoted by ANP and supply distributors with amounts of biodiesel corresponding to the proportional volume of diesel purchased. This policy aims to prevent distributors from selling diesel without including the minimum required amount of biodiesel.

The role of the Brazilian government. The Brazilian government has historically regulated the pricing of oil and oil-derivative products, ethanol, natural gas and electric energy. From 1990 onwards, the Brazilian oil and gas sector has been significantly deregulated. Until the adoption of the Petroleum Law, the Brazilian government maintained strict control over the prices that could be charged by (i) refineries to distributors, (ii) distributors to service stations and other channels and (iii) service stations to end-users.

Currently there is no legislation or regulation in force giving the Brazilian government power to set oil-derivative and ethanol fuel prices. However, given that Petrobras is a state-controlled company and the dominant supplier in this market, prices of oil-derivative fuels are still subject to indirect government influence, resulting in potential differences between international prices and domestic oil-derivative prices.

 

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From 2008 to 2010, Petrobras changed the prices of gasoline and diesel charged by refineries twice, and the Brazilian government simultaneously changed the CIDE tax in order to partially or fully offset the effect of the change in prices to the end consumer.

In October 2011, to avoid the gasoline price increase to the end consumer, the Brazilian government decided to simultaneously reduce the CIDE tax of gasoline A from R$230 per cubic meter to R$193 per cubic meter. In November 2011, Petrobras increased gasoline and diesel prices by 10% and 2%, respectively and, simultaneously, the Brazilian government reduced once more the CIDE tax of gasoline A to R$91 per cubic meter and that of diesel from R$70 per cubic meter to R$47 per cubic meter, therefore without affecting final consumer prices.

In June 2012, as a consequence of its increased requirements for importing oil products at prices above those practiced in Brazil, Petrobras increased gasoline and diesel prices by 3.9% and 7.8%, respectively, and the CIDE tax of both products was simultaneously reduced to zero by the Brazilian government, offsetting the effect of the increase in prices. In July 2012, Petrobras further increased its refinery price for diesel by 6.2%.

Due to the Real depreciation and to the fact that the average cost of oil derivatives imported from the international markets was higher than the price practiced by Petrobras in the Brazilian market, (i) in January 2013, Petrobras increased gasoline and diesel prices by 6.6% and 5.4%, respectively; (ii) in March 2013, Petrobras announced a new adjustment in diesel price, of 4.9%; and (iii) in November 2013, Petrobras increased gasoline and diesel prices by 4.0% and 8.0%, respectively. In November 2014, Petrobras announced another increase in the gasoline and diesel prices by 3.0% and 5.0%, respectively.

In January 2015, the Brazilian government announced the return of the CIDE tax and the increase in the PIS and COFINS taxes on fuel, with an impact of R$220 per cubic meter for gasoline and R$150 per cubic meter for diesel, valid from February 1, 2015. On September 30, 2015, Petrobras announced a new increase in gasoline and diesel prices of 6.0% and 4.0%, respectively.

In October 2016, a new pricing for gasoline and diesel was established with the objective of, among other aspects, controlling fluctuating prices according to international references on a monthly basis. Therefore, gasoline and diesel prices became directly influenced by the international prices and the Real/U.S. dollar exchange rate. Under the new pricing dynamic, gasoline prices were reduced by 3.2% and 3.1% and increased by 8.1% in October, November and December 2016, respectively. On the same occasions, diesel prices were reduced by 2.7% and 10.4% and increased by 9.5%.

In July 2017, the new price dynamic was updated in order to make daily price adjustments based on international references and the Real/U.S. dollar exchange rates. Also, in July 2017, Brazilian Government announced an increase in PIS and COFINS taxes for gasoline and diesel. On gasoline the taxes levied increased from R$381.6 to R$792.5 per cubic meter, while for diesel it jumped from R$248.0 to R$461.5 per cubic meter.

In 2018, fuel costs increased in Brazil as oil prices rose globally and the Real depreciated. As a consequence, at the end of May 2018, the truck drivers started a nationwide strike claiming for a decrease on diesel prices, exemption from tolls on passages without goods, a legal reform among others demands. The strike caused fuels and other consumer goods shortages all over the country. Therefore, the Brazilian government reacted by establishing emergency measures, such as minimum freight price table, reduction of R$460 per cubic meter (or R$0.46 per liter) in diesel price, being R$160 per cubic meter (or R$0.16 per liter) in CIDE and PIS and COFINS tax exemptions and R$300 per cubic meter (or R$0.30 per liter) by the subvention program up to December 31, 2018. Initially, prices were maintained for 60 days, and after this period, they were monthly adjusted according to a parametric formula established by the ANP. The program ended on December 31, 2018. In 2019, Petrobras returned to the previous adjustment policy according to the international market. Therefore, gasoline and diesel prices are set by Petrobras taking into account the international parity price, including international prices and the Real exchange rate, together with margins to remunerate Petrobras for the risks inherent in its business.

