Ultrapar Participações Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 2 speakers on the call.

Operator

And that all participants will be in a listen only mode during the company's presentation. After Ultra Power's remarks are completed, there will be a question and answer session. And at that time, further instructions will be given. We remind you that questions, which will be answered during the Q and A session, may be posted in advance in the webcast. A replay of this call will be available for 7 days.

Operator

Before proceeding, let me mention that forward looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward looking statements are based on the beliefs and assumptions of Ultrapar Management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Ultrapar and could cause results to differ materially from those expressed in such forward looking statements. Now, I'd like to turn the conference over to Mr.

Operator

Rodrigo Pizinato. Mr. Rodrigo, you may now begin the conference.

Speaker 1

Good morning, everyone. It is a pleasure to be here once more to talk about Ultrapar's results. And starting on Slide number 2, I remind you that both the earnings release and this presentation consider Ultrapar's data from continuing operations in 2023. As for 2022, the company's data is presented in the pro form a view, considering the sum of continual and discontinued operations as disclosed throughout last year, unless otherwise stated. Moving now to Slide number 3 with Ultrapar's consolidated result.

Speaker 1

As you can see in the chart in the upper left side, our recurring EBITDA from continuing operations totaled BRL 1,992,000,000 in the Q3 of 2023, 124 percent higher year over year. This increase is due to the higher EBITDA at our business, especially Ipiranga, results that I will go through in detail in the next slides. Ultrapar's net income was BRL891 million in the 3rd quarter compared to BRL83 million in the Q3 of 2022, mainly on the back of the higher EBITDA from continuing operations. Investments from continuing operations totaled BRL380 million in this 3rd quarter, 27% lower than that of the Q3 of 2022 due to lower investments at Ipiranga, partially offset by higher investments at Ultracargo. We had in the 3rd quarter an operating cash generation of BRL1.901 billion, BRL609 million above that of the Q3 of 2022.

Speaker 1

This increase is a result of the higher EBITDA, partially offset by the reduction in draft discount balance and the investment in working capital in the Q3 of 2023, now rising from the increase in fuel prices. I remind you that in the Q3 of 2022, on the other hand, there was a release of working capital as a consequence of the reduction in fuel prices in that period. If we exclude the reduction of BRL294 1,000,000 in the draft discount balance, the operating cash generation in this Q3 was BRL 2,195,000,000. Moving now to Slide 4 to talk about our liability management. We ended the 3rd quarter with a net debt of BRL7.1 billion, a reduction of BRL924 million compared to June 23.

Speaker 1

This decrease resulted from greater operating cash generation, partially offset by the payment of dividends and the reduction of BRL294 1,000,000 in the direct discount balance this quarter. In addition to these effects, during the Q3, we received the 2nd installment from the sale of ExtraPharma in the amount of BRL198 1,000,000 and we disbursed BRL 210 1,000,000 for the acquisition of Opla. Our leverage went from 2.1x in June 23 to 1.4 times in September 23, the lowest level of the last 10 years, on the back of the higher LTM EBITDA from continuing operations with cash generation and consequently the reduction in net debt that I've just mentioned. I'd like to point out that the numbers of net debt still do not include pending receivables of BRL 932,000,000 related to the sales of Oxiteno and Extra Pharma. We've included at the bottom of this slide a table with the total amount of draft discount and vendor lines as well as pending receivables from the sales of Oxiteno and Extra Pharma, all lines highlighted in our balance sheet.

Speaker 1

The net debt of September 23, adding the draft discount, vendor and divestment receivables, would be BRL 7,700,000,000, which is BRL 1,746,000,000 lower than the balance of September 22, 1 year ago. Moving on to Slide number 5 to talk about another excellent quarter of Ultragaz. The volume of LPG sold in this Q3 was 1% higher year over year due to a 4% increase in the bulk segment on the back of higher sales to industries. The bottle segment in its turn remained flat. Ultragaz SG and A in this Q3 was 15% higher than that of the Q3 of 2022 due to 2 manufacturers, expenses with freight due to higher sales volume and higher expenses with personnel, mainly collective bargaining agreement and variable compensation, in line with the progression of results and a larger headcount due to the acquisitions of Stella and Nelgas.

