Earnings Call Transcript - UGP Q3 2020

Operator, Operator

Good morning and thank you for holding. Welcome to Ultrapar's Third Quarter 2020 Results Conference Call. There is also a simultaneous webcast that can be accessed through Ultrapar's website at ri.ultra.com.br and the MZiQ platform. This conference call will feature Mr. Frederico Curado, Chief Executive Officer, and Mr. Rodrigo Pizzinatto, CFO and Investor Relations, along with other executives from Ultrapar. We want to inform you that this event is being recorded. We would like to remind you that questions, which will be addressed during the Q&A session, may be submitted in advance via the webcast. A replay of this call will be available immediately after it concludes for one week. Before proceeding, I would like to mention that any forward-looking statements made during this conference regarding the company's business perspectives, projections, and financial and operational objectives reflect the beliefs and assumptions of Ultrapar management and are based on current information available to the company. Future considerations involve risks, uncertainties, and assumptions because they relate to future events, which depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, industry conditions, and other operational factors could also impact Ultrapar's future results, potentially causing outcomes to differ significantly from those articulated in these forward-looking statements. Now I will turn the conference over to Mr. Frederico Curado, who will begin the conference. Mr. Curado, you may proceed.

Frederico Curado, CEO

Good morning, everyone. Thank you for joining our quarterly call. In this third quarter, we've observed a recovery in economic activity across the country, and all our businesses are showing solid operational and financial performance. Our teams have demonstrated exceptional management of operations during the crisis, focusing on the safety of our employees as well as maintaining service to customers and consumers. So far, we have reported 744 confirmed cases of COVID since the pandemic began, with 720 individuals having recovered and returned to work, while the remaining are completing their expected quarantine period of about two weeks. This indicates that our safety protocols are effective, and as economic activity resumes, our businesses have been agile in seizing opportunities, including resuming previously on-hold investments as economic clarity improves. Throughout, we have upheld our financial discipline, evidenced by our cash performance year-to-date, which allowed us to reduce our debt leverage by 14 basis points in this quarter. Now, moving on to our businesses, Ultragaz had an impressive quarter, reaching a historical record with volume recovery in bulk customers, including small and medium-sized enterprises, while maintaining strong margins in both the Bulk and Household segments. Ipiranga also saw good recovery in volumes and margins, which would have been even better were it not for ongoing pressure on ethanol margins. Extrafarma is continuing its improvement and had another strong quarterly result, marking its best performance since we acquired the company in 2014. Oxiteno reported another excellent quarter, recovering in the sectors hit hardest by the crisis, benefiting from the devalued exchange rate while maintaining a healthy margin level. Ultracargo also experienced a good quarter, accelerating projects for their new base in Pará at the port of Vila do Conde and the expansion in Itaqui, state of Maranhão, with both projects expected to reach full capacity by 2022, when we will fully benefit from them. In summary, all of Ultrapar's businesses performed strongly in the third quarter, rebounding from the negative impact of the crisis in the second quarter, confirming the resilience of our portfolio and the quality of our companies. Regarding our strategic initiatives, we are focused on analyzing the refining assets that Petrobras intends to sell, alongside the growth of our new business, Abastece Ai, which is now fully operational. This new app includes a digital wallet and account, and in just a few months since we launched this feature, we have already registered 1.8 million active digital accounts—a solid start. On the personnel front, we have made some important appointments recently. Alexandre Saigh has been elected to our Board of Directors, and Rodrigo Pizzinatto has been appointed as our Chief Financial Officer. Additionally, we welcomed Marcelo Bazzali as the new CEO of Extrafarma. Alexandre Saigh brings strong business insight and experience to our Board and reinforces the position of our reference shareholder, Ultra SA. Rodrigo has been with us for over 20 years and has deep knowledge of our financial processes, enhanced by his experience as CEO of Extrafarma, positioning him well for this new role. Lastly, Bazzali is a seasoned executive with a proven track record in retail, which will greatly aid in consolidating Extrafarma as a profitable business following our recent journey. This marks Rodrigo's first earnings call as CFO, and it has been a good quarter, providing a strong start. He will share further details on the quarter, and I will return for the Q&A session. Thank you very much.