 

 

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The following graphs show the price volatility of fuels acquired by the distributors from the refineries:

 

LOGO

 

Source: Petrobras

Ethanol prices are deregulated, being freely charged by the ethanol producers. In order to curb unfair competitive practices in the ethanol sales, some measures have been taken by the government, supported by Sindicom (formerly Plural) members. In April 2008, it became mandatory for fuel producers and distributors, as well as TRRs, to issue electronic tax invoices in all the states of Brazil. In addition, in June 2008 the government, through the Brazilian Congress, enacted Law No. 11,727/08, based on the Provisional Measure 425 (Medida Provisória 425), which came into force in October 2008. Under this law, two initiatives were imposed to prevent tax evasion: (i) increasing the proportion of collection of PIS and COFINS taxes at distilleries from 25% to 40% and (ii) requiring distilleries to install flow meters (medidores de vazão) to control the output of ethanol, however this initiative was not implemented due to technical aspects. In 2009, ANP started to track sales of methanol. The blending of methanol with ethanol is an example of product adulteration practiced by certain distributors or gas station owners, mainly in the State of São Paulo.

On May 7, 2013, the government adopted the Provisional Measure 613 (Medida Provisória 613), which, among other resolutions, granted tax incentives to ethanol producers and to chemical producers through PIS and COFINS tax credits and reductions. As a result, all PIS and COFINS taxes levied on ethanol, which corresponded to R$120 per cubic meter as of December 31, 2013, were collected by the producers, and they received a R$120 per cubic meter tax credit to offset the increased PIS and COFINS taxes levied on ethanol. However, in January 2017, PIS and COFINS taxes for ethanol producers were reestablished at R$120 per cubic meter, without any corresponding credit.

In July 2017, the Brazilian Government announced an increase in PIS and COFINS taxes for ethanol. For ethanol producers, taxes levied increased from R$120.0 to R$130.9 per cubic meter and for ethanol distributers went from zero to R$110.9 per cubic meter.

In accordance with the publication of Law No. 11,097 on January 13, 2005, the National Biodiesel Program (Programa Nacional de Biodiesel) was created. Since 2008, a certain amount of biodiesel has been required to be added to diesel. In addition, some changes were required in the distributors’ facilities, as well as the restructuring of its logistics. In March 2016, the government enacted Law No. 13,263, which increased the required percentage of biodiesel mix to diesel to 8% until March 2017, reaching 10% up to 2019. On March 1, 2017, the biodiesel mix was 8% and since March 1, 2018, the biodiesel mix requirement is 10%. On October 29, 2018, the National Council of Energy Policy published CNPE 16/2018 Resolution authorizing the ANP to increase the biodiesel mix requirement to 15% until 2023, subject to technical testing of engines.

 

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The role of Petrobras. Since its establishment in 1953, Petrobras maintained a legal monopoly in the exploration, production, refining, importing and transporting of crude oil and oil products in Brazil and its continental waters. This monopoly was confirmed in Brazil’s federal constitution enacted in 1988. As a result, Petrobras has historically been the sole supplier of oil and oil-derivatives in Brazil.

In November 1995, Petrobras’ monopoly was removed from the federal constitution by a constitutional amendment approved by the Brazilian Congress. According to this amendment, other state and private companies are permitted to compete against Petrobras in virtually all fields in which Petrobras operates. This amendment was also reflected in Law No. 9,478, dated August 6, 1997, which limited Petrobras’ monopoly to a maximum period of three years. Law No. 9,478 prescribed that the termination of Petrobras’ monopoly would be accompanied by the deregulation of oil, gas and oil-derivative product prices, and created a new regulatory agency, the ANP, to oversee all oil-related activities. However, in practice, Petrobras still remains basically the largest domestic oil-derivative supplier of oil and oil-related products, including naphtha, LPG and oil-derivative fuels in Brazil, even though there are no legal restrictions on the operations of other suppliers or to imports.

Since 1971, Petrobras has acted in the Brazilian fuel distribution market through its subsidiary BR. BR is the leader in the fuel distribution market, with market share of 24.8% in 2019, according to ANP.

With the discovery of the pre-salt reservoirs, the Brazilian government adopted a series of measures in the regulatory environment, establishing a new legal framework for the oil industry, which may result in a series of regulations, such as production-sharing and concession contracts, among others. This discovery may bring a new scenario for the sector, creating major investments and adaptations in infrastructure such as new refineries, highways, pipelines, platforms, ports and ships, among others.