Speaker 1

Ultragaz EBITDA totaled BRL553 1,000,000, 36% higher year over year. This growth is mainly explained by efficiency and productivity initiatives implemented in the last quarters, by better sales mix and by inflation pass through despite higher expenses. For the Q4, we expect a profitability measured in EBITDA per ton similar to that of the 3rd quarter, despite seasonally lower volumes. Moving now to Slide 6 to talk about another great quarter of Ultracargo. The company's average installed capacity was 1,059,000 cubic meters in the Q3 of 'twenty 3, an 11% growth year over year.

Speaker 1

This increase results from 3 capacity additions carried out in recent months, 90,000 cubic meters coming from the acquisition of the 50% stake in Opla as of July, 12,000 cubic meters from the acquisition of the Hondonopolis base from Ipiranga in September and 10,000 cubic meters relating to the expansion of the Villa do Conde terminal. These capacity additions had no material impact in this quarter's results and should begin to gradually contribute to the upcoming months as operations ramp up. The cubic meters sold increased by 26%, mainly due to higher handling of fuels in Itaqui, in Santos and in Suape and the startup of operations in Opla. Tracargo's net revenues were BRL264 1,000,000 in this Q3, 18% higher year over year as a result of spot sales, higher cubic meters sold and higher tariffs. Combined cost and expenses were 8% higher than those of the Q3 of 2022 as a result of higher personnel expenses, mainly collective bargaining agreement and variable compensation in line with the progression of results.

Speaker 1

We also had higher expenses with advisory and consulting services linked to expansion projects. Ultracargo's EBITDA totaled BRL173,000,000 in the quarter, a growth of 27% year over year due to higher capacity occupancy with profitability gains, spot sales, higher tariffs and productivity and efficiency gains despite higher expenses. EBITDA margin was 65% in this quarter, 5 percentage points above that of the Q3 of 2022. And for the current quarter, we expect Ultracargo to continue its good operating performance, but with fewer spot sales marginally reducing its results. And to conclude this presentation, moving on to Slide 7, let's talk about Ipiranga's result.

Speaker 1

Volume sold in the quarter decreased 2% year over year with a 3% reduction in the auto cycle and a 1% reduction in diesel, mainly due to the strategy of lower sales to the spot market during this period. We ended the 3rd quarter with a network of 5,816 service stations, 465 stations less than that of June 23. In September, we concluded the process of managing the legacy of service stations started in 2022. A total of 70 new service stations were added to the network, with an average volume contribution of 288 cubic meters per month. On the other hand, 5 35 service stations were closed, with an average volume contribution of 57 cubic meters per month.

Speaker 1

The greater number of stations closed this quarter relates to the decision to also close service stations with commercial practices not aligned with business principles and in disagreement with contractual obligations. This increased level of closure of stations did not have a relevant impact on Ipiranga's market share or results. In addition, we ended the quarter with 1542 AMPM stores with same store sales growth of 9% year over year. Ipiranga's SG and A increased 27% in the quarter due to 4 main factors: higher provisions for contingencies, higher provision for doubtful accounts, higher marketing expenses and higher personnel expenses, mainly collective bargaining agreement and variable compensation, in line with the progression of results. The other operating results line totaled negative BRL178 1,000,000 in the quarter, in line with the Q3 of 2022.

Speaker 1

The disposal of assets line totaled BRL68 1,000,000, mainly due to the capital gain related to the sale of the Rojondo Nopales base to Ultracargo in the amount of BRL59 1,000,000 and the sale of 3 real estate assets. Ipiranga's EBITDA totaled BRL1513 1,000,000 in the quarter, 184 percent higher than that of the Q3 of 2022. Recurring EBITDA was BRL1445 1,000,000,000 in the quarter, 199% higher year over year. The higher EBITDA mainly reflects 2 factors. 1st, margins benefited from the inventory gains caused by the increasing fuel costs throughout the quarter.