Rodrigo Pizzinatto, CFO

Thank you, Fred, and good morning/good afternoon, everyone. It's a pleasure to be back at Ultrapar Holdings. That's where I began my career as an intern 21 years ago, in the same year of Ultrapar's IPO and where I spent my first 15 years in the treasury, M&A, corporate planning and Investor Relations. My last six years were dedicated to Extrafarma, where I was the Chief Executive in the last two years, focused on the strategic review and turnaround. I'm really glad to reconnect with friends and colleagues, and without further ado, let's begin the presentation of the third quarter result of Ultrapar on slide four. Ultragaz sales volume in this third quarter fell 1% year-on-year due to a reduction of 2% in the bottled segment, a result of lower sales in the Southeast region. On the other hand, volumes in the bulk segment grew by 1%, influenced by sales to the industrial and special gas segments as a consequence of the economic recovery underway in Brazil despite the lower demand from the commerce and services segment, which were the most impacted by the pandemic. Ultragaz SG&A remained stable compared to the third quarter of last year. We had an increase mainly in variable compensation, which is in line with the company's earnings progression, and we also had increased expenses with consultancies to pursue further operational efficiency gains. On the other hand, we were able to implement several reductions with initiatives to control expenses, including some related to the pandemic such as travel expenses. As a result, Ultragaz EBITDA was a record BRL 222 million in the quarter, 18% higher than that of the third quarter of '19 on the back of better sales mix and improved operational efficiency. Looking ahead, the outlook is for similar levels of results compared to the previous year, having in mind that the fourth quarter is seasonally weaker for Ultragaz. Moving on to slide five, we will now talk about the third quarter of Ultracargo. As you can see on the chart, the average capacity reached 838,000 cubic meters. That's a growth of 11% compared to third quarter '19 due to the capacity expansion we made at the Santos and Itaqui terminals over the past 12 months. The cubic meters sold increased by 14% in the period, mainly as a consequence of the capacity expansion I mentioned, of the growth in spot and fuel handling revenues, and new contracts for both the previously existing and the newly added tankage capacity. The quality and reliability of Ultracargo services allow a large part of the new capacity to be sold during the investment period, even before the start-up of operations. This accelerates the tank utilization ramp-up and the profitability of such investments, as we can see in these recent earnings. Ultracargo recorded net revenues of BRL 160 million in the quarter, 18% higher than that of the third quarter of '19. This was driven by the increased cubic meters sold I mentioned as well as readjustments to existing agreements and the signature of new contracts. We had an increase of 2% on costs and expenses combined on the back of larger tankage capacity in Santos and Itaqui and increased expenditures with insurance policies and IT systems for productivity gains. It's worth mentioning that, as seen in the previous quarter, the costs and expenses per cubic meters sold reduced by 10% year-on-year, showing an increase in productivity resulting from economies of scale and improved operations. EBITDA at Ultracargo was BRL 78 million in the quarter, and if we exclude the nonrecurring expenses of BRL 30 million in the third quarter last year, EBITDA grew by 35% due to increased revenues as well as optimization and dilution of costs and expenses. The EBITDA margin in the quarter was 49%. For the current quarter, we expect to maintain the same level of earnings growth presented in the third quarter. I would also like to mention here the capacity expansions underway in the port of Vila do Conde in the state of Pará and in Itaqui in the state of Maranhão. These expansions will start operations over the next 18 months, sooner than initially planned, once again increasing the scale, allowing productivity gains for Ultracargo and, consequently, for its profitability. Moving now to slide six to Oxiteno, which had another great quarter of results, the volume of specialty chemicals rose 8% in the quarter compared with the third quarter of '19 due to increased sales to the home and personal care segment, which is directly involved in the prevention of COVID-19. We also increased the exports from Brazil, especially to China, due to a faster economic recovery