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Ultrapar Participacoes SA (NYSE:UGP)
Q1 2020 Earnings Call
May 14, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Frederico Curado -- Chief Executive Officer

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 Issues] 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% are working remotely and surprisingly I think this is the experience of many companies who have quite high efficiency, based the IT infrastructure working beyond better than what we expected. So it is doing quite well. And, of course, our operational staff, they have been doing -- those guys, they are in the front line, they have been doing an exceptional job with dedication and discipline and we have here in Brazil a lot of increase [Phonetic] in mobility difficulties with mayors and governors who are changing rules everyday, but they have really gone the extra mile and all of our operations are ongoing and without any interruption. So far, I think we can say that we have managed to overcome the difficulties quite well with resilience and relative success, but let me comment as well a little bit more on each of our businesses.

So starting with Ultragaz, we saw some reduction in LPG volumes in the bulk segment, this is more to small and medium-size enterprises, but on the other hand, we have seen growth in households, in consumption households and margins have been quite stable. So, so far so good for Ultragaz. Ultracargo, a similar situation, some reduction in movement of cargo, but the take-or-pay storage commitments they have, -- they have remained firm. We have had proactive negotiations to of course ease some payment conditions, but, again, Ultracargo has shown as Ultragaz has, a strong resilience throughout the crisis so far. Oxiteno, we have seen reduction in sales in some segments specifically in painting [Phonetic], in oil and gas and also automotive. On the other hand, the agribusiness [Technical Issues] markets they are quite solid including some actual increases in volumes and good margins. So the company has also benefited from the favorable exchange rate. So all the costs is in reais, of course, and translated to dollars, they are lower now and also the drop in Santa Catarina [Phonetic] projects, more specifically ethylene which is a major raw material for Oxiteno. So that's another business, which has been quite resilient so far throughout the crisis.

Talking a little bit about Ipiranga, this is clearly the business which has been more susceptive [Phonetic] by the contraction of economic activity. We have seen a drop of 30% in volume more concentrated in Otto cycle with gasoline and ethanol. And those volumes, they are getting a little bit better in the last few days, but there is also some pressure on margins especially in ethanol that we have seen of course due to the strong reduction in demand. So Ipiranga has been working quite diligently to support its network of sellers both directly. So Ipiranga has shown some flexibilization of contractual conditions -- direct contractual conditions with resellers and also supporting them indirectly with the banks so they can really get some credit lines for working capital. So that support I think so far has been very, very efficient and the network is still solid.

And finally commenting on Extrafarma. We have about a little bit less than 10% of our stores of our network as stores are closed. Those are the stores which are in shopping malls. All shopping malls in Brazil or most of them are shutdown. So, of course, there is a reduction in sales regarding those stores. On the other hand, we have will seen higher demands in the 90%, 93% of our network, which are regular operation. So when you consider revenues per store, you see actually better volumes, better sales than last year and solid margins as well. So I think the strategy that we have been endeavoring for the last 12 months, 15 months, 18 months I think is paying off now. So we have closed the low performing stores, a lot of actions toward cost reduction and improvement of our infrastructure. So, clearly, positive results in that front.

So regarding liquidity, we have a very comfortable position at this stage. We did reinforce our cash with three lines of new loans, short-terms loans of about BRL1.5 billion. So that's an safety cushion to face the crisis. As far as late payments go, we have seen some increase which obviously was expected, but at acceptable levels, at manageable levels and we are closely monitoring those levels. So again, so far so good on that front as well.

And turning a final word on social support, a lot of initiatives we have concentrated our efforts in those communities in which we operate and also focusing on infrastructure of the health system. So we have invested -- co-invested with some other companies and always trying to have an operational partner, so like a reference hospital Grajau [Phonetic] for example here in Sao Paulo to give one example. In construction of field hospitals and also donation of the products, materials and equipment to those hospitals. So besides that, we have also undertaken several ancillary actions like granting few discounts to health professionals and support truck drivers, donation of basic food products and LPG [Phonetic] to underprivileged communities among among others.