The role of the ANP. The ANP is responsible for the control, supervision and implementation of the Brazilian government’s policies with respect to activities related to oil, natural gas and biofuels. The ANP regulates all aspects of the industry, from the exploration and/or production, transportation to the sale of these products, including product quality standards, to the minimum storage capacities required to be maintained by distributors with respect to oil and oil products in Brazil. Prior to 1999, there were no formal requirements imposed by the Brazilian government on the fuel distribution segment. Distributors were only required to register with the national department of fuels or the national Petroleum Agent or the National Agency prior to starting operations. On December 30, 1999, the ANP established through Resolution No. 202, a number of requirements, with which all distributors must comply. In October 2014, the ANP Resolution No. 202 was replaced by Resolution ANP No 58/2014. Under the new rules, a fuel distributor, in order to operate in Brazil, must obtain an operating authorization and meet certain minimum requirements of operation, including:

 

   

minimum paid-in capital of R$4,500,000.00; and

 

   

proof of financial capacity equivalent to expected volumes to be sold (proof of such capacity may include proof of ownership of assets, insurance or a bank guarantee).

ANP is also responsible for establishing the limits of oil-based fuel volume purchased by distributors based on their storage capacity. Fuel distributors are required to provide the ANP with monthly reports showing their previous month sales.

Fuel distribution for service stations and large consumers must be carried out only by a registered distributor. TRRs are allowed to trade only diesel, lubricants and grease to small-end consumers. Each distributor must provide the ANP with information regarding its contracted independent dealers on a monthly basis. The construction of storage facilities and approval for new retail sellers to operate is subject to the prior approval of the ANP. Service stations and storage facilities may only begin operations after ANP inspections.

Regulation. Distributors are prohibited from operating service stations, other than for training purposes or for the development and testing of new products and services, and therefore, service stations are operated by independent resellers. Three types of arrangements between distributors and service station operators are generally used in the fuels industry: (i) the distributor owns land, equipment and buildings for a service station and leases to an operator, (ii) a third party owns land, leases it to a distributor who constructs a service station facility or makes improvements to an existing facility and leases the station to an operator and (iii) the operator or a third party owns the land and constructs a service station facility or makes improvements to an existing facility, which is typically financed by the distributor (the most common practice in Brazil). Agreements between distributors and operators of service stations are generally exclusive for a given period. In exchange for being an exclusive reseller, the operator is granted the right to operate under the distributor’s brand name. The agreement might also include provisions related to the leasing of pumps and tanks, layout standards, training, quality control, technical and financial support, marketing and advertising support and franchises for complementary services, such as convenience stores (am/pm) and lubricant servicing franchises (Jet Oil).

 

 

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Sindicom (formerly, Plural) is the association that represents the interests of major Brazilian fuel distributors, with its members controlling 65% of the Brazilian fuel market in 2019. The association was formed in 1941 and its primary purpose is to promote uniform standards for industry regulation and to provide a forum in which members can discuss matters affecting the industry. Sindicom represents its members in discussions before federal and state governmental bodies and presents its members perspectives on relevant laws and regulations, including those relating to taxation, operations, industrial and occupational safety and environmental protection.

During the 1990s, when the process of deregulation began in the fuel distribution sector in Brazil, a number of parties entered the market with a business model based on cost advantages derived from anticompetitive practices through fuel adulteration and tax evasion, including (i) diluting gasoline by mixing solvents or adding anhydrous ethanol in an amount greater than the permitted by applicable law (anhydrous ethanol has its taxation incorporated into gasoline “A” and is historically cheaper than gasoline), (ii) non-payment of federal taxes on fuels, taxes on gross revenues and state value-added taxes and (iii) selling anhydrous ethanol mixed with water as hydrated ethanol. Such practices have enabled these players, all of them non-Sindicom (formerly Plural) distributors, to increase their market share by charging artificially lower prices also based on artificially lower costs. Sindicom (formerly Plural) distributors, including Ipiranga, have taken, individually and collectively, a number of actions targeted at reducing or eliminating the effects of these anticompetitive and illegal practices.

Among the actions taken were:

(i) significant interaction with the Brazilian judiciary, including holding seminars for judges and prosecutors concerning the problems facing the industry and directly participating in tax litigation involving distributors that are not Sindicom (formerly Plural) members, (ii) sponsorship of the development of a chemical coloring solvent that is added to anhydrous ethanol, in order to prevent the addition of water (and later to be sold as hydrated ethanol), (iii) support of ANP resolution that restricts the sale of hydrated ethanol by producers to distributors and prohibits sales by producers to resellers or end-consumers; (iv) support of ANP resolution that forbids distributors to sell fuels to resellers operating under another brand, except for white-flag dealers, who operate without a brand; (v) contribution to the development of CODIF, a system that electronically controls the collection of value-added taxes on fuel sales, (vi) support in the implementation of electronic invoices at the federal level, concluded in 2008, (vii) support for ANP regulation which established brand definition and the obligation of disclosing the origin of the fuels in order to inhibit certain distributors from using a fake brand (known as cloned stations); and (viii) the suggestion of several other measures, supported by ANP, including focusing the collection of PIS and COFINS on distilleries and the installation of flow meters, which were included in Law No. 11,727/2008. As a result of these efforts, the more regulated market is leading to the weakening of the business model of lower prices based on artificially lower costs and unfair practices, creating a level playing field and increasing sales volume of the formal market.

