Earnings Call Transcript - UGP Q3 2023

Operator, Operator

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Ultrapar's Quarter 3 2023 Earnings Conference Call. There is also a simultaneous webcast that may be accessed on Ultrapar's website at ri.ultra.com.br and MZiQ platform. The presentation will be conducted by Mr. Rodrigo Pizzinatto, Ultrapar's Chief Financial Officer and Investor Relations Officer. And then for Q&A session, we'll have also have the presence of Mr. Marcos Lutz, Ultrapar's CEO and the CEOs of the respective businesses, Mr. Tabajara Bertelli, Mr. Décio Amaral and Leonardo Linden. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. After Ultrapar's remarks, we will open the floor for questions and at that time, further instructions will be given. We remind you that questions, which will be answered during the Q&A session, may be posted in advance in the webcast. And a replay of this call will also be available for seven days. Before proceeding, let me mention that forward-looking statements made during this conference call under the safe harbor of the Securities Litigation Reform Act of 1996 are based on the beliefs and assumptions of Ultrapar management and on information currently available to the company. These forward-looking statements are no guarantee of performance. 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 related conditions and other operating factors could also affect the future results of Ultrapar and could lead to results that differ materially from those expressed in such forward-looking statements. Now, I'd like to turn the conference over to Mr. Rodrigo Pizzinatto. Mr. Pizzinatto, you may proceed.

Rodrigo Pizzinatto, CFO

Good morning everyone. It is a pleasure to be here once more to talk about Ultrapar's results. And starting on slide number two, I remind you that both the earnings release in this presentation consider Ultrapar's data from continuing operations in 2023. As for 2022, the company's data is presented in the pro forma view, considering the sum of continuing and discontinued operations, as disclosed throughout last year unless otherwise stated. Moving now to slide number three with Ultrapar's consolidated results. As you can see in the chart in the upper left side, our recurring EBITDA from continuing operations totaled BRL 1,992 million in the third quarter of 2023, 124% higher year-over-year. This increase is due to the higher EBITDA at our businesses, especially Ipiranga results that I will go through in detail in the next slides. Ultrapar's net income was BRL 891 million in the third quarter compared to BRL 83 million in the third quarter of '22, mainly on the back of the higher EBITDA from continuing operations. Investments from continuing operations totaled BRL 380 million in this third quarter, 27% lower than that of the third quarter of '22, due to lower investments at Ipiranga partially offset by higher investments at Ultracargo. We had in the third quarter an operating cash generation of BRL 1,901 million, BRL 609 million above that of the third quarter of '22. 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 third quarter of '23 and arising from the increase in fuel prices. I remind you that in the third quarter of '22, 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 BRL 294 million in the draft discount balance, the operating cash generation in this third quarter was BRL 2,195 million. Moving now to slide four to talk about our liability management. We ended the third quarter with a net debt of BRL 7.1 billion, a reduction of BRL 924 million compared to June '23. This decrease resulted from greater operating cash generation, partially offset by the payment of dividends and the reduction of BRL 294 million in the direct discount balance this quarter. In addition to this effect during the third quarter, we received the second installment from the sale of Extrafarma in the amount of BRL 198 million and we disbursed BRL 210 million for the acquisition of Opla. Our leverage went from 2.1x in June 2023 to 1.4x in September 2023, the lowest level of the last 10 years. This is 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 million related to the sales of Oxiteno and Extrafarma. 