in this country. In addition, sales from our unit in the United States grew 41% with the ramp-up of another plant, though still partially impacted by the pandemic. However, commodity sales volume was down 13% due to lower demand for these products. To summarize it, the sectors benefiting from or less affected by the pandemic grew and continue to grow, while the sectors initially more affected have shown a recovery in recent months. In addition to the good performance of the sales volume, I'd like to remind you that the real devaluation has a positive effect on Oxiteno's revenues and margins. SG&A, on the other hand, rose by 20% due to three main factors: higher sales volume impacting freight and storage expenses; real devaluation affecting expenses of our international units; and higher variable compensation, which is in line with the growth in results. As a consequence, Oxiteno's EBITDA was BRL 169 million in this quarter, an outstanding 110% growth over the third quarter of '19, on the back of higher sales volume, the ramp-up of the U.S. plant and the real devaluation. Looking ahead, although the fourth quarter is seasonally weaker, the trend is for a level of volumes and margins similar to that of this third quarter of '20. Now moving to slide seven, we will talk about the third quarter of Ipiranga, where sales volume dropped 11% year-on-year, a direct result of the pandemic and the major impact it had on fuel consumption. The Otto cycle segment, as shown in the chart, was the most affected by the restrictions imposed and by lower car traffic, thus recording a drop in sales of 17% year-on-year. Diesel volumes were less affected and fell 5%. The decrease was significantly smaller than that of the second quarter of '20, confirming the gradual recovery of vehicle traffic. We ended the third quarter of '20 with a network of 7,107 service stations, a gross addition of 72 stations and a churn of 70 new units in the period. Ipiranga has focused its investments on adding stations with greater throughput in order to grow volumes without necessarily increasing the total number of stations. In this quarter, price volatility of value derivatives, combined with ethanol price increases, contributed to a recovery in Ipiranga's margins. In addition, Ipiranga posted a 12% reduction in SG&A compared to the third quarter of '19 as a result of lower expenses with payroll provisions to default and with trade expenditures due to weaker sales volumes. Part of this reduction came from the effect of the pandemic, either due to contingencies or the effect of the volume drop impact came from initiatives to reduce costs and expenses implemented since 2019. The line item, other operating results, was down BRL 91 million compared to last year. This was due to the provision for the carbonization credits of the renewable program, the so-called CBIOs in the amount of BRL 66 million in this quarter. In the same line item, we also had booked extraordinary tax credits of BRL 32 million in the third quarter of '19. As a result, Ipiranga's EBITDA was BRL 566 million, 17% down year-on-year, but an increase when compared with the second quarter, demonstrating the recovery I mentioned before. I would also like to talk briefly about our convenience stores, the AmPm's, new management model and store concept, a project we started in 2019 with two main stages. The first was the review of the physical store where we developed a new layout that provides a more fluid journey with great space for consumption of products inside the stores in a more pleasant environment. In the second stage, we reviewed the brand positioning, exploring concepts of proximity marketing and new consumer habits with a review of the product mix and expansion of food services, grocery and hygiene and beauty products offered. The initial test of this new model has been promising with higher sales and better margins. In this review, we identified 486 stores that didn't fit into this new business model. And in addition, we closed 81 stores during the quarter due to the pandemic. As a consequence, AmPm ended the quarter with 1,778 stores in its network. Looking forward, in Ipiranga, the outlook for the current quarter is for continued gradual volume recovery, with commercial margins relatively stable when compared to the third quarter of '20. However, so far, fuel cost increases in the first quarter have been lower than those we saw in this third quarter. Moving now to slide eight, presenting Extrafarma's results. We ended the third quarter with 408 stores, 4% below the network we had in the third quarter of '19, reflecting greater selectivity