So, thank you so much. A short -- a good first quarter. We're going through the crisis with of course a lot of determination. We're preserving our workforce, not laying people off, seeking to sustain of course, our resources and above all, of course, ensuring the continuous supply of our services and products to the population of Brazil. So with that, over to Andre and of course, I'll be available at the end for the Q&A. Thank you.

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Well, thanks, Fred and good morning everyone. Before we discuss the performance of our businesses, I'd like to highlight some important aspects of our first quarter 2020 results. Last year 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 Otto cycle sales compared with the first quarter of 2019 reflecting the impact 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 has been better than planned. Oil prices during the quarter were extremely volatile largely because of the sudden drop in 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 by 4% compared with the first quarter of 2019 mainly due to the initiatives for reducing SG&A, which Ipiranga has been implementing since 2019. Ipiranga's EBITDA amounted to BRL480 million, a decrease of 20% compared with the first quarter of 2019. This was mainly the result of lower sales volume and the impact from the drop in prices I already mentioned. These factors are somewhat offset by the reduction in expenses.

I would also like to mention that in April, for the sixth year in a row, Ipiranga and am/pm received from Folha de Sao Paulo newspaper The Best of Sao Paulo award in the Service Station and Convenience Stores categories. This is particularly important recognition for us and is indicative of the efforts we make to offer high-quality products and services to the society. Given the impact of the pandemic on Ipiranga's volumes up to now, we have seen a significant decline in Otto cycle sales. Diesel sales has been less affected since a good part of the supply chain and therefore, cargo transportation continues to operate normally. Volume trends are likely to be unchanged while restrictions on the mobility of people and social distancing in Brazil remain in place. As the margins between ups and downs since the end of March, fuel prices have fallen directly impacting margins over the short-term due to inventory losses. These losses may be greater or smaller depending on how fuel prices behave in the weeks ahead.

Now moving on to Slide number 6, at Oxiteno, sales volume of specialty chemicals was stable compared to the first quarter of 2019. This was due to the increase in sales to the Crop Solutions and Home and Personal Care segments, offset by a reduction of 6% in exports. Reduction is mainly due to lower solvent sales to Asian markets already impacted by the pandemic during the quarter. We had a slight increase of 2% in sales volume of commodities driven by exports. The Pasadena plant reported a 31% increase in sales volume in the quarter with the ramp up of its operations. Oxiteno's results in the quarter benefited from improved contribution margins in U.S. dollars per ton and driven by the reduction in the cost of key raw materials and the devaluation of the real. SG&A was 13% higher in the period due to increased expenses with freight and the impact from foreign exchange rate appreciation [Phonetic] in our international operations even considering the initiatives under way to reduce expenses at Oxiteno.

Results were also boosted by a non-recurring tax credits of BRL71 million booked in the first quarter of 2020. As a result, Oxiteno's EBITDA was BRL193 million in the quarter. If we exclude the effect of the tax credits, EBITDA was BRL122 million, an increase of 207% over the first quarter of 2019 for the reasons I have just described. Looking at Oxiteno's performance in this current quarter, prospects are for volumes reduction for some segments that are more severely impacted by the pandemic such as coatings and oil and gas. However, other segments are more resilient such as the Home and Personal Care sector and Crop Solutions. Nevertheless, the positive effect of the foreign exchange rate appreciation [Phonetic] on Oxiteno's results in reais combined with the resilience of unitary dollar margins indicate an expansion in EBITDA compared to the second quarter last year.

Moving on to Slide number 7, sales volumes at Ultragaz in the first quarter of 2020 increased by 7% compared with the first quarter of 2019, better than the market as a whole where volumes are up by 5% in the period. Ultragaz saw an improved market share in both bottled and bulk segments. In the bottled segment, volumes rose by 7% year-on-year largely driven by stronger demand in the final weeks of March as a result of the pandemic. There was a particularly strong growth in sales to the Midwest and Southeast regions of the country. In the bulk segment, sales volume was up by 6%, with increased sales to industries, condominiums, and special gases.