Environmental, health and safety standards. Fuel distributors are subject to Brazilian federal, state and local laws and regulations relating to environmental protection, safety and occupational health and safety licensing by the fire department and transportation. The CONAMA is the principal responsible for ruling and accepting matters with respect to the environment. Environmental state agencies and municipal departments are also responsible for establishing and supervising complementary laws and regulations within its areas of operation.

Fuel distributors must obtain authorizations and/or licenses from federal, state and/or municipal environmental agencies and fire departments to implement and operate their facilities. They are required to develop programs to control air and water pollution and hazardous waste. Emergency plans for its plants and headquarters, involving communities, public companies and other private companies must also be implemented. Additionally, fuel distributors must also comply with laws from the Ministry of Economy, which prescribes occupational health and safety standards. To maintain a safe and healthy workplace, companies must carry out comprehensive occupational health and safety programs.

Fuels may be transported only under special conditions. In Brazil, transportation of dangerous products is regulated and the regulations cover all modes of transport.

Ipiranga

Ipiranga was established in 1937 and is one of the largest fuel distributors in Brazil, with 19.3% market share in terms of sales volume in 2019, according to ANP. Ipiranga distributes diesel, gasoline, ethanol, NGV, fuel oil, kerosene, ARLA (liquid agent to reduce nitrogen oxides emissions from heavy vehicles), lubricants and greases nationwide through its network of 7,090 service stations and 86 storage terminals as of December 31, 2019.

 

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Ipiranga has implemented a differentiation strategy by offering a broad range of products and services throughout its service station network. This strategy has led to a significant and growing convenience store business, branded am/pm, including the expansion of the bakery network and private label products under the same brand, as well as lubricant servicing businesses, Jet Oil and Jet Oil Motos (for motorcycles), and the consolidation of other related products and services.

Ipiranga conducts its commercial operations through five businesses units, as follows:

 

   

Retail – fuel distribution through retail service stations;

 

   

Business to business – large consumers and TRRs;

 

   

Am/pm – convenience store;

 

   

Jet Oil – oil change service centers; and

 

   

Digital products – responsible for developing and marketing Ipiranga’s loyalty program, KMV, and Ipiranga’s digital products.

Post the acquisition by Ultrapar, Ipiranga operated in the South and Southeast regions of Brazil only. In March 2009, Ipiranga acquired Texaco gas stations network in Brazil and became a nationwide distributor, operating in all regions of Brazil, including the Northeast, North and Midwest regions where the fuel consumption grows above the national average rate, given the lower car penetration and faster-growing household income compared to other regions. In November 2010, Ipiranga acquired DNP, which distributed fuel in the states of Amazonas, Rondônia, Roraima, Acre, Pará and Mato Grosso through a network of 110 service stations, with 4% market share in the North region of Brazil in 2009 and was the fourth largest fuel distributor in this geographic area.

In August 2016, Ipiranga entered into a joint-venture agreement with Chevron to create a new company in the lubricants business, Iconic, of which Ipiranga and Chevron hold 56% and 44% respectively. Operations commenced on December 1, 2017. The JV combines two complementary and experienced companies in this business, aiming at value creation by sharing best practices and strengthening its position in the competitive Brazilian lubricants market. The combination of the two businesses increases the capillarity of the sales channels in Brazil through Ipiranga’s network, as well as through Ipiranga’s and Chevron’s lubricant distributors network. Currently, Iconic serves more than 5,200 retailers in Brazil through approximately 50 authorized distributors. The company operates three plants, two in the state of Rio de Janeiro and one in São Paulo. Iconic sells lubricants, greases, additives and coolants under Ipiranga and Chevron brands. For the year ended December 31, 2019, Iconic’s sales volume was 280 thousand cubic meters. As of December 31, 2019, Iconic had 613 employees.

Fuel distribution

Ipiranga operates in the retail segment of the fuels distribution market through a network of service stations operating under the Ipiranga brand throughout Brazil. Sales volume from service stations network accounted for 76% of the total sales in 2019. Ipiranga also operates in the business-to-business (B2B) segment with more than seven thousand clients, such as state and municipal governments, industries and cargo and passenger transportation fleet owners. Distribution to B2B represented 24% of Ipiranga’s sales in 2019.

In 2019, the fuel volume sold by Ipiranga decreased 0.8%, with sales volume of diesel decreasing 3.6%. Conversely, the volume of gasoline, ethanol and NGV was 2.5% higher, on year-over-year comparison. Ethanol and NGV grew 14.5% and 1.1% respectively, while gasoline declined 2.7%.

Growth in the fuel distribution sector is directly influenced by GDP growth rates and by the size of the car fleet. See “Item 5.D. Operating and Financial Review and Prospects—Trend Information”. Legislative changes and inspection in the fuel distribution sector in recent years have progressively curbed unfair competition, creating a level playing field in the Brazilian distribution market. Overtime, these improvements should benefit the formal market by capturing the volume from the grey market. See “Item 4.B. Information on the Company—Business Overview—Fuel Distribution—Industry and Regulatory Overview”.