Speaker 1

I remind you that in the Q3 of 'twenty two, we had reductions in fuel costs and inventory loss. The second factor was the normalization of the commercial environment in the Q3 of 'twenty three due to a more regular product supply in the market, which affected the 2nd quarter results. These two factors were partially offset by higher expenses. As you may have noted, the fuel distribution sector has had more volatile results in recent quarters. Therefore, we also highlighted on the slide the EBITDA per cubic meter of the last 12 months, helping to provide a better perspective of the results over time.

Speaker 1

In addition to the normalization of product supply, the Q3 result benefited from inventory gains. For the Q1, considering the current scenario of product supply and no significant impacts of inventories, we expect a profitability measuring EBITDA per cubic meter above that of the last 12 months and continued recovery of the return levels of the industry. With that, I now conclude my presentation. I appreciate your interest and attention. And let's now move on to the Q and A session in which we are available to answer your questions.

Speaker 1

Thank you.

Operator

Ladies and gentlemen, we will now open the floor for questions. We will take questions from investors The first question comes from Monique Greco, Itau BBA. Hello, everyone. Good morning. Can you hear me?

Operator

Yes. Good morning, Monique. Good morning. Thank you for your presentation. Congratulations on your very strong results.

Operator

I have two questions on my side. Let me start from the end of your presentation, Fisunato. You talked about the dynamics expected in terms of margin for quarter 4 in Ipiranga. Can you please share with us a little bit more about what you are feeling in terms of the competitive dynamics in Q4? We saw that in the first half of the year, this competitive dynamics was very linked with products imported from Russia.

Operator

So can you please share with us what you see for the dynamics, the diesel dynamics in quarter 4? And also, we have been talking a lot about diesel and the auto cycle ends up as a in the background. So I would also like to hear from you what this dynamic look like for the auto cycle. And my question to Lutz is that in Ultrale, you talked a lot about some opportunities for growth with a strong focus on agribusiness and also energy transition. So can you please talk more about this?

Operator

What are the prospects and opportunities in this sector? What are the main criteria that you consider when you're looking at these opportunities? Thank you. Hello, Monique. This is Linde.

Operator

So your first question was about competitive dynamics. Of course, this is an ever competitive market. And in quarter 4, we are seeing a somewhat more balanced situation in terms of supply and demand, which balances out the market. But we have to look at this market as a movie and not a snapshot. What we saw in quarter 3 was indeed a favorable scenario for our business, but we cannot forget that we were coming from a quarter 1, which was very poor in terms of we had some major inventory losses with a high supply of diesel, as you said yourself.

Operator

And this scenario started to change in Q3, and then we had some inventory gains and better market conditions. And in quarter 4, I'd say the situation is more balanced. But it is a transition quarter because we are also starting to see some parity opening up. We start to see a higher appetite for imports. So I think we will have a transitional quarter in quarter 4.

Operator

But as you heard in Rodrigo's explanation, we are looking at quarter 4 with potentially with higher margins than what we saw in the past 12 months. And just an additional comment, Monique. In the first half, we had an excess of products in the market. And retail fuel is no different from other industries. When you have excess product, this will negatively impact your margins, which is what we and what we had in Q3 and that should remain in Q4 is this return to normal levels, normal stock levels in the industry and that allows our margin to return to the levels expected.

Operator

So now I'd like to hand the conference over to Marcos. Hello, Monika. Good morning. So let's start by the criteria, which I think is the most important point in your question. We will have to have huge discipline looking at the risk return ratio of our projects.

Operator

As we said, we want to be more exposed to our new business. We want to grow more in these regions in our three areas of business. Ultracargo, Ultracas and Ipiranga are making all the efforts to expand their operations in these markets. And we are considering multiple projects and companies that have a higher exposure to these markets. And the main criterion here is the return on investment, of course, combined with the risks of this investment.

Operator

So these are more mature projects that give us slightly lower returns, but have also lower risk are very attractive and less mature projects have higher risk and that has to be justified. And also about risk return, it is important to note that even with the current return levels, the risk return ratio of fuel distribution projects in Brazil is not yet appropriate. We have a volatility level that we think is here to stay in this segment and this would warrant a requirement for a higher return from these projects. Today, we see, for example, that the price in Brazil is higher than the international price. So this increases the entrance of products.