SG&A fell by 4% from the first quarter of 2019 largely due to the efficient expense control and in spite of increase in freight expenses. Ultragaz EBITDA amounted to BRL147 million. That's an increase of 34% compared with the same quarter in 2019 due to higher sales volume and SG&A reduction. For the current quarter, we are experiencing a reduction of sales volume for the bulk segment mainly to the small and medium-sized companies, which are primarily affected by the pandemic. On the other hand, falling demand in the bulk segment has been partially offset by soaring demand for residential LPG with the scenario of the trend in results for the current quarter remains the same as in the first quarter of 2020.

Let's move on now to Slide number 8 talking about Ultracargo. Ultracargo reported an increase of 20% in average storage compared with the first quarter of 2019 due to the expansion in tankage capacity at the Santos and Itaqui terminals with greater fuel movement as well as greater handling activity at Suape and Aratu. As from this quarter, we are also providing data for cubic meters sold at Ultracargo. We have included this information to align the market disclosure with the KPIs we track internally allowing a better visibility of the evolution of the results. Cubic meters sold is an important metric at Ultracargo since it captures information on the turnover of products in the tanks, more appropriate fuel operations.

Net revenue at Ultracargo was BRL163 million in the quarter, 29% greater than in the first quarter of 2019 due to tariff adjustments and new contracts with clients. We also had an increase in average storage following the capacity expansion in Santos and Itaqui. Regarding cost and expenses, we had a combined increase of 9% due to increased expenditures with payroll and maintenance mainly due to the increase in capacity in Santos and Itaqui. We also had a positive impact from a BRL4 million reimbursement of compulsory loans made to Eletrobras in the past years. In the quarter, EBITDA amounted to BRL91 million equivalent to an expansion of 52% compared with the same quarter of 2019 due to greater handling activity and the rationalization and dilution of costs and expenses. EBITDA margins in the quarter were 55%. Over the course of the first quarter, Ultracargo brought on stream more than 18,000 cubic meters of tankage at Itaqui terminal, the project's second expansion phase. With this, we see a continued trend of solid and consistent results over the forthcoming quarters.

Moving on to Slide number 9, talking about Extrafarma. Extrafarma ended the quarter with a network of 411 drugstores, a net reduction of five stores compared with the first quarter of 2019. Of the total stores in the network, 40% are currently in the ramp-up process. Gross revenue in the quarter was BRL521 million, 5% lower than in the first quarter of 2019 due to the decrease of 7% in the number of stores and to lower sales to the wholesale segment impacts, which were partially offset by ramp up in revenues of new stores. Gross profit was BRL145 million. That's a 2% year-on-year increase equivalent to a gross margin of 28% reflecting better overall margins and richer sales mix.

SG&A was down by 6% in the quarter thanks to initiatives adopted to improve productivity, the reduced number of stores and logistics improvement notably the optimization of personnel expenses and the opening of the distribution center in the Greater Sao Paulo region. With this, EBITDA at Extrafarma was BRL9 million due to the operational improvements made over the past quarters and to better margins. It is worth remembering that in the first quarter of 2019, we had a non-recurring tax credit of BRL9 million. So the increase in EBITDA was effectively BRL17 million in relation to the first quarter of 2019. Pharmaceutical sales tend to be more resilient in times of a crisis as drugstores remain in operation. Currently, about 30 Extrafarma stores, largely those located in shopping malls are closed and therefore are impacting our overall sales. However, we remain confident on the continuation of better results on a recurring basis versus the same period of last year.