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 Extrafarma all lines highlighted in our balance sheet. The net debt of September 2023 adding the draft discount vendor and divestment receivables would be BRL 7.7 billion, which is BRL 1,746 million lower than the balance of September 2022 one year ago. Moving on to Slide number 5 to talk about another excellent quarter of Ultragaz. The volume of LPG sold in this third quarter was 1% higher year-over-year, due to a 4% increase in the bulk segment on the back of higher sales to industries. The bottled segment in turn remained flat. Ultragaz SG&A in this third quarter was 15% higher than that of the third quarter of 2022, due to two manufacturers' expenses with freight due to higher sales volume and higher expenses with personnel, mainly collected by gaining agreement in variable compensation in line with the progression of results and a larger headcount due to the acquisitions of Stella and NEOgas. Ultragaz EBITDA totaled BRL 453 million, 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 fourth quarter, we expect a profitability measured in EBITDA per ton similar to that of the third 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 10,590,000 cubic meters in the third quarter of 2023 and 11% growth year-over-year. This increase results from three 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 Rondonopolis base from Ipiranga in September and 10,000 cubic meters relating to the expansion of the Vila 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 use in Itaqui in Santos and in Suape and the start-up of operations in Opla. Truck cargo's net revenues were BRL 264 million in this third quarter, 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 third quarter of 2022, as a result of higher personnel expenses mainly collective bargaining agreement in variable compensation in line with the progression of results. We also had higher expenses with advisory and consulting services linked to expansion projects. Truck cargo's EBITDA totaled BRL 173 million 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, five percentage points above that of the third quarter 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. Volumes sold in the quarter decreased 2% year-over-year with a 3% reduction in the Otto 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 third quarter with a network of 5,816 service stations, 565 stations less than that of June 2023. 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, 535 service stations were closed with an average volume contribution of 57 cubic meters per month. 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 this agreement 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 1,542 Am/Pm stores with same-store sales growth of 9% year-over-year. Ipiranga's SG&A increased 27% in the quarter due to four main factors: higher provisions for contingencies, higher provision for doubtful accounts, higher marketing expenses, and higher personnel expenses mainly collective bargaining agreement in variable compensation in line with the progression of results. The other operating results line totaled negative BRL 178 million in the quarter in line with the third quarter of 2022. The disposal of assets line totaled BRL 68 million mainly due to the capital gain related to the sale of the Rondonopolis base to Ultracargo in the amount of BRL 59 million and the sale of three real estate assets. Ipiranga's EBITDA totaled BRL 1,513 million in the quarter, 184% higher than that of the third quarter of 2022. Recurring EBITDA was BRL 1,445 million in the quarter, 199% higher year-over-year. The higher EBITDA mainly reflects two factors: first, margins benefited from the inventory gains caused by the increase in fuel costs throughout the quarter. I remind you that in the third quarter of 2022, we had reductions in fuel costs and inventory loss. The second factor was the normalization of the commercial environment in the third quarter of '23% due to a more regular product supply in the market which affected the second 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. In addition, to the normalization of product supply the third quarter result benefited from inventory gains. For the fourth quarter, considering the current scenario of product supply and no significant impact of inventories, we expect a profitability measured in EBITDA per cubic meter above that of the last 12 months and a 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&A session in which we are available to answer your questions. Thank you.