In December 2019, the Renovabio program came into effect. In order to reduce carbon emissions, the program generates credit (CBIO) for biofuel producers and is mandatory for distributors to purchase CBIOs according to their share of CO2 emissions in gasoline and diesel. Despite coming into effect in 2019, Ipiranga was not required to buy CBIOs that year as the target for 2019 is required to be purchased in 2020.

 

 

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In 2019, 2.7 million new light vehicles were registered according to ANFAVEA, an increase of 8% compared to 2018, with flex fuel cars representing 87% of the total light vehicles registered in 2019. According to ANFAVEA, the average light vehicles fleet in Brazil as of December 31, 2019 was more than 43 million, an increase of 2% from 2018, as a consequence of the 2.7 million new cars registered and a scrapping of 1.7 million cars in 2019.

The table below shows Ipiranga’s sales of fuels by products:

 

     Year ended December 31,  
     2019      2018      2017  
     (in thousand cubic meters)  

Diesel (by client category)

        

Retail (service station)

     6,168.1        6,377.9        6,317.3  

B2B (large consumers and TRR)

     5,365.1        5,586.6        5,426.1  
  

 

 

    

 

 

    

 

 

 

Total diesel

     11,533.3        11,964.5        11,743.4  

Gasoline

     7,380.8        7,589.0        8,791.6  

Ethanol

     3,864.7        3,375.5        2,321.6  

Lubricants

     279.8        292.4        156.5  

Others(1)

     435.6        458.2        410.7  
  

 

 

    

 

 

    

 

 

 

Total volume sold

     23,494.1        23,679.6        23,458.5  
  

 

 

    

 

 

    

 

 

 

 

(1) 

Includes NGV, fuel oil, kerosene and ARLA.

Retail. Accounting for 76% of the total sales in 2019, the retail segment of the fuel distribution market has a network of 7,090 service stations operating under the Ipiranga brand throughout Brazil.

In 2019, Ipiranga prioritized the return on investment (ROI) in its service stations assets, which resulted in a decrease of 128 stations in its network during the year. As of December 31, 2019, there were 7,090 service stations, of which 932 had the land either owned by Ipiranga or under a long-term lease to Ipiranga and 6,158 owned by third parties. In 2019, 90% of these service stations were located in urban areas, with the remaining 10% located in highways. Furthermore, Ipiranga ended 2019 with 910 eco-efficient service stations (Posto Ecoeficiente — service stations with a set of solutions that reduce the consumption of materials, natural resources and energy of these service stations, including the reduction of waste generated during the construction).

Ipiranga generally enters into three types of arrangements with resellers in which: (i) Ipiranga owns the land, the service station and its equipment and leases it to an operator, (ii) a third party owns the land and leases it to Ipiranga and it constructs a service station facility or make improvements to an existing facility and further leases the station to an operator and (iii) the operator or a third party owns the land and constructs a service station facility or makes improvements to an existing facility that is typically financed by Ipiranga. Under the terms of the contracts and in accordance with applicable law, each reseller operating under Ipiranga’s brand must purchase fuels exclusively from us.

Ipiranga has created incentive programs over the years in order to strengthen brand loyalty and its relationship with its resellers’ network, in order to differentiate itself from its competitors. These incentive programs include annual rewards to its resellers, such as international trips through the relationship program Clube do Milhão (Million Club), upon the accomplishment of pre-established goals.

Ipiranga also establishes relationship programs with resellers’ employees, such as Clube Vip (VIP Club), to encourage the sale of added-value products and services, including credit cards, such as Cartão Ipiranga (Ipiranga private label credit card), Cartão Ipiranga Carbono Zero (Ipiranga Zero Carbon Card), premium gasoline and lubricants. Training programs are provided to these employees focusing on developing their knowledge about the business and their capacity for selling products and services.

B2B. Ipiranga operates in the B2B segment with almost seven thousand clients, such as state and municipal governments, industries and cargo and passenger transportation fleet owners. In 2019, Ipiranga’s ten largest clients in B2B segment accounted for 15% of its revenue and no single customer accounted for more than 4%. Distribution to B2B represented 24% of Ipiranga’s sales in 2019.

 

 

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Contracts. The relationship between Ipiranga and its clients is generally governed by exclusive supply contracts with terms ranging from 1 to 10 years. The types of contracts change according to the distribution channel. For service stations, contracts usually have longer terms (5 to 10 years) and may provide for the installation of pumps and tanks on the client’s premises and for the offering of financing and bonuses. Our commercial strategy includes the concession of bonuses agreements, which can be paid upfront (received on the signing of the contract) and/or post-paid (through the achievement of certain targets defined in contract). For the B2B segment, Ipiranga may sell fuels in the spot market or under exclusive supply contracts, with the terms ranging from 1 to 3 years on average. Ipiranga has been working to increase the percentage of supply of fuels in the B2B segment under exclusive supply contracts by providing additional services and generating value to its clients.