Operator

So we should have an inventory loss because we should see a price reduction in Brazil shortly in the future because it doesn't make sense to have a price which is that higher than the international price. So we will see this volatility taking place. It's what I said about seeing it as a movie versus a snapshot. We need to bring more focus on Cin the past 12 months and not just the past quarter to evaluate whether we are going in the right direction or not. The next question comes from Leonardo Marcones, Bank of America.

Operator

Good morning. Thank you for taking my questions. I have two questions about Ipiranga. My first question is about the service stations. Can you please recap what are the effects that we can expect in Ipiranga after you finish this process with this divestiture?

Operator

And also, what can we expect from the company in terms of the future? And also I have a question about Ipiranga's margins. You already mentioned what you expect for Q4. But looking at the mid- to long term, I think your market has seen a recurring margin of about BRL 100,000,000 to BRL 110,000,000 per cubic meter from you. In your mind, does this level of margin make sense?

Operator

Or do you think you can have a stronger recurring margin for Ipiranga looking forward? And still within this context, considering the 4 pillars of the turnaround process of the company, is there still room for improvement in your opinion? And if yes, this improvement will come for each pillar for which pillars? You remember that there was I remember you mentioned that there were some improvements to be made in your network and logistics. So can you give us more color about that?

Operator

[SPEAKER CANDIDO BOTELHO BRACHER:] Hello, Leonardo. Good morning. Thank you for your question. Well, about the close down of service stations, I'd say that the effect will be a healthy effect, both from the Ipiranga standpoint and also the reseller standpoint. This was a clearance of legacy service stations that we absolutely had to do.

Operator

And as you said, we are coming to the end of this process. And what we still expect to have in the future is a natural clearance of our network of service stations, which takes place naturally. But the bulk of this process is already finished. And you start to see the effects, for example, when you start seeing productivity gains or increased productivity of each Ipiranga service station. For the brand strategy, we will continue with the same strategy that we have been using so far.

Operator

We are making investments, raising the bar of quality because of the reasons I mentioned before, because we won points of sale that have the highest potential. We are looking at our business prioritizing the highest returns on substations because this brings us a healthier relationship. And we will keep investing as we have been investing in the past years, as I said, with now a slightly higher level of quality. We are always basing the bar. Now as for the margin, we talked about this during Monique's question, but you asked us if this makes sense.

Operator

One thing is what we expect and another thing is what we think we should have according to the compensation level expected for the business. For the next quarter or this quarter that is starting now, we're expecting a margin higher than what we saw in the past 12 months. But what we should have in this business is something that could provide us with a return of about 20%, which is what we are pursuing. So as an industry, I think we still have room to improve in terms of profitability, and that's what we have been working for. Just one follow-up question about the service station.

Operator

I remember that there was a point of depreciation. And now with a healthier network, I imagine that there will be a positive impact on the receivables of Ipiranga overall. So can you please talk about this, just to recap? [SPEAKER CANDIDO BOTELHO BRACHER:] Leonardo, this is Rodrigo. Yes, we should see a benefit in the reduction of amortization and depreciation for Equiranga.

Operator

But remember that we have other investments to make, so it's a dynamics in our depreciation. But this stand alone effect finished now in the month of September. So we should see this benefit of reduction in our depreciation and amortization. And I didn't understand your question about the impact on nonrecipients. So now that you have a healthier network, a more robust network of standardization, is there still room to improve your receivables?

Operator

[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] I don't think that's relevant, Leonardo. The effect on receivables reflects the best situation in terms of receivable now. So we don't have any additional recognition to expect in the future or looking forward. Okay. Thank you.

Operator

And Leonardo, to your last question about if there's any room for improvement and you talked about the 4 pillars. Oh, yes, the 4 pillars. Yes, in your Investor Day, you mentioned the 4 pillars and the point that there is still room to do more in terms of trade and logistics. So I want to know if you've seen any evolution since then that you can share with us. So first, just a general comment.