Operator, Operator

Ladies and gentlemen, we will now open the floor for questions. The first question comes from Monique Greco, Itau BBA.

Monique Greco, Analyst

Hello, everyone. Good morning. Can you hear me?

Marcos Lutz, CEO

Yes. Good morning, Monique.

Monique Greco, Analyst

Good morning. Thank you for your presentation. Congratulations on your strong results. I have two questions. Let me begin with your comments at the end of your presentation, Pizzinatto. You mentioned the expected margin dynamics in Ipiranga for the fourth quarter. Could you elaborate on the competitive dynamics you're anticipating for that period? In the first half of the year, we noticed heightened competition, particularly with products imported from Russia. Can you provide your outlook on the diesel market dynamics for the fourth quarter? Additionally, we've been discussing diesel while the Otto cycle has been declining. What do the dynamics look like for the Otto cycle? My question for Lutz is that during Ultra Day, you emphasized the opportunities in agri-business and energy transition. Could you discuss these opportunities further? What key criteria do you consider when evaluating these prospects? Thank you.

Leonardo Linden, Business Executive

Hello Monique. This is Linden. Your first question was about competitive dynamics. This is certainly a highly competitive market. In the fourth quarter, we are observing a more balanced situation regarding supply and demand, which is stabilizing the market. However, we need to view this market as a progression rather than a single moment in time. What we experienced in the third quarter was indeed favorable for our business, but we must remember that we were coming off a very poor first quarter, characterized by significant inventory losses and a surplus of diesel, as you noted. The situation began to shift in the third quarter, leading to inventory gains and improved market conditions. In the fourth quarter, I would describe it as more balanced, but this is also a transition quarter as we are seeing some openings in parity and an increased appetite for imports. Therefore, I expect a transitional quarter in the fourth quarter. However, as Rodrigo mentioned, we are looking at the fourth quarter with the potential for higher margins than we experienced in the past 12 months. Additionally, in the first half, we faced an oversupply of products in the market. Retail fuel is not an exception to our industry; excess products negatively impact margins, as we saw in the third quarter, and this situation is likely to continue in the fourth quarter. This return to normal stock levels in the industry should enable our margins to align with expectations. Now, I would like to pass the conference to Marcos.

Marcos Lutz, CEO

Hello Monique. Good morning. Let's begin with the key criteria related to your question. We need to maintain strict discipline regarding the risk/return ratio of our projects. As mentioned, we want to increase our business exposure and grow in these regions across our three sectors: Ultracargo, Ultragaz, and Ipiranga are making significant efforts to expand their operations in these markets. We are evaluating various projects and companies that offer greater exposure to these areas. The primary focus is, of course, on the return on investment, balanced with the associated risks. Therefore, more established projects that yield slightly lower returns but come with reduced risk are quite appealing, while less mature projects, despite their higher potential returns, carry greater risk that needs to be justified. Additionally, it's crucial to recognize that the risk/return ratio for field distribution projects in Brazil remains unsuitable even at current return levels. We anticipate that the volatility within this segment is likely to persist, demanding a higher return from today's projects. For instance, we observe that prices in Brazil exceed international levels, which increases product imports and could lead to inventory loss as we approach a necessary price correction in Brazil. This correction is crucial since it doesn't make sense for prices to remain above the international average. We expect to see this volatility unfold, which is why I emphasize looking at the situation as a continuous trend rather than a fleeting moment. It is essential to focus on the past year rather than just the last quarter to assess whether we are on the right path.

Monique Greco, Analyst

Perfect. Thank you.

Operator, Operator

The next question comes from Leonardo Marcondes, Bank of America.

Leonardo Marcondes, Analyst

Good morning. Thank you for taking my question. I have two questions about Ipiranga. My first question is related to the service stations. Can you recap the effects we can expect in Ipiranga after the completion of the project with Ultragaz? Additionally, what can we anticipate from the company regarding its future brand strategy? I also have a question about Ipiranga's margins. You previously mentioned your expectations for the fourth quarter. Looking at the mid to long-term, I believe your market is targeting a recurring margin of about BRL 100 or BRL 110 per cubic meter. In your opinion, does this margin level seem reasonable, or do you believe Ipiranga could achieve a stronger recurring margin going forward? Furthermore, considering the four pillars of the company's turnaround process, is there still potential for improvement, and if so, which pillars will this improvement impact? You mentioned previously that there were enhancements needed in your network and logistics. Could you provide further details on that?

Rodrigo Pizzinatto, CFO

Hello Leonardo. Good morning. Thank you for your question. Well, about the close down of service station, 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, 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 and service stations, which takes place naturally. But the bulk of this process is already finished. And you start to see the effect, 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. We are making investments raising the bar of quality because of the reasons we mentioned before, because we won points of sale that have the highest potential. We are looking at our business prioritizing the highest returns on service stations, 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 raising the bar. Now as for the margin, we talked about this during Monique's question, but you asked us if this makes sense. One thing is what we expect. And another thing is what we should have according to the compensation we will have 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.

Leonardo Marcondes, Analyst

Just one follow-up question about service stations, I remember that it was the 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?

Rodrigo Pizzinatto, CFO

Hello Leonardo. This is Rodrigo. Yes, we should see a benefit in the reduction of amortization and depreciation for Ipiranga, but remember that we have other investments to make, so it's the dynamics in our depreciation. But this standalone 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 non-IFRS.

Leonardo Marcondes, Analyst

Now that you have a healthier network and more robust network of service stations is there still room to improve your receivables?