Distribution infrastructure. Ipiranga operated through 86 storage terminals as of December 31, 2019 that were strategically located to facilitate fast and efficient delivery of its products. There are two types of facilities: primary storage terminals, generally located near the coast and major cities, which are supplied by refineries through pipelines, and secondary storage terminals, which are mainly located inland, and are supplied by primary terminals by railroad or through road transportation for locations not accessible by railroad. Ethanol is supplied to the terminals mostly by road.

Ipiranga has its own fleet of trucks through its transportation company, Tropical, which was responsible for transporting 35% of the volume of fuels sold by Ipiranga in 2019, with the remaining portion of the transportation provided by third parties.

Supply of fuels. Currently, Ipiranga and its competitors purchase the majority of oil-derivative fuels from Petrobras under a formal supply contract that establishes the volume and the terms of supply. The contract with Petrobras is renewed annually and the volume contracted is based on the volume purchased in the previous year. The procedures for ordering and purchasing fuels from Petrobras are generally common to all distributors, including Ipiranga. There have been no significant interruptions in the supply of fuels by Petrobras to the distributors, with the exception of an interruption in 1995 due to a 15-day strike by Petrobras employees. In 2019, 89% of oil derivates was supplied by local refineries and the remaining 11% was imported.

The ethanol fuel market in Brazil consists of corn and sugarcane mills, producing sugar, ethanol and Dried Distillers Grains (DDG). Ethanol production from sugarcane occurs approximately eight months per year and ethanol from corn runs through the whole year. A portion of the production is stored in the distilleries to meet demand during the inter-harvest season. Distilleries produce two types of ethanol: (i) anhydrous ethanol, which must be blended with gasoline and (ii) hydrated ethanol, which is essentially used for flex fuel vehicles.

Ethanol in Brazil is substantially based on sugarcane that can either be used to produce ethanol or sugar. As mentioned, there are also six corn-based ethanol plants currently operating in the Midwest region of Brazil. From an ethanol producer’s perspective, the production ratio between ethanol and sugar is determined based on the respective prices of ethanol in the Brazilian market and of sugar in the international markets, such choice being fundamental for leveraging the profitability of their plant. Although ethanol production is subject to favorable climate conditions, the risk of interruptions in supply is primarily confined to the end of the harvest.

Ethanol producers have been investing in production capacity on the basis of higher fuel consumption and prices, also encouraged by the Brazilian decarbonization program, RenovaBio. The RenovaBio Program is designed to support Brazil’s COP21 goals and was launched in December 2016 by the Ministry of Mines and Energy (MME), instituted as the “National Biofuels Policy”. The rationale behind this Program is to create a market for decarbonization credit for biofuels (CBIO), thus, RenovaBio aims to recognize environmental benefits of biofuels, remunerating the sector’s role in reducing GHG emissions.

Storage of fuels. Ipiranga stores its fuels in large tanks at each of its facilities located throughout the regions in which it operates. Primary facilities receive fuels directly from Petrobras by pipeline and from distilleries by railroad and road transportation, while secondary facilities are supplied by railroad and trucks. See “Item 4.D. Information on the Company—Property, Plant and Equipment”. In 2019, Ipiranga’s storage capacity was 846.5 thousand cubic meters. Based on its 2019 average sales, Ipiranga can store approximately eleven days of fuel supply. Accordingly, an interruption in the production of oil-based fuels for longer than that time period could result in shortages, such as the one that occurred during the Petrobras strike in 1995. See “—The role of Brazilian government”.

 

 

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In March 2019, Ipiranga was awarded the concession of specific areas in Vitória (ES) and Cabedelo (PB) through the consortia Nordeste and Navegantes, in which Ipiranga holds one third of the total participation, together with BR and Raízen. The concessions require the consortia to build and operate a minimum storage capacity for the Nordeste consortium of 64 thousand cubic meters and initial operations are currently expected to commence during 2020, while the minimum storage capacity of the Navegantes consortium is 66 thousand cubic meters, with initial operation currently expected during 2022. In April 2019, Ipiranga won two concessions in the port of Miramar, in Belém (PA): (i) area BEL02A, through a consortium 50% owned by Ipiranga and 50% owned by Raízen, with a minimum storage capacity of 41 thousand cubic meters, and (ii) area BEL04A, which is currently operated by Ipiranga, therefore maintaining its operation in the region, with minimum storage capacity of 23 thousand cubic meters. These were strategic moves for Ipiranga, which improves logistics efficiency of fuels distribution through its own storage capacity and contributes to better quality services in the respective regions.

am/pm

am/pm convenience store is the third largest franchise network in the country, according to ABF’s (Brazilian franchising association) ranking, with 2,377 stores, a penetration of 34% in the total service stations as of December 31, 2019.

Through its am/pm convenience stores, Ipiranga has been developing initiatives to increase product offerings. In 2010, we announced the launch of private label products, including energy drinks and snacks, and the expansion of the am/pm bakeries, providing to resellers an additional source of income, as well as strengthening the am/pm brand.