Operator

I don't like talking about turnaround anymore because I think we're past that, but I want to talk about improvement processes. And yes, indeed, in line with the 4 pillars that we have been discussing for a long time now, we even said in Ultradale and we have our logistics pillar, which is more of a structural pillar and it will still take us some time until we can actually enhance and potentialize the improvements that we see for this pillar. We are expecting to potentially gain by the end of 2025. But you're right, certainly, we have room to improve further in Ipiranga's operations. Very clear.

Operator

Thank you. The next question comes from Thiago Duarte, BTG Pactual. [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA DE OLIVEIRA:] Thank you. Good morning. Let me bring back the discussion to Ipiranga.

Operator

We already talked about the margin with some very good information. But I heard Linden talking about this when we talked about your brand strategy, because I think that these two things are related. But I want to go back to the topic of the share, because until the first the end of Q1, there was as you said, there was excess product in the market, excess molecules. So you had a consistent loss of share, not just Repidanga, but for the 3 main businesses in the industry, in the 3 main companies in the industry. And now in the second half, there seems to be a recovery in the share and we talked about the imports from Russia, but this loss of share also took place in the auto cycle.

Operator

So I want to hear from Linding. I know that this is not the utmost goal of everything, but I believe that with better operations now and a more balanced market and your value proposition after the turnaround is finished and your value proposition is very consistent and positive, I believe that you are expecting a resumption or a recovery in your market share or in your volume as a positive symptom of this turnaround. So do you think it makes sense to think of this evolution as a positive indicator looking forward also considering your brand strategy? I think this positive value proposition will increase the opportunity to explore your brand. And as you said, you're raising the bar every time.

Operator

So this is my question. And my second question is for Marcos. And we know that the company's leverage today is much lower. You have a good cash generation and your results are improving more and more. So the market wants to know about your next movement.

Operator

Have you discussed at a high level you discussed this at a high level during Ultra Day and Marcos talked about this in this call. But my question is what format should we expect for your capital allocation movement in the future aiming at growing the company? I heard from Marcos during the Ultra Day that the company no longer has a dogma of having to control 100% of the business. You're thinking of partnerships or minority stakes. So, Marcos, I don't know if you can well, after time has asked, can you give us more information about what we can expect and what if the company is willing to hold minority stakes or non controlling stakes on other companies?

Operator

And what are the companies that you're considering in this pipeline? Thank you. Thiago, let me ask your first question. First, in terms of market share, we need to break this down. For example, if you look at the share of contracted volume in our own network, we don't have any loss of share.

Operator

If you look in the last 2 years, there was an evolution in our share. Where we actually lost share because of a market decision that made was in the spot market. And this is due to issues related with supply, the supply issues that we had in the first half of this year. Now the spot market represents a price sensitive volume. So when you think you recovering is a good strategy, then you can come back and compete in that market.

Operator

So we prioritized the supplies to our own network because we were more concerned with supply at that time. So that's why we made this the top priority. And we stopped temporarily supplying for the spot market. I'm not concerned with the share. The share is a consequence.

Operator

What's important for me is the scale, the volume and the share is a consequence of the quality of your value proposition and the work that you do. If you make high quality investments and you have high quality operations, the share will come naturally. And for the spot market, we will work on the spot market as it goes back to making sense to the company. First, I think that our role here as a capital allocator is to not be anxious or not to be as anxious as the rest of the market. We have to carefully look at the opportunities and we don't control their timing.

Operator

We have to be prepared for the opportunities and this we have been doing really well. Our balance today is well prepared for any opportunities that may arise in the future. But having said this, indeed, our main drivers here are the risk and the return that we expect from those projects. And our 3 businesses have been making investments and have been looking for avenues of growth. In some cases, we made some small acquisitions and organic acquisitions, which is the case of Ultragaz, which is now growing organically with the companies acquired.

Operator

Also in cargo, we have a project of exploring the inner part of the country and out of the capitals with a broader logistic offer. Now as for Ultrapar, I think that's first. In Ultrapar, we have a higher requirement for a higher return because the money is closer to the shareholders. So we need to have higher return rates for those projects. Now in terms of the format, which was your specific question, we have fewer paradigms today, but we will not make investments where we do not have a relevance influence in where that business is heading.