Rodrigo Pizzinatto, CFO

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 – in the future or looking forward.

Leonardo Marcondes, Analyst

Okay, thank you.

Rodrigo Pizzinatto, CFO

And Leonardo, to your last question about if there is any room for improvement.

Leonardo Marcondes, Analyst

And you talked about the four pillars.

Rodrigo Pizzinatto, CFO

Oh yes, the four pillars. Yes, indeed in line with the four pillars that we have been discussing for a long time now, we even said in Ultra Day, 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 improvement that we see for this pillar. We're expecting to potentially gain by the end of 2025. But you're right certainly we have room to improve further in Ipiranga's operations.

Leonardo Marcondes, Analyst

Very clear. Thank you.

Operator, Operator

The next question comes from Thiago Duarte, BTG Pactual.

Thiago Duarte, Analyst

Thank you. Good morning. Let's return to the discussion about Ipiranga. We've previously covered the margin with some excellent insights. I heard Linden mention this earlier. When discussing your brand strategy, I believe these two aspects are interconnected. However, I want to revisit the topic of market share. Up until the end of the first quarter, as you noted, there was an oversupply in the market, resulting in a steady decline in market share not only for Ipiranga but for the three major players in the industry as well. Now, in the second half, we're observing a recovery in market share. We previously discussed imports from Russia, but this decline also affected the Otto cycle. I would like to hear from Linden on this. While I understand that market share isn't the ultimate goal, I feel we are now operating more efficiently in a balanced market. Your value proposition following the turnaround appears solid and favorable. I believe you are anticipating a rebound in market share or volume as a sign of this improvement. Do you think viewing this progression as a positive signal moving forward is reasonable? Additionally, considering your brand strategy, I believe this strong value proposition will enhance the potential for leveraging your brand. As you've mentioned, you're consistently raising the bar. This leads to my question. My second question is for Marcos. We know that the company's leverage is currently much lower, supported by strong cash generation and continuously improving results. The market is curious about your next steps. While you discussed this at a high level during Ultra Day and Marcos addressed it during this call, I'm interested in understanding what format we can expect for your future capital allocation aimed at company growth. Marcos mentioned during Ultra Day that the company no longer needs full control of operations and is open to partnerships or minority stakes. Marcos, could you provide further details on what we might anticipate regarding the company's willingness to hold minority or non-controlling stakes in other firms? What companies are you considering in this context? Thank you.

Leonardo Linden, Business Executive

Thiago, let me address your first question. In terms of market share, it's important to analyze it specifically. For instance, if we examine the share of contracted volume within our own network, we haven't lost any share. Over the past two years, we did experience some loss in share due to market shifts towards the spot market, primarily caused by supply issues we faced in the first half of this year. The spot market caters to price-sensitive volume, so when we consider recovering, it's a good starting point to re-enter and compete in that market. We prioritized supplying our own network because we were more focused on ensuring that supply was maintained at that time. Therefore, we temporarily paused our supply to the spot market. I haven't been reconfirmed on the share; rather, the focus should be on the scale of volume because share is essentially a result of the quality of our value proposition and the effort we put in. By making high-quality investments and maintaining excellent operations, share will follow naturally. We will address the spot market when it aligns better with our company's interests.

Marcos Lutz, CEO

Thiago, first, I think that our role here as capital allocators 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. 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 three 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. Also in cargo, we have a project of exploring the inner part of the country and out of the capitals with a broader logistics offer. Now as for Ultrapar, I think that first in Ultrapar, we have a higher requirement or a high 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 relevant influence and where that business is heading. 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, acquiring a minority stake is not something that interests us because there will 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. 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% of the company and trying to control the timing of a transaction which is not something that is under our control. I hope I answered your question.

Thiago Duarte, Analyst

Yes. Thank you.

Operator, Operator

Next question comes from Luiz Carvalho, UBS.