in the expansion and the increased rigor to underperforming stores. The network is practically the same as that of the second quarter. And I also highlight that 32% of the stores are still at a ramp-up phase. Gross revenues at Extrafarma were BRL 523 million, 3% below that of the third quarter of '19 as a consequence of the smaller network and the reduced flow of people in stores located in shopping malls. However, if we exclude stores located in shopping malls, Extrafarma recorded a 3% growth in same-store sales, driven by the annual readjustment in medicine prices and sales growth through digital channels. The gross profit was BRL 147 million, down 2% year-on-year, equivalent to a gross margin of 28.2%, 0.3 percentage points better than that of the third quarter of '19. SG&A expenses fell 14% in the quarter, thanks to the smaller network, continuity initiatives, productivity gains and logistics optimization. Consequently, EBITDA came in at BRL 28 million in the third quarter, a record earnings for Extrafarma since Ultrapar's acquisition in 2014, as Fred mentioned at the beginning of the presentation, a level that is 52% increased over the third quarter of '19. It's important to highlight that we recorded BRL 15 million of extraordinary tax credits in the third quarter of last year, and if we exclude this effect, the EBITDA for the third quarter of '20 would have been BRL 25 million greater than that of the same period of '19 on the back of operational improvements in recent quarters despite the impact of the pandemic. At Extrafarma, we continue to see operational improvements, initiatives and digital journey underway. And as a consequence, we've maintained the perspective of continued strong growth in recurring results compared to the previous year. Moving to slide nine, we will now present the consolidated results for Ultrapar, and you can see the net revenues in the third quarter were BRL 21 billion, 11% less than that of the third quarter of '19, mainly due to lower revenues at Ipiranga. EBITDA amounted to BRL 1,038 million in the quarter, a 6% growth over the same period of '19 or 5% growth if we exclude nonrecurring items. As we presented in the previous slides, we reported EBITDA growth across all businesses, except for Ipiranga, which was the most affected by the pandemic. Net income was BRL 277 million, 10% lower than that of the third quarter of last year, mainly due to higher costs and expenses with depreciation and amortization despite the EBITDA growth in this quarter. CapEx was slightly above EUR 1 billion on September year-to-date, a 5% decrease compared to the same period of '19, mainly due to measures for cash preservation and greater selectivity in capital allocation, which has been more restricted during the ongoing pandemic. Nevertheless, the current CapEx includes expansion, maintaining the perspective of continued growth for our businesses. We had another quarter of strong operational cash generation, reaching the mark of BRL 2 billion year-to-date, 22% above that of the same period of '19 as a result of better management of working capital and EBITDA growth. This cash generation also underscores our commitment to financial discipline and the resilience of our portfolio. To conclude our conference call going on to slide 10, the cash generation in the quarter and the higher EBITDA that I just mentioned enabled us to end this quarter with a leverage ratio of 3.1x measured by the net debt-to-EBITDA of the last 12 months. That's a slight reduction compared with the leverage in the second and first quarters of this year, as you can see in the chart. I would also like to recall you that since the first quarter of this year, we have been including lease payable in the calculation of net debt following the implementation of IFRS 16. This has also contributed to an increased leverage, even though these leases are not financial debt. We ended the quarter with a cash position of BRL 9.8 billion, boosted by the cash generation in the period and by new funding. In July, we announced the issuance of $350 million in notes with a coupon of 5.25% per year through the re-tap of our 2029 notes. As a result, the average duration of our debt increased from 4.4 years in the second quarter to 4.8 years in this third quarter. We used $220 million of these proceeds to pay down bilateral debt with financial leverage and interest coverage covenants. Consequently, from the third quarter onwards, we are free from any relevant financial covenants restrictions in our debt. With this, I conclude my presentation. I appreciate your attention. We may now begin the Q&A session.