Operator

So we are adding value with the strategy, the structure, the business model, and we will not go for acquisitions where this cannot be leveraged. So I don't have to acquire 100% of a company. I don't need to be a controller, at least not initially, but I need to have a clear path in terms of the influence I want to have on that business. So for example, if acquiring a minority stake is not something that interests us because there would be a controller in the picture. So at the end of the day, we have a high level of clarity about what we want, but no, we do not necessarily need to acquire 100% of another company.

Operator

What we need is to have a good return on investment versus the risk. And we want to buy efficiently. It is better to go for those projects and just buy 100 percent of a company and trying to control the timing of transaction, which is not something that is under our control. I hope I answered your question. Yes.

Operator

Thank you. The next question comes from Luis Carvalho, UBS. Hello. Good morning. Thank you for taking my question.

Operator

Congratulations on the results. I have two questions, one for Lutz and one for Zendim. And looking at things from a different angle, in our last few calls, you shared a lot about this company's strategy and capital allocation. But I want to know more details about the timeframe and prioritization. So I want to understand how much you're focused on diversification or capital allocation and how much that is to be done in terms of operational improvements?

Operator

I will no longer call it turnaround. So is there anything that you can do still in terms of your management preparation and that initial plan of having just one position in your Board? So how are you allocating time and what are the priorities in the next 12 months? And my second question, going back to Linden's comment, it is very clear that there was an improvement in your competitive environment. I think it is unanimous that both small and larger players are more focused on profitability.

Operator

And you mentioned a 20% return rate as an appropriate level for Ipiranga considering all the risk and volatility. So how far thinking of the margin, how far is Ipiranga from the revenue industry? For example, you talked about diesel and then there's ethanol. Do you think we will see a fast improvement in these fields? And how do you see the competitive environment looking forward and your probability of reaching the 20% return rate that mentioned?

Operator

You sound like my mother, Luis. But when you asked about my time allocation, I don't have a very fixed routine. It will depend on the weeks and the demands of each week. Rodrigo and I, we have a monthly routine with our business. Maybe I would I'd say it takes 25% of our time and this is part of our routine.

Operator

And the other 35% depend more on what's happening during that month in terms of business and also other aspects. Rodrigo and I also dedicate some time to governance, to the Board and the transition that is taking place and has been taking place in the Board and the major changes that we made in our governance and the generational transition. So I don't have a straight answer for you. But I don't think we have any time restriction if that is your concern for us to dedicate to new investments. We have the capacity.

Operator

We have built this capacity over time. So I don't think there's any problem in that sense. Luis, I think we have some positive points that allow us to believe that we can go back to the 20% return rate and the industry has been at a level before in the past and what we also have missed. And it's not just about and returning to the 20% level, it's not just about the margin. It's the margin, but it's also the environment.

Operator

And specifically at Ipiranga, as we have been saying, we have some parts of improvement in our operation that will help us get closer to the 20% return rate. Brazil has seen some enhancements in the regulatory framework. You talked about some tax related issues, which are positive, but there are also risks for this environment. We have irregular trade, we have tax evasion, we have problems with counterfeit products that we need to fight together as an industry. So as I said, you're looking at a snapshot.

Operator

If we look at a snapshot of quarter 3, we are not that far. But if you look at the movie, there's still a lot of work to be done until we can get to the 20% return rate, but we are in the right track. But it's important, we shouldn't just wait for the margin to solve everything. We have to work also on the competitive environment and other business aspects. And we also have some homework to do, some housekeeping to do to improve Ipiranga's operations as we have been doing in the past 2 years.

Operator

The next question comes from Rodrigo Ameda Santander. Good morning, Lutz and the rest of the team. I have two questions. First, we already talked about this today, but I want to make this at a different angle. I want to talk about the capital structure.