Luiz Carvalho, Analyst

Hello. Good morning. Thank you for taking my question. Congratulations on the results. I have two questions, one for Lutz and one for Linden. In our recent calls, you've shared a lot about the company's strategy and capital allocation. I would like to know more about the time frame and prioritization. Specifically, how focused are you on diversification for capital allocation compared to operational improvements? I will refrain from referring to it as a turnaround. Can you discuss how you're preparing your management team and your initial plan for having just one position on your board? How are you planning your time and what are the priorities for the next 12 months? My second question relates to Linden's comment about the improved competitive environment. It's clear that both small and large players are increasingly focused on profitability. You mentioned a 20% return rate as an appropriate level for EBITDA across all products. Considering margins, how does Ipiranga compare to the rest of the industry? For instance, you mentioned diesel and ethanol. Do you believe we will see rapid improvements in these areas? How do you view the competitive landscape moving forward and the likelihood of achieving the stated 20% return rate?

Marcos Lutz, CEO

You sound like my mother, Luiz. When you inquire about my time allocation, I don’t have a strict routine. It varies depending on the weeks and the demands where Rodrigo and I follow a monthly routine for our business. I would estimate that it takes about 25% of our time and is a part of our routine. The other 35% is more influenced by what occurs during that month in terms of business and other factors. Additionally, Rodrigo and I spend some time on governance for the Board, along with the ongoing transition and significant changes we’ve implemented in our governance and generational transition. So, I can’t give you a definitive answer. However, I don’t believe there are any time restrictions that would prevent us from dedicating efforts to new investments. We have the capacity for it, which we’ve developed over time, so I don’t think that will be an issue. Luiz, I believe there are some positive aspects that lead us to feel confident about returning to the 20% return rate, similar to levels seen in the industry in the past. We have identified areas for improvement that will help us approach the 20% return rate. Brazil's regulatory framework has made progress, and there are some favorable developments regarding tax issues. However, we also face challenges in the environment, including trade regulations, tax efficiency, and the need to combat counterfeit products collectively. While a snapshot of the third quarter shows we’re not far off, a broader view reveals we have significant work ahead before reaching the 20% return rate. We are making progress, but relying solely on margin improvements isn’t sufficient. It’s crucial that we also focus on enhancing the competitive landscape and addressing other operational aspects, as we have been doing over the past two years.

Luiz Carvalho, Analyst

Perfect. Thank you. Very clear.

Operator, Operator

The next question comes from Rodrigo Almeida, Santander.

Rodrigo Almeida, Analyst

Good morning, Lutz and the team. I have two questions. First, I want to discuss the company's capital structure, particularly regarding energy and growth, capital allocation, and current capital. Over the past six months, it has been challenging to predict future opportunities. However, it's evident that you will keep generating cash, and we anticipate a significant cash inflow for the quarter. I would like to know your perspective on the company's capital situation and how you see the capital structure evolving over the next three to four quarters, as well as the implications for dividend payouts, buybacks, and inorganic growth. I recognize that you have a dividend policy and would like to understand how the efficiency of your capital structure this quarter might influence that. My second question concerns your societal reorganization and the leadership changes to a holding structure. What are the next steps we can expect regarding this reorganization? Specifically, will there be more capital strength for different businesses, such as a potential increase in leverage for Ultragaz and Ultracargo, or perhaps an optimization of liabilities? Additionally, in terms of portfolio optimization, are you anticipating something similar to what was recently done with Ultracargo? Will there be comparable actions with Ipiranga? Thank you.

Rodrigo Pizzinatto, CFO

Good morning, Rodrigo. Thank you for your questions. Well, since the evolution in results in our cash flow, since we had this evolution in our results and cash flow, we can certainly are in a comfortable position in terms of cash generation. And we are using our cash for investment projects. We have concentration of investments in quarter four and we had a disbursement to acquire Opla in quarter 3 also the investments in NEOgas and Stella. And the way we look at our investments, Marcos talked about this is very risk sensitive. So, is there a business that we know well because in this place, the risk is much easier to measure and the lower the volatility of the company's business, the best you can foresee your flow. Ultracargo is a more stable business and Ultragaz is more volatile. And that's why the return rate that should go back to the level of 20%, which is suitable to the risk of the business. Now, when we go from very well-known businesses to business that we do know that well, the level of return that we require is higher to the lack of knowledge in that business and the higher level of risk. So looking forward, if we don't have good applications for the cash and good costs for mid to long-term projects, we will increase the payment of dividends, because we don't want to be at a sub-optimal 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.