Moving on to the consolidated numbers at Ultrapar on Slide number 10. Net revenues was BRL21 billion, 3% higher than in the first quarter of 2019 with revenue growth across all the businesses, but Extrafarma. EBITDA reached BRL880 million in the quarter, an increase of 12% compared to the same period of 2019. If we exclude the nonrecurring tax credits of BRL71 million at Oxiteno, EBITDA was BRL809 million, a 3% increase in the quarter due to the growth of EBITDA at Oxiteno, Ultragaz, Ultracargo, and at Extrafarma. We posted a net financial expenses of BRL168 million in the first quarter of 2020 compared to a practically neutral financial result in the first quarter of 2019 when we registered important gain from a mark-to-market of exchange rate hedging instruments. The FX volatility in the first quarter of 2020 led to extremely atypical and important positive and negative impacts.

The main impact came from a negative result of a mark-to-market of a zero cost collar hedging instrument contracted in the first quarter of 2020 to protect Oxiteno's operating margins in reais against the volatility of the U.S. dollar exchange rate. Net income was BRL169 million, 30% less than in the first quarter of 2019 due to higher financial expenses despite an increase in EBITDA and the tax credits of Oxiteno. Capex was BRL350 million, an increase of 31% compared with the first quarter of 2019. These investments were made prior to the decision to cut our original investment plan by 30% announced in early April. So the trend will be for lower capex for the coming quarters. The highlight for the period was the cash generation from operating activities of BRL900 million. Total operating cash generation was BRL731 million, an 184% increase over the first quarter of 2019.

Moving on now to Slide number 11 to talk about our debt profile. We ended the quarter with a leverage ratio of 3.27 times measured by net debt to EBITDA for the last 12 months. It is worth mentioning the impact of the exchange rate variation of the bonds in the net debt equivalent to BRL730 million. Excluding this effect, the leverage would have been 3.06 times. To better explain this impact, we have to issue bonds in the international market with protection via hedge accounting instruments based on future exports from Oxiteno. Consequently, this portion of the debt fluctuates according to currency variation, we generated an increase of BRL730 million in our net debt. However, this increase does not have a cash impact since as exports are performed, they revert into cash in U.S. dollars accumulated abroad for the future settlement of this bond in 2026 and 2029.

As from the first quarter of 2020 with the introduction of IFRS 16, we started to consider leases payable in the calculation of net debt contributing to an increase in leverage. It is worth to remember that these leases are not bank debt. We came to the end of the quarter with a cash position of BRL7.2 billion. This was boosted by the cash generation during the period and additional credit lines. In addition to the preventive steps taken to mitigate the impacts of the pandemic and to which Fred has already alluded earlier, now in the financial part, we announced in early April a 30% reduction in that 2020 capex plan as a measure to preserve cash. We're also optimizing expenses across all our businesses.

In addition, we have strengthened our cash position by raising a further BRL1.5 billion in credit lines. That's about BRL200 million in bank credit lines drawn in March and BRL1.3 billion in promisary notes which was incorporated in our cash position in early April. Both lines mature in a year. This was a preventive step to help us navigate this period of uncertainty and at the same time secure our financial liquidity. In addition, this cash support was crucial for putting together a comprehensive package for assisting our partners along Ipiranga's value chain. In turn, it gives additional soundness to the Brazilian fuel distribution system as a whole. With this, I conclude my presentation. We can now begin the Q&A session. Thank you.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Christian Audi with Santander.

Christian Audi -- Santander -- Analyst

Okay, thanks. Hi, Fred and hi, Andre. 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 so your interest may still be there, but I was just wondering, what's happening to the process, please. Then 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're seeing from the white flags. They had proven resilient in the past at the beginning of this year, has 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, I know that you had introduced a number of initiatives to cut SG&A costs across several of your businesses and 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. Thanks.

Frederico Curado -- Chief Executive Officer

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 you should prioritize capital allocation in the downstream sector in Brazil. So, of course, our port infrastructure. The infrastructure also you know in 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.