Operator

In terms of growth, capital allocation and also the current capital of the company. So looking at the past exports, I know it is difficult to foresee which opportunities will come in the future and to understand the returns of these potential products. But in the short term, it is clear to us that you will continue to generate cash and you have a relevant cash entry expected for the next quarter. So I want to talk about the capital strategy of the company. Where do you think the company is hedging in terms of its capital structure and how efficient this capital structure will be 3 or 4 quarters from now?

Operator

And what are the implications for dividend payout, buyback and inorganic growth? I understand that you have a dividend policy. I want to understand how the efficiency of your capital structure in your capital quarters can have an impact on that. My second question was also about points, but slightly different. You talked about your societal reorganization and how changing the leadership or from a plumber to a holding.

Operator

And I want to understand what are your next steps. 1st, in terms of this reorganization, what can we expect in terms of more capital structure for the different businesses? For example, 40,000,000,000. I don't know if maybe you want to increase the leverage for Ultragaz and Ultracargo or maybe optimize your maybe organize your liability structure, your debt structure? And also within the portfolio optimization, are you expecting something similar to what you recently did in Ultracargo?

Operator

Are you going to do something similar with Ipiranga? Thank you. Good morning, Rodrigo. Thank you for your questions. Well, since the evolution in results and our cash flow since we had this evolution in our results and cash flow, we are in a comfortable position in terms of cash generation.

Operator

And we are using our cash for investment projects. We have a concentration of investments in quarter 4, and we recently had a disbursement to acquire OPPA in quarter 3, also the investments in Neogas, Stella. And the way we look at our investments, Marcio talked about this, is very risk sensitive. So is it a business that we know well, because in this case the risk is much easier to measure and the lower the volatility of a company's business, the best you can foresee your flow. Ultracargo is a more stable business and Ultragaz is more volatile.

Operator

And that's why the return rates at Ipiranga should go back to the level of 20%, which is suitable to the best of the business. Now when we go from very well known businesses to business that we don't know that well, the level of return that we require is higher due to the lack of knowledge of that business and the higher level of risk. So looking forward, if we don't have good applications for the cash and good prospects for making long term projects, we will increase the payment of dividend because we don't want to be at a suboptimal capital structure. Now as for your question about the businesses' capital structure, the capital structure for each of the business will reflect that of the holding. But this is something that will be discussed timely at the right time when the time comes.

Operator

Perfect. Thank you. The next question is from Moncadao Bara, Citibank. Hello, everyone. Thank you for taking my question.

Operator

I have two questions. My first question, I want to know more details about imports. I think it's a very unique dynamic what we saw in quarter 3, much different than what we saw earlier this year. And I return to normal levels, which we haven't seen since 2020. And what I want to know from you is that at this point in the quarter, we have a little more fat to be trimmed in imports and maybe a more open window looking forward with a stronger lineup for November December.

Operator

So I don't know if maybe Linden can help us, but I want to understand how these dynamics will change considering this scenario. It seems to me that a great part of this relevant improvement that you had in your margin has to do with supply and how the market has behaved and changed the way it behaves since last year? And I don't know if I missed this part, but can you talk more about the import dynamics in Q3? How much it helped your sourcing with more competitive prices compared with the Petrobras consortium? Can you give us more clarity that will help us better understand the results of Ipiranga?

Operator

And my second point, in other industries, and particularly in the fuel industry, the tax issues are important. Maybe this is the main topic being discussed in the industry today, the tax reform. And yesterday, they had their first win, their first vote and their first win for the tax reform. And there's an important point, which is the point about S and L. I think the change that everybody is expecting and maybe the most relevant point of this tax reform relative to fuel is the point about S and L.

Operator

And this could be game changing. And I want to hear from you how relevant this is for you and how could this affect your margin levels? Because since last year, this wasn't the case, there was an improvement in the industry, but this will cause a structural change in how this industry operates and this will affect productivity, particularly for the 3 or 4 top companies in the industry. How do you see this looking forward? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] This is Guilmar.

Operator

Thank you for your question. So let's try to put this in perspective and take a few steps back and look at this as an Ipiranga investor or one of Ipiranga's shareholders. It's very important to mention that Brazil today operates at very low margins compared to the rest of the world. And the main reason for this is not an inefficiency of the distributors. There's a lot of efficiency.