With nationwide presence, our bakeries serve fresh products – such as bread, coffee, snacks and hot meals – through more than 100 items, including am/pm branded products. A convenience store with a bakery has the potential to increase revenues by 100% compared to a regular am/pm by offering more products of daily consumption and increasing the flow of costumers in the store. Ipiranga ended 2019 with 934 bakeries.

In 2014, Ipiranga launched a new beer purchase experience through its Beer Cave, which is a walk-in refrigerated container that stores more than 100 brands of beer. Ipiranga ended 2019 with 561 Beer Caves.

In order to strengthen the am/pm convenience stores’ product offerings and operations, Ipiranga launched in 2014 its own supply solution. The am/pm Suprimentos concentrates logistics, sales and customer service of the convenience store main products in just one structure – covering 45% of the products basket and serving approximately 1.4 thousand stores. This initiative aims to streamline the am/pm convenience store’s operation, increase the competitiveness of franchisees and ensure higher-quality product range and higher standardization of products assortment and availability.

At the end of 2019, am/pm Suprimentos operated four distribution centers located in Rio de Janeiro, São Paulo, Paraná and Rio Grande do Sul states, which supply the stores in those states with the main categories of products, except tobacco and ice cream.

Ipiranga presented in São Paulo new configurations of the am/pm store concept in 2015. The new am/pm store models increase the options for complementary revenues to resellers. As of December 31, 2019, there were 5 stores with these new concepts installed in the states of Santa Catarina, São Paulo and Rio de Janeiro.

In 2018, Ipiranga further strengthened the products offered at its am/pm stores with the launch of Wine Cave. An air-conditioned wine cellar that customers can find a wide variety of wines, from 60 to 80 different labels, at the right temperature. As of December 31, 2019, there were 15 Wine Cave units installed in the States of Minas Gerais, São Paulo, Rio de Janeiro, Santa Catarina, Paraná and Amazonas.

In line with its commitment to expand its franchise network, am/pm established proprietary store operations in the southeastern region with 3 stores at the end of 2019. The strategy is to be a test of how the franchise model can be leveraged, predominantly in the southeast, and a transient operation in markets with a low level of brand penetration. In January 2020, we opened the first store in the new am/pm concept in Rio de Janeiro with its own operation. The new concept is based on a new layout, providing a better experience in the consumer’s journey, revision of the food service offering with a focus on improving the profitability of the operation, and adjustments in the operational model providing greater efficiency. The model will be a leap from the previous one, seeking to strengthen its position in the market of proximity stores, with food service and the expanded mix of convenience as strengths of the new model.

 

 

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The table below shows the highlights of am/pm stores:

 

2019

      

Number of gas stations

     7,090  

Number of stores

     2,377  

Penetration

     34%  

Revenues (in millions of Reais)

     1,980.6  

SKUs

     1,300  

Average area (in square meters)

     58.5  

am/pm revenues include a fixed franchising fee and a percentage of total revenues, which generally range between 4% and 8%. We also receive merchandising fees linked to contracts with suppliers, which establish trade agreements for the convenience stores. The model of convenience stores integrated with service stations is complementary, increasing fuel sales by 18%, on average.

Service stations convenience stores’ revenues in the Brazilian markets were R$7.5 billion in 2018 (last data available), a 1.5% growth compared to 2017, according to Sindicom (formerly Plural). We believe the sector has potential for continued growth, mainly due to the shifts in cultural and household habits, such as (i) higher participation of women in the labor market, (ii) the increase of single-person households and smaller apartments, (iii) urbanization, increasing population density and logistical complexity, among others.

The convenience proposal increasingly adapts to the needs of consumers who seek practicality and speed in their routine, trying to solve their demands in a single stop. Thus, convenience stores fit the ideal model, adapting a complete service in one place.

These strategic differentiation initiatives implemented by Ipiranga resulted in a better value proposition for customers and resellers, generating benefits for the whole chain – the consumer gets access to differentiated products and services, the reseller earns higher revenues, and the service station obtains a differentiated positioning, turning Ipiranga into a convenience business platform for facilitating people’s daily routine and mobility.

Jet Oil

The Jet Oil business unit, Ipiranga’s lubricant-changing and automotive specialized service network, is the biggest franchise of automotive services in Brazil and the ninth in ABF (Associação Brasileira de Franquias – Brazilian Franchise Association) ranking among all kind of franchises. Jet Oil ended 2019 with 1,492 franchises.

More than seven thousand oil changes are made at Jet Oil units per day and 65% of the products sold are premium products. Jet Oil units offer an oil change service that features technology and safety, unifying quality products and expert services. These attributes translate Jet Oil’s slogan for consumers: “The full care that your car deserves”. Since 2015, we have modernized 32% of units into an innovative and more technological model, the Jet Oil Digital, a higher-selling version that offers consumers a new digital consumption experience.