Operator, Operator

Mr. Luiz Carlos from [indiscernible] will now ask the first question. Please go ahead, sir.

Unidentified Analyst, Analyst

Hi, thank you for your time. I have a couple of quick questions. First, you mentioned in the second quarter conference call the involvement of Saigh and Pátria in the shareholders list, and I’d like to understand how this impacts the company's capital allocation process. Could you provide some insight into the strategies of Ipiranga, Oxiteno, and Extrafarma, including Abastece Ai, and how that connects to your leverage? You indicated that owning 100% of Ipiranga may not make sense anymore, and that there could be businesses that aren't viable in the long term. I’d like to hear more about that. My second question pertains to capital allocation; we've been focusing on the last two privatizations from Petrobras concerning natural gas. There seems to be some hesitation around relying on a single Petrobras refinery. Can you clarify your strategy? Would it be advantageous to pursue this independently or in partnership, and how does this fit into your overall natural gas strategy? Lastly, regarding Ipiranga, we observed a positive margin recovery, but the volume remains relatively low compared to your main competitors. Any insights on your strategy in this area would be appreciated.

Frederico Curado, CEO

Thank you for your questions. I will address the first two, and Rodrigo can cover the last one. Regarding the election of our new Board member, Alexandre, the Board of Directors is a collective body primarily tasked with allocating capital in line with the company's strategy, while also ensuring governance oversight. Alexandre, like any Board member, must align with this framework. Although we do not have a controlled company and have a diverse shareholder structure, Okasia was instrumental in both the investment and the nomination of Alexandre. As I mentioned in the previous call, I view this positively, not just because of his personal experience but also due to the constructive way he integrated into the company, which should foster stability and continuity in our initiatives. As for our strategy and portfolio, since 2018, we have been vigorously working to recover results, and this has proven effective. The pandemic certainly impacted us, as it did the entire industry, but we showed resilience. Our investment levels remain consistent with last year, and we are maintaining our investments. However, our investment strategy for Extrafarma has substantially shifted. Instead of pursuing expansion as we did until 2018, we are focusing on densifying and maturing our network. We believe this will yield positive results, especially with our multi-channel strategy, which is evident in our digital investments starting to generate outcomes. We anticipate seeing more significant results next quarter. Regarding Oxiteno, we do not have plans for major expansions at this time, although we still have available capacity for growth and improved productivity. We will continue with our existing plans. About diversifying into new areas, I want to clarify that I did not suggest that Ipiranga would be fully shared. There may be future opportunities for collaborations, but that remains a theory or hypothesis. We are not currently pursuing a partnership at Ipiranga, as that is not part of our strategy. On the refinery front, a strategic partnership for the bid would be advantageous and is something we are considering. However, it's important to note that if we win the bid, the timeline between signing and operationalizing the project may allow for that possibility. While we see a partnership as beneficial, we are not reliant on it to proceed with our plans, as we are confident in our ability to undertake this independently if needed. Finally, regarding your last question, we are still evaluating this and do not have any conclusions related to the industry or our supply chain yet. Rodrigo, please address the inquiries about volumes and Ipiranga.

Rodrigo Pizzinatto, CFO

Okay, Fred. Hi, Luiz. Thank you for your questions. Well, as you can see in the market, April was the worst month on car movements because of the pandemic, and that's where we were most impacted in Ipiranga, but since then, we've had a gradual recovery in sales volumes in Ipiranga. We're focused on defending our own network, and we lost some share in markets that have lower margins, which are TRE and non-branded stations. So that was the effect that we had in our volume. These markets have a strong characteristic, and we continue to follow up on them to see if we can get stronger margins.

Unidentified Analyst, Analyst

Okay, Fred and Rodrigo, thank you so much.

Operator, Operator

Our next question comes from Thiago Duarte from BTG Pactual.

Thiago Duarte, Analyst

Hello, good morning everyone. Good morning, Frederico and Rodrigo. So I'll keep it to two questions. I have two questions on Ipiranga. The first is about the cost that you mentioned, BRL 106 million versus CBIO. If you could tell us a bit more about that, I understand that a part of it is like a provision based on the 2.9 million CBIOs that you have to buy this year, according to the goal you defined with the NPD. Since this is the first quarter, I believe that this figure refers to three out of the four quarters of this year that you have to set provisions for. So I'd just like to understand if this is the right rationale, regardless of how much you have purchased, if the BRL 66 million refers to the first 9 months of the year? And you will probably have another figure for the rest of the year. So I'd just like to understand how this will interfere with Ipiranga results for the fourth quarter and for the next years? My second question is about the clearing process for the stations. You mentioned that you added 90 stations and lost 70. So I'm not sure if this is a continuous process or if you will continue to do this or if it's close to ending. Would just like to understand how now when we should see a reacceleration of net additions? So that's the first part. And the second part is at AmPm, the 24 stores that you remove from the network, how should that be interpreted in the future? What I mean is, is that a change in your model? Or how will that impact the profitability of this business and the holding itself?