Operator

But the main point here, but there's a part of this model, which is not operating according to the rules established by the government in terms of taxes and regulations and the mix is. And this is permanent fight for us for who are complying with the law and responsibly working. And we are trying they're also trying to change the laws, to simplify the laws so that they can be better enforced and inspected. Of course, this will improve tax collection by the government and it will also improve the level playing field that will more easily establish a conversion model that will be more homogeneous. So this is my first point.

Operator

What we did not see during this period, you talked about the margin. But if we always import products, we will always source enough products to meet the needs of our clients. For example, if our market share, if our B2B clients, our largest clients will always be supplied by Ipiranga And many months before we deliver, we are already preparing, planning and sourcing product for these clients. So even if the product was a little more heated in quarter 3, there was no stock out for our clients. And but of course, we had this phenomenon where we had some opportunistic players.

Operator

And in quarter 3, these opportunistic players left the market and this created an additional demand, which ended up being met by the largest companies, which were better structured and had more inventory. So it's important to mention this. So as we said, if we look at the snapshot today, we have huge arbitrage for imports. We don't believe this will last long. It doesn't make sense that internal prices charge that refineries in Brazil are much higher than the international price.

Operator

So is this just a matter of timing? We believe that there will be an adjustment in the short future and that adjustment will cause a major loss of inventory for distributors, including ourselves. This is part of the business. This always happens when the price drops, just like we always gain when the price increases. This is part of the business.

Operator

So if you ask me, what do I think? If I think that regulatory movement will bring impact to more margin, I'd say that the margin will give a fair return to investments made by the companies. For example, if you look at this math a while ago when companies were running at 2%, 3%, 4%, 5%, 8% return on investment, it doesn't make sense now with a CDI of 12% and a company that has this volatility with a return on investment of 6%, 7%. So it is just natural for a well structured company that has an infrastructure, strong brand and the assets, they should have a return of about 20%. So these adjustments, these regulatory improvements should bring us to this scenario that I just described.

Operator

And for consumers, it's the changes marginal. For example, you're going to have a net result of BRL 1,000,000,000 or BRL 130 billion, this means less than 1%. If it's BRL 2,000,000,000, it's less than 2%. And in the enterprise, to consumers, the change is marginal. But it is a brutal transformation for the industry in their capacity to invest, how much they can grow, how much they can improve their supply capacity and so on and so forth.

Operator

So of course, my answer is more macro focused, but I think it's important that we all understand these points. And just a follow-up question about the regulatory changes. One of the discussions that were raised recently is maybe have a national operation for fuel distribution. I know it doesn't sound like a good idea at first, but how do you industry mitigate this rate? Well, I think it's early to say.

Operator

But if this is to reduce tax evasion and increase the efficiency of tax collection in Brazil, we can see that in a good light. But it's too early to say. I don't think that anyone today can truly know what's being built for the future. I think there's a dialogue between the industry and the government right now. And this could take place in the future or not.

Operator

It's too early. Thank you. The next question comes from Bruno Montanati, Morgan Stanley. Good morning. Thank you for your question.

Operator

I have a question about Rodrigo's comment about the seasonality of the assets. So firstly, we know that you invest in quarter quarter 4. And fortunately, that in 2023, this seasonality is very stronger. So we talked about BRL2.2 billion in investments. So how is the company expecting to close the year?

Operator

Will you be able to make all that investment in Q4? Or will the numbers be lower than expected? And will this roll out into 2024? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, our investment plan, we see it as a cap of investments for the year. So I'd say it is normal to have slightly lower numbers and that is an inflation retraction in quarter 4.

Operator

So part of our investment may roll over to 24, but it's not part of the plan. Maybe we're talking about slightly lower numbers than what was planned. Since we have no further questions, I'd like to hand the conference back to Mr. Rodrigo Pizinato for his final remarks. Mr.

Operator

Pizinato, you may proceed. Thank you for your questions. Our investors relations team will answer all the questions that were submitted to our webcast platform, and we hope to see you in our next earnings call. Thank you.

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Earnings Conference Call
Ultrapar Participações Q3 2023
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