Digital products

The digital products area is responsible for developing and marketing Ipiranga’s loyalty program, KMV, and Ipiranga’s digital products, focused on three pillars: innovation, intelligence and transformation.

KMV was created in 2009 and is a pioneer customer loyalty program in the fuel industry through which customers and resellers may redeem rewards and benefits in areas of entertainment, tourism, magazines, airline tickets, car rental and others. With over 32 million participants, KMV has served as an important platform, strengthening relationships with Ipiranga’s customers.

Each year, Ipiranga seeks new initiatives to add further value to the program, maintain current participants and increase the number of new participants. In 2019, more than 22 million products were redeemed at KMV loyalty platform and 28% of customers that filled-up at Ipiranga’s service stations collected points.

 

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Ipiranga developed and launched Abastece Aí (Portuguese for Fill Up Here) in 2016, a mobile payment service app, that seeks to maximize advantages from the integration of platforms to offer even greater convenience and benefits to customers. Through the Abastece Aí app, customers can obtain discounts in exchange for KMV points. In addition, they can receive rewards of their preference and finalize the refueling process by using a unique KMV password in a safe payment method. In 2019, more than 3.4 million customers used the app as a mean of payment and 3.7 times more payments were made through Abastece Aí compared to 2018.

Ipiranga is a well-known and relevant brand in Brazil being considered Top of Mind by Kantas TNS 2019 in the segment. The marketing campaign “Ipiranga: um lugar completo esperando por você” (Portuguese for “Ipiranga: a complete place waiting for you”) was created with the concept of creating a place where customers can find a broader range of products and services to meet their needs. This concept is stimulated on Ipiranga’s communications, especially its TV ads, which includes the catchphrase “Pergunta lá no Posto Ipiranga” (Portuguese for “Ask there at the Ipiranga service station”), commonly used by many Brazilians as a jargon in its daily conversation.

In this context, Ultrapar intends to integrate its two main digital programs, Abastece Aí and KMV, to enhance the customer experience of its digital programs, to create a unified ecosystem of advantages and benefits, integrated with a digital payment solution and great acceptance capillarity, including adoption by other business partners outside service stations.

Competition

Ipiranga’s main competitors in 2019 were:

 

   

Petrobras Distribuidora S.A. (“BR”), a subsidiary of Petrobras, which has been operating in the Brazilian fuel distribution sector since 1971. BR is the Brazilian market leader and operates throughout the entire country. In December 2017, BR concluded its initial public offering, listing the shares on B3. However, since 2019, as disclosed by BR, Petrobras is no longer the controlling shareholder of BR, even though it continues to hold a significant stake in BR.

 

   

Raízen Combustíveis S.A. (“Raízen”), a joint-venture between Cosan S.A. (“Cosan”) and Shell International Petroleum Company Limited (“Shell”), a subsidiary of Royal Dutch Shell. Cosan, through its subsidiaries, is the largest producer of sugar and ethanol in Brazil, having entered the fuel distribution market in 2008, when it acquired Esso’s fuel distribution business in Brazil. In June 2011, Cosan established Raízen, a joint-venture with Shell by combining certain of their respective assets, including their respective distribution businesses.

In addition, a number of small local and regional distributors entered the Brazilian fuel distribution market in the late 1990’s, after the market was deregulated, which further increased competition in such market. Moreover, in 2018, some important international players entered the Brazilian fuel distribution market: (i) Glencore Oil Participações Ltda., a Swiss company, through the acquisition of 78% of Alesat; (ii) Total, a French company, through the acquisition of 100% of Zema; (iii) PetroChina, a Chinese company, through the acquisition of 30% of TT Work and (iv) Vitol, a Dutch company, acquired 50% of Rodoil and, subsequently, Rodoil acquired 100% of MegaPetro Petróleo Brasil S.A.. In 2019, Vitol also acquired 50% of Dislub Equador (a company based in Recife in the Northeast of Brazil) and therefore became a nationwide player in the distribution market.

The following table sets forth the market share of Ipiranga and its main competitors based on volume of gasoline, ethanol and diesel sold, according to ANP and Sindicom (formerly Plural) data:

 

     Year ended December 31,  

Distributor(1)

   2019      2018      2017  

BR Distribuidora

     24.8%        26.3%        26.8%  

Ipiranga

     19.3%        20.2%        20.3%  

Raízen

     21.0%        20.6%        20.6%  

Others

     34.9%        32.9%        32.3%  
  

 

 

    

 

 

    

 

 

 

Total

     100.0%        100.0%        100.0%  

 

(1) 

Volume sold of gasoline, ethanol and diesel.

 

 

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The retail market for gasoline, diesel and ethanol in Brazil is highly competitive, with similar products and relatively low margins. Therefore, our strategy is to differentiate ourselves in the market by offering value-added services to complement our main products, with the goal of becoming the preferred choice of customers. For more information on Ipiranga’s strategy see “Item 4.B. Information on the Company—Business Overview—Our Strategy—Enhance retail network”. Th