Christian Audi -- Santander -- Analyst

Thanks.

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

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 upsides from that.

Christian Audi -- Santander -- Analyst

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

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Yeah, clearly, clearly. We can expect this coming more from Ipiranga clearly.

Christian Audi -- Santander -- Analyst

Okay and going back to Ipiranga on the white flags, 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?

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Christian, 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 costs a 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 this 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 surface. So it's a tale of two stories to be honest. 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 resilience especially on the ethanol markets I would say.

Christian Audi -- Santander -- Analyst

Okay and last clarifying point on leverage you explained very well how your hedge accounting impacted the increase in net debt to EBITDA. This hedge accounting 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?

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Yeah, well, the hedge accounting Christian, it will 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 [Indecipherable]. So this number does not flow through our P&L and does not require any cash 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. I mean if there is 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 5.5 [Phonetic] or 6 [Phonetic] or whatever to settle all 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.

Christian Audi -- Santander -- Analyst

Thank you very much Fred and Andre.

Operator

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

Frank McGann -- Bank of America -- Analyst

Okay, thank you very much. 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, it 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?

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Hi Frank, thanks for the question. Hope everything is fine with you. Well, the inventory loss -- normally, I mean after prices became more volatile in Brazil, I mean we basically decided to 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 is being, let's say, such a dramatic price drop that we talked about that in our previous call in Portuguese. 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 -- the end of -- 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 this LPG cost coming down.

Frank McGann -- Bank of America -- Analyst

Okay, great, thank you very much.

Operator

Our next question comes from Luiz Carvalho with Banco UBS.

Luiz Carvalho -- Banco UBS -- Analyst

Hi Andre and Fred, thanks for taking the question also in the English call. I have one question that I read it to Fred actually during the Investor Day recently about capital allocation. I mean, due to the current environment, how -- 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 change in some of the business sectors could change, how can I say, the plans and the strategy for the company to potentially I don't know divest from some of the assets and potentially invest in others. So just would like to try to get a better, more long-term sense in terms of the capital allocation strategy for the company amid all these changes that we're seeing.

Frederico Curado -- Chief Executive Officer

Okay, thank you Luiz. I mean we have a clear direction, a clear direction that is really to prioritize our positioning in the downstream sector in Brazil. So there are, of course, more initiatives to defer [Phonetic] our capex and operational results in let's say the triangle, which is Ipiranga, Ultragaz and Ultracargo as we have discussed during the Investor Day. Of course, you know we are trading down the capex for this year, maybe more contingent upon what we see in the next several weeks. So far -- as you have followed, except for Ipiranga, all other business are quite resilient throughout the crisis. So our view continues to be the same.

We have significantly reduced the capital allocation as far as investments for Extrafarma and for Oxiteno. Extrafarma now is much more in the, let's say, optimization cycle, getting rid of the low performing stores and turning positive cash and possibly EBITDA terrain for a couple of quarters now and Oxiteno, of course, having ended a long and deep investment cycle ramping up in the [Indecipherable] 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 how we see what we have now and obviously, as far as, the refining opportunities and also natural gas and then we continue to investigate, continue to analyze, obviously, there's a lot of fog now regarding these business plans or 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 is a good case for when Petrogas privatize the natural gas chain. There's probably some parts of the value chain, which we may be able to play -- may be able to play with differentiated conditions, but of course, you know, this whole -- any decision -- any major decision, now it's obviously depending upon how the current crisis unfolds. So no change. No change 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.

Luiz Carvalho -- Banco UBS -- Analyst

Okay, thank you. Thank you very much.

Operator

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.

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

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.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Frederico Curado -- Chief Executive Officer

Andre Pires de Oliveira Dias -- Chief Financial and Investor Relations Officer

Christian Audi -- Santander -- Analyst

Frank McGann -- Bank of America -- Analyst

Luiz Carvalho -- Banco UBS -- Analyst

More UGP analysis

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