Rodrigo Pizzinatto, CFO

Thiago, I'll take your questions. This is the first year in which we've been operating in this market. And in fact, the goals have just been defined for 2020 because of the revision we had to make for the pandemic. The negotiation in defining the CBIO prices, it's an open market, and it's not a linear price. It varies, as you can see. What we recorded was that BRL 66 million in the third quarter is a major part of the need we had or the demand we had to buy during this period. So about a bit less than half of it is for 2020, but I can't give you more details because this is a part of Ipiranga's strategy, even for procuring this service, but the value represents about half of what we need to buy for the year. Most of the volume has been purchased for the year, and it was recorded this quarter, and whatever is outstanding will be recorded in the fourth quarter. To answer your second question, as we've been saying, these new stations have a higher volume than the stations leaving. So we are removing the stations with lower volumes and increasing the number of stations with higher volumes. And that leads to a net gain. If you look further ahead, the focus on stations is not the amount of the volume they bring. So there was not a major change. This is a natural churn for the network. Thinking about AmPm, we finished clearing our portfolio. As we showed in our presentation, we are reviewing the management and operation model for AmPm. The initial results have been very positive. We're seeing additional revenue, and this is related to food service. When we look at our network, we found stores that don't adapt to the model. So we are cleaning the network at once in the third quarter, all at one time. In the future, it will be the same for stations. We won't have any major changes, except for the natural process that happens in the network.

Frederico Curado, CEO

Rodrigo, I would like to add something about AmPm. Our plan is to increase network penetration, so we see an opportunity to boost the percentage of stations that include an AmPm store.

Thiago Duarte, Analyst

Great, I'd just like to follow-up on stations. There is a number that you mentioned in the call, which is like your backlog of stations that have been contracted but are not active yet. In the beginning of the year, it was around 2%, if I'm not mistaken. This was in the first quarter conference call. I'm not sure if you have this figure, just so that we know how many stations will naturally go into your active basis in the next months.

Rodrigo Pizzinatto, CFO

Around 100 stations, Thiago.

Operator, Operator

Mr. Christian Audi from Santander will ask the next question.

Christian Audi, Analyst

Thank you. Good morning, Fred and Rodrigo. Rodrigo, good luck with your new responsibilities as CFO. I have a question for each of you. Fred, regarding the portfolio, can you clarify the situation with the Petrobras repair announcement that you had mentioned but didn't finalize? Will it be concluded this year or next year? Also, concerning Oxiteno, this asset has shown strong resilience, particularly during the COVID pandemic, but it demands significant capital, and you've made considerable investments in it previously. I'd like to know your thoughts on this. On one hand, it's resilient, and it would be beneficial to keep it in your portfolio. On the other hand, it is capital-intensive. Rodrigo, looking towards October and November, you noted that market conditions are improving, but I'd like to hear your perspective on the fourth quarter. It is expected to be atypical, right? Traditionally, December is a slower month due to patients, but this might change because of COVID. Do you anticipate a positive result? Will this normally weak fourth quarter potentially not be so weak this year?

Frederico Curado, CEO

Thank you for your question, Christian. Regarding the portfolio and the assessment of the refinery with Petrobras, I can't provide much information due to confidentiality. We did have a significant update that aligns with what Petrobras mentioned, and this information is public. We are nearing the final stages of this process, but I am unable to share further details unless the pandemic impacts this timeline. I also want to emphasize that once this closes, there will still be considerable effort required, making it a long-term project. Unfortunately, I can't disclose any more details due to a confidentiality agreement. As for Oxiteno, you're correct that the company has substantial capital, and we have worked over the past years to enhance returns on investments. We have projects underway in Bahia, including expansion initiatives. Our emphasis at Oxiteno is primarily on execution, and they have been performing excellently in this regard. I believe that the results are not declining but rather improving the profitability of our assets, and we are already considering a new investment cycle.

