Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Ultrapar's First Quarter 2020 Results Conference Call. There is also a simultaneous webcast that may be accessed through Ultrapar's website at ri.ultra.com.br and MZiQ platform. Please feel free to flip through the slides during the conference call. Today with us we have Mr. Fred Curado, Chief Executive Officer and Mr. Andre Pires, Chief Financial and Investor Relations Officer, together with the other executives of Ultrapar. 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 are completed, there will be a question-and-answer session. At that time, further instructions will be given. [Operator Instructions] A replay of this call will be available for one week. 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'll turn the conference over to Mr. Curado. Sir, you may now begin the conference.

Well, thank you very much. Good morning, good afternoon everyone. Well, we had a good first quarter in 2020 and the quarter was pretty much in line with our expectations and all businesses, they have showed good operational performance and also profitability, even Ipiranga which was, of course, which EBITDA was impacted by the inventory losses which were due to the abrupt and also unexpected reduction in oil prices toward the end of the quarter. At up to March, we were quite positive regarding our guidance, but of course, we began to feel the effects of the crisis already in the last two weeks of March and, of course, we had to withdraw the projections due to the uncertainties in the economy and society at large. [Technical Difficulty] we have been working diligently in managing the crisis I think actually in four fronts. Firstly and foremost, the health and safety of our people. Second, the integrity and continuity of our operations. Thirdly, support to the extent that you can, of course, to our value chains and our resellers, and last, but not least, social support during this pandemic. So before I pass the floor to Andre, let me just present you an overview of the effects of the crisis on our businesses. This is the eighth week since the outbreak here in Brazil. So, firstly our security and social evaluation protocols that have proven to be very efficient. All of our businesses, they are essential to the society and we have been able to maintain our operations without any interruptions or any discontinuities, which is, I think, a very positive result. So our office staff is almost 100%, something close to 95% working remotely. And surprisingly, I think this is the experience of many companies, who are quite high-efficiency based…

Well, thanks, Fred. And good morning, everyone. Before we discuss the performance of our businesses, I would like to highlight some important aspects of our first quarter 2020 results. Last year, it was a period of transition with the implementation of the new IFRS 16 accounting rule and the disclosure of the holdings expenses. You may remember that we published our results in 2019, with and without these changes for comparability. As from this quarter, all numbers are reported according to the new IFRS 16 rule and the segregation of the holdings expenses, both for 2020 and 2019. Moving on now to Slide number 5, talking about Ipiranga. Ipiranga reported a 2% decrease in sales volume in the quarter, the result of a 5% lower autocycle sales compared with the first quarter of 2019, reflecting the impacts of the coronavirus pandemic on sales in the second half of March. During January and February combined, sales volume at Ipiranga went up by 0.7% on a year-on-year basis, while March sales were down by 6.4%. On the other hand, diesel sales increased by 2% relative to the first quarter of 2019. We ended the first quarter with a network of 7,106 service stations, a net addition of 16 during the quarter and 2,373 am/pm convenience stores, a slight drop of four stores in the period. As anticipated in our Ultra Day presentation, since the end of last year, we implemented a number of company-operated am/pm stores and their performances have been better than planned. Oil prices during the quarter were extremely volatile, largely because of the sudden drop on global demand due to the pandemic and to the price war in the international markets, which caused significant reductions in fuel prices. Consequently, we incurred sharper inventory losses impacting Ipiranga's margins. SG&A fell…

[Operator Instructions] Our first question comes from Christian Audi with Santander.

Okay. I would like to start with a question for Fred. Given all that's happening. As you look at your portfolio, Fred, how has the outlook for a potential refinery acquisition changed? Or can you just give us an update as to where that process is going? I know it's a long-term process or your interest may still be there, but I was just wondering what's happening to the process, please? And secondly, Andre, on the Ipiranga front, with volumes marginally improving potentially lower inventory losses in the second quarter as oil prices have stabilized a bit. This leads me to believe that we could see improved margins in the second quarter. If you could comment on that? And also the type of behavior you've seen from the white flags. They had proven resilience in the past at the beginning of this year. Is that still been the case in April and May? In other words, are they still gaining market share? And then the third and final question was on the SG&A cut initiatives, in other words, André, you had introduced a number of initiatives to cut SG&A costs across several of your businesses. Some of those have already been achieved. What I was wondering if you could give us an update as to in which businesses do you still see important upside from potential further cuts in SG&A?