Rodrigo Almeida, Analyst

Perfect. Thank you.

Operator, Operator

The next question is from an unidentified analyst, Citibank.

Unidentified Analyst, Analyst

Hello everyone. Thank you for taking my question. 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 three much different than what we saw earlier this year and a 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 and December. So I don't know, if maybe Linden can help us, but I want to understand how this 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 quarter three, how much it helped your sourcing with more competitive prices compared with the market. Can you give us more clarity that will help us better understand the results of Ipiranga? And my second point in other industries in particular in the field industry the tax issues are included. Maybe this is the main topic being discussed in the industry today the tax reform and yesterday they had their first win for the tax reform and there's an important point which is the point about ethanol. I think the exchange that everybody is expecting maybe the most relevant point of this tax reform relative to fuel is the point about ethanol and this could be game changing. And I want to hear from you, how relevant it 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 three or four top companies in the industry. And how do you see this looking forward?

Unidentified Company Representative, Company Representative

Hello. Thank you for your question. To put this in context, it is important to note that the mill currently operates with very low margins compared to global standards. This situation isn't due to inefficiencies on the part of the distributors; rather, it stems from certain aspects of the model not aligning with government regulations regarding taxes and mixes. We are working towards changing these regulations to create a more equitable framework that can be effectively enforced. This would help improve government collection and establish a more uniform conversion model. During the period you mentioned regarding margins, we are always ensuring that we have adequate products for our B2B clients, even if product prices rise. Our largest clients are consistently supplied by Ipiranga, and we prepare well in advance to meet their needs. Although we experienced some optimistic market players leaving in the third quarter, which created additional demand that larger companies were able to satisfy, it's important to recognize that there is currently significant arbitrage for imports. However, we don’t expect this to last, as domestic refinery prices are unsustainably high compared to international prices. We anticipate a short-term adjustment, which may lead to inventory losses for distributors, including ourselves. Such fluctuations are common in the business, as gains are often realized when prices rise and losses occur during price drops. Regulatory improvements are likely to positively impact margins, yielding better returns on investments made by companies. When companies previously operated with returns of around 2% to 8%, this was no longer viable amid a CDI of 12%. A well-structured company should ideally see returns near 20%. These regulatory changes are expected to bring us closer to that target. For consumers, the changes might seem minimal, with impacts of less than 1% or 2% on final prices, yet the transformation for the industry is significant in terms of investment potential and growth capacity. While my answer is broad, it's crucial to understand these key points.

Unidentified Analyst, Analyst

I have a follow-up question regarding the regulatory changes. There has been some discussion about potentially establishing a national operation for various issues. It may not seem like a priority, but how can you address this range?

Leonardo Linden, Business Executive

Well, I think it's early to say. 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 me to the future or not it's too early. Thank you.

Operator, Operator

The next question comes from Bruno Montanari, Morgan Stanley.

Bruno Montanari, Analyst

Good morning. I have a question about seasonality. We know that you experienced it in the past quarter four, and fortunately, that seasonality is getting stronger. We discussed BRL 2.2 billion in investments. How does the company plan to end the year? Will you be able to invest in quarter four, or will the numbers be lower than anticipated? Will this impact 2024 as well?

Rodrigo Pizzinatto, CFO

Our investment plan is focused on capital investments for the year. It's typical to see slightly lower numbers, which is a reflection of the retraction in the fourth quarter. Some of our investment may carry over into 2024, but that wasn't part of our original plan. We might see slightly lower numbers than what was initially anticipated.

Operator, Operator

If we have no further questions I'd like to hand the conference back to Mr. Rodrigo Pizzinatto for his final remarks. Mr. Pizzinatto, you may proceed.

Rodrigo Pizzinatto, CFO

Thank you for your questions. Our Investor 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.

Operator, Operator

Ultrapar's quarter three earnings conference call is now closed. You may now disconnect your lines. Have a great day.