Rodrigo Pizzinatto, CFO

So let me answer your question on the fourth quarter. Thank you for your message, Christian. Before I tell you about the fourth quarter, let's just look back. The pandemic did cause some shifts to the economy, as you can see. In some industries, the effect was greater, but other industries were not as affected. So we see that in the industry, there was a positive impact for Oxiteno for bulk and Ultragaz and also volumes in Ipiranga, which dropped less than it would have. If we look at the fourth quarter, it's difficult to understand what are the effects of seasonality because of these shifts. We continue to see volumes recovering gradually in Ipiranga, and Ultragaz is being led by the industry.

Operator, Operator

The next question comes from Mr. Regis Cardoso from Crédit Suisse.

Regis Cardoso, Analyst

Hi, Fred and Rodrigo. Thank you for taking my questions. Welcome, Rodrigo. I hope you have a lot of success in your new role. I have a couple of questions on my side. Both are to understand how recurrent these results will be. They were very good. One of the things that drew my attention was the level of expenses in sales and also G&A. G&A specifically had dropped significantly in the second quarter, and now in the third and second quarter, it went up a bit, but it's still far below what it used to be last year. So I'm thinking about Ipiranga specifically when I'm asking this, but I think this is true for Ultrapar as a whole. So my question is, the level of expenses you see in the third quarter, will it still benefit from the contingencies on expenses, which I believe is related to this year? Will you go back to the previous level of expenses? And in Ipiranga, specifically, there seems to have been a POS reduction, which might have helped. And a couple of other things on that, if you can tell us about your inventory effects this quarter, if it contributed to Ipiranga results and how zero cost collar has impacted Oxiteno negatively? So after this year, should we expect a higher EBITDA for Oxiteno? That's it. Thank you.

Rodrigo Pizzinatto, CFO

Hi, I'll answer your questions. Thank you for them. So to tell you about the expenses, we have four main factors that justify this reduction. One of them is the volume effect. When volumes are below the previous period, volume expenses, especially shipping expenses, go down. And as you recover volumes, these expenses recover too. So there is a variation in your sales. A part of it is also due to results going up, as we mentioned with Oxiteno and Ultragaz. We had more bonuses because of the growth that the company had. So of course, this depends on if this will continue next year. So if we continue to grow, we'll continue to have more variable remuneration. The third effects are the contingencies because of the pandemic. This also affects our results. As contingencies go down, expenses will go up. So, some part of it is based on time and some of it is structural. Marcelo mentioned this in Ultra Day. Ipiranga has been working on reducing its expenses structurally. You mentioned a question about POS. There's some good news here. We were concerned about the possible effects of the pandemic. Ipiranga was agile. It advanced its credit. It postponed its rent. It paid some of its financing plans and also suspended some contracts. So all of this is reflected in the results we saw during this quarter in terms of defaulting, which went back to the relative or common levels. So there was that reversal, which had a positive impact on this quarter. Now, to talk about inventory in Ipiranga, what we have this quarter, which you saw, were price hikes from Petrobras, which had a positive effect on Ipiranga results, and if we add up the inventory gain effect, the import effect and CBIO, if we combine these three factors, there was a positive effect of about BRL 100 million this quarter. Oh, and the zero cost collar, which you had also asked, this quarter, it had a negative impact of about BRL 100 million on our EBITDA, on our results at Oxiteno.

Regis Cardoso, Analyst

Great, thank you.

Operator, Operator

The next question will be asked by Mr. Andre Hachem from Itaú.

Andre Hachem, Analyst

Thank you for taking my questions. I have two simple questions. So Fred, it's now been three years since you became CEO. Your administration led to a great turnaround. Ipiranga had adverse events such as the trucker's strike, then COVID. You've had a great turnover from the last three years, but can you tell us a bit about how Ultrapar was when you took your position and how it is to date, and how will you solve the next challenges? I think Ultrapar will have new acquisitions when we think about refineries. So, how do you see that in terms of financing, capital market? So just tell us about what changed in the last three years, and how you see the challenges for the next three years?