Okay. Thank you, Christian. This is Fred. Thank you for your questions. So let me address the question about portfolio and strategy. So I mean we remain in our view that we should prioritize capital allocation in the downstream sector in Brazil. So of course, our port infrastructure, the infrastructure also -- and the networks of both UltraGaz and Ipiranga. And of course, we have a continued interest in the refining opportunities. Structurally, we don't think there is a change. Structurally, Brazil will be a net exporter, a net producer of oil and we will always have a deficit of refined products. So that the case that are obviously we -- I think we and I suppose everybody else has to take a breath and reevaluate where we are. There's a lot of volatility. I mean we still need I'd say a few weeks or a few months before we have any idea where this whole thing will end, but again, we remain confident that the business proposition structurally speaking Brazil is still relevant. As you can understand, Chris, I cannot make any comments about the process itself. The whole process is under confidentiality, but I guess my comments before that I could give you an idea where we are. Thank you.

Thanks.

Hi, Christian. Thanks for the questions. Starting with Ipiranga in terms of margins and inventory losses. I think it's important to mention that when we look at the impact of the inventory losses in the first quarter, it was related to the big drop in prices starting, I would say in the second half of March, but as you know, right, when you have such a dramatic price decline, the inventory impact is not observed immediately, it takes some time, especially in a moment of low volumes for the volumes to be recycled. So what I'm trying to say here is that part of the big drop that happened already in the end of March flew down toward the second quarter as well, but it is a fact and you mentioned that, that prices have started to recover. There has been already two price increases from Petrobras in the last few days, but overall, this will depend on how prices ended up staying, let's put it like that by the end of the second quarter. Obviously, there is a question that relates to operational leverage, right. I mean the fact that lower volumes tend to influence negatively the margins and it is also important to mention that we have seen margins -- sorry volumes improving in the last few weeks as the let's say, the isolation started to somewhat be lower than in the beginning, right. So I think it's too early to tell. I think obviously, if the trend of prices recovery continue, there will be a reduction of the impact in inventory losses. It's also important to mention that we have to take into consideration also ethanol. Ethanol prices have dropped more in the second quarter than in the first quarter and they remain relatively low. So there is an impact coming from there as well, but it is also true that in terms of volumes if in the first couple of weeks of the isolation, let's put it like that, we saw volumes going down by 60%, 70%, we're now seeing volumes in the Otto cycle down around 25% and in the diesel down by 10%. So there is some recovery happening. As for SG&A, in general, all across the business, I mean the measures continue to be taken. It is true for Ipiranga that basically had a 4% SG&A decline in the first quarter of this year versus last year. It is true for Oxiteno as well. If we look at, even considering the FX depreciation, SG&A is below historical levels. So there is further upside, I would say, from SG&A cuts across our businesses. If you look at Extrafarma, there has been also a strong reduction in terms of, I would say, SG&A, in general, optimizing personnel costs or increasing productivity. So this is something that we are doing on a regular basis, and we can expect to see further upside from that.

And Andre, is Ipiranga the biggest source of those additional cuts in SG&A?

Yes. Yes. Clearly, clearly. We can expect this coming more from Ipiranga, clearly.

Okay. And on the, going back to Ipiranga, on the white flag, have you seen any changes in market share that lead you to believe that the white flags, given their low-cost business model are benefiting, particularly from the current difficult macro environment?

My question, it's too early to tell. I think you have, let's say, two sides of the story. I mean, we see, obviously in some cases because of their, I would say, lower headcount or lower cost continued capacity to compete. But on the other hand, it's important as well to mention that to go through this crisis, it's important that you have solid financial background or solid financial situation. And there is, so any of these competitors that, I mean, do not have, let's say, enough capacity from a working capital point of view to pass through the crisis. I mean they tend also to service. So it's a tale of two stories, to be honest with you. I mean, it's difficult to call a trend. But I mean, we've seen all. In some cases, tougher difficulties for some of these guys. And in some other cases, some resiliency, especially on the ethanol market, I would say.

Okay. And last clarifying point on leverage, you explained very well how your hedge accounting impacted this increase in net debt to EBITDA. Does hedge accounting, Andre, will continue in place through the end of the year? In other words, if the FX were to continue to depreciate during the second quarter, we could see a similar type of impact in your leverage from hedge accounting as well?