Frederico Curado, CEO

That's a straightforward question. It’s quite simple to respond to, isn't it? However, we faced three very challenging years. Our focus was on renewing the leadership at Ultrapar for a clear reason. The prior administration consisted of many senior individuals, including their ages. When I joined the company, I was among the youngest leaders, and now I am the oldest. The average age has decreased significantly, which has been a positive change. The team possesses strong and solid values, both in business and behavior, which has helped us attract excellent talent. Our goal has been to make our business more agile and dynamic, fostering a business model that promotes autonomy. We have moved away from referring to our leaders as 'Superintendents' since that term is outdated and does not reflect the expectations of a CEO. Now, we have CEOs in Ipiranga and other areas; they are recognized as business leaders. This shift provides more accountability and responsibility, allowing for team development within each segment, which I believe expands management capacity and enhances value generation compared to the past. While it's not necessarily easier, it's more promising to coordinate a team where each player understands their role. Our primary responsibility as Board members is to allocate capital effectively. There are two stages involved in recovering results, including minor adjustments and preparing for the future. We have an important project involving joining an OEC, which is a rare opportunity. We see a lot of synergy in our downstream industry with Ultragaz and Ipiranga. There are significant challenges ahead; we need to identify opportunities, have the ability to seize them, and execute them effectively. That is my perspective, and we anticipate a productive year ahead.

Rodrigo Pizzinatto, CFO

Oh, I'm sorry. I think I forgot to answer on leveraging. Well, as we've said in the previous quarters, we've been able to reduce leveraging despite our EBITDA being weaker in the second quarter. Our business is generating cash. And despite the weaker EBITDA, we did reduce our leverage, and that increases our capacity to get resources for any eventual acquisitions we might have. So we will always continue to see quick results with the comfortable leverage level, and we believe that the current level is already comfortable. Also, as a reminder, there's no obligation to keep all businesses under our own control. If we see any investments that require any movement of that sort, we will do it in our assessment.

Andre Hachem, Analyst

Great, Rodrigo, that was very clear. Thank you.

Operator, Operator

Ms. Fernanda Cunha from Citibank will ask the next question. Mr. Bruno Montanari from Morgan Stanley will ask the next question.

Bruno Montanari, Analyst

Good afternoon. Thank you for taking my questions. Most of them have been answered, but I have a couple here. Can you tell us about your fuel import book, thinking about Petrobras and the exchange rate? What is your feeling for the next quarters? And specifically for Extrafarma, we're seeing margins go up, and is this the level you expect? Or what is your potential margin for the drugstore business and the new structure? And if you reach that level, would it make sense to sell that specific business, either partly or completely?

Rodrigo Pizzinatto, CFO

I'll answer the first question and leave Fred with the last one. Well, we've had a recurring level of exports in Ipiranga, which is about 15% to 20% of our needs, and that window seems to be tighter. These variations are natural. They go up and down over time, and right now, we are a bit tighter. And I'll let Fred answer your second question.

Frederico Curado, CEO

Yes. This was a major part of the process since 2018. From the point we came into the company, we really wanted to bring the company to a higher profitability level to generate cash in a different way, and that's related to reversing our strategy. It really was the reversal, but also management. Of course, it wasn't a complete change, but it did play into that specifically. So as Rodrigo said, we had 30% of the network still maturing. We have a distribution center, which will be opened late this year or early next year. So we can still recover our profitability. We still have space for that to have higher margins, and the major growth leverage that the business has, in our point of view, will be digital. That's been our focus. Also, our team is much stronger. Bazzali's team is also a great addition to our team. They have a lot of experience in regional, and that just adds to our business capacity. Of course, in terms of control, this is something that we understand. We are a company that has a portfolio. So we're always looking at opportunities, but the focus really is to continue to recover results and generate cash.

Bruno Montanari, Analyst

Thank you. This concludes our questions-and-answer session. At this time, I'd like to turn the floor back to Mr. Rodrigo Pizzinatto for his closing remarks. Go ahead, sir.

Rodrigo Pizzinatto, CFO

Well, thank you very much. Thank you for your questions, and we expect you for the fourth quarter results conference call next year. Thank you.

Operator, Operator

Thank you. This concludes today's Ultrapar conference call. You may disconnect your lines.