Yes. Well, the hedge accounting, Christian, it will too continue until, obviously, the bonds are settled. But again, when you see, for example, the BRL730 million of net debt going up. The other side is a reduction on our equity, on our net [indiscernible] in our equity. So this number does not fall through our P&L and does not require any cash. So, and obviously, when you see this increase, you can expect, and this is happening. The accumulation of cash from Oxiteno exports in our international subsidiary Ultrapar international. So it is -- I mean if there was no hedge accounting, obviously, this impact would be felt in the P&L, since there is a hedge account. The impact is in the equity part of the balance sheet, and the impact is in the cash being mounted up in our international subsidiary. I mean, summarizing all that, we're not going to have to buy U.S. dollars at BRL5.5 or BRL6 or whatever to settle out the bonds. I mean this is what is very important. We're not taking money from our cash to settle the bonds. The settlement will be coming from exports that are being performed by Oxiteno over the years.

Our next question comes from Frank McGann with Bank of America.

Okay. Two questions, if I could. One, I -- and perhaps I just missed it, but I didn't see the exact quantification of how much the inventory loss was included in the quarter if you have that number? And then in the UltraGaz, the increase in EBITDA was really quite strong. So I was wondering if you could provide just a little bit more clarity on what really drove that?

Frank, thanks for the question. I hope everything is fine with you. Well, inventory loss is normally. I mean, after prices became all volatile in Brazil, I mean, we basically decided to, and not necessarily, talk about the impact of this movements because it became a very recurring impact. But I think it's fair to say that in that particular quarter, it's being, let's say, such a dramatic price drop that we talked about that in our previous call, unfortunately. So, the impact is in the vicinity of BRL100 million. In terms of inventory losses in the first quarter. As for the LPG, basically, there has been a few important, I would say, tailwinds for UltraGaz. I think the first one was the increased demand for bottled LPG, especially in the end of the quarter -- in the end in the last two weeks of March. People kind of piled up their LPG bottles, afraid that doing, let's say, social isolation period, they're going to be without LPG for cooking, specifically. So, this helped results in one hand. And the expected reduction in terms of volume for bulk hasn't been as bad as we were expecting. In fact, in the first quarter, we haven't seen any reduction in bulk LPG. In general, the demand continues strong for bulk as well in the first quarter. In addition to that, the cost of LPG came down. And therefore, there was also a margin expansion opportunity with the LPG costs coming down.

Our next question comes from Luiz Carvalho with Banco UBS.

I have one question that I referred to Fred actually during the Investor Day recently about capital allocation. I mean, due to the current environment, how do -- I mean, of course, the more capital allocation strategy of the company is long term, but how do you see this current environment? And potential changes in some of the business sectors could change? How I can say the plans and the strategy for the company to potentially, I don't know, divest in some of the assets and potentially invest in others, right? So just would like to try to get a better long-term sense in terms of the capital allocation strategy for the company amidst the -- all these changes that we are seeing?

Okay. Thank you, Luis. We -- I mean we had a clear direction. That clear direction is really to prioritize our positioning in the downstream sector in Brazil. So there are, of course, smaller initiatives through our -- to defect our CapEx and results -- operational results and the -- let's say, the triangle, which is Ipiranga, which regarding Ultracargo. As we have discussed during the today. Of course, we are trading down the CapEx for this year. And we are maybe more contingent upon what we see in the next several weeks. So far, as you have followed, except for Ipiranga, all other businesses are quite resilient throughout the crisis. So our views continues to be the same. We have significantly reduced the capital allocation as far as investments in -- for Extrafarma and for Oxiteno. Extrafarma, now it's much more in the, let's say, optimization cycle in our [indiscernible] low performance stores and turning into positive cash and positive EBITDA terrain for -- a couple of quarters now. I will now -- I think, of course, having ended a long and deep investments cycle ramping up and the wells going fine in our steel available capacity in Brazil. So it's a company that really can increase its results with, let's say, maintenance, if you will, type of CapEx. So that's what -- that's how we see what we have now. And obviously, there is -- as far as there is refining opportunities and also natural gas. I mean we're -- we continue to investigate, continue to analyze, obviously, there's a lot of fog now regarding these business plans, business cases. But again, structurally, we don't think there's any major change in the validity of our views that there is a good case for refining in Brazil. There's a good case for when Petrogas privatize the good natural gas chain. There's probably some parts of the value chain, which we may be able to play, and may be able to play with differentiating conditions. But of course, this whole -- any decision, any major decision now. It's obviously depending upon how the current credit unfolds. No change to this directionally in the strategy, but of course, fine-tuning of movements and times, and obviously, a clear sense of cash preservation in that road map.

Okay. Thank you. Thank you very much.

This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Pires for any closing remarks.

Okay. Well, thank you everybody. Thank you all for participating in our quarterly call. So I hope to talk to you all again in early August. Thanks very much. Stay safe. Bye-bye.

Thank you. This concludes today's Ultrapar first quarter 2020 results conference call. You may disconnect your lines at this time.