Companhia Siderúrgica Nacional : 1Q20 Results Conference Call Transcript

Petrobras Distribuidora S.A.

Webcast/Conference Call

1Q20 Results

June 11, 2020

Operator:

Good afternoon, ladies and gentlemen. Welcome to Petrobras Distribuidora conference call with analysts and investors to present the results of the 1Q20.

We would like to inform that participants will be on listen-only mode. After the presentation, we will have a Q&A session, when further instructions will be provided. Should you need assistance during the conference call, please, request help of an operator by dialing *0.

Today with us, we have Mr. Rafael Grisolia, CEO; and Mr. André Natal, CFO.

We would like to remind you that this meeting is being recorded, and this presentation may contain forward-looking statements. These statements are merely the expectations of the

Company's executives about future economic conditions, in addition to the sector we operate in, the performance and financial results of the Company, amongst others things. The terms 'predict', 'believe', 'expect', 'forecast', 'intend', 'plan', 'project', 'objective', 'should' and other such terms are used to identify such forecasts, which evidently involve risks and uncertainties seen or not seen by the Company, and do not therefore provide assurance to the Company's future results. The future results of the Company's operations may, therefore, differ from current expectations, and readers should not solely rely on the information set out herein.

The Company undertakes no obligation to update the projections in the light of new information or future development. The figures informed for 2019 onwards are estimated on targets.

The 1Q20 earnings presentation for Petrobras Distribuidora will be delivered by the CEO, Mr.

Rafael Grisolia. Mr. Rafael Grisolia, you have the floor.

Rafael Grisolia:

Good afternoon, everyone. Andre, my CFO, my IR and my accounting team are here together with me, and we are following the entire safety protocol. Everybody is wearing safety masks, obeying social distancing. This is a different moment for society from the entire world, that this is a moment of crisis.

Our first message here on behalf of BR, we are in solidarity to the entire Brazilian society.

We have had almost 40,000 deaths. And this is not only a specific data. We are talking about lives. And now we are seeing the great importance human beings. Sometimes we see it as numbers, but these are not only numbers. We are talking about lives, and this is a crisis that is affecting mankind. And as an organization, we are taking this into account.

I will talk about the different steps and progress that we have made, and I will talk about our value agenda, and of course, the crisis impacts all the companies here, I would just like to say that when the crisis begins, as I always say, we are in the middle of a marathon rightnow. Therefore, a number of our initiatives are making progress that I would like to talk about some that are important and how they are important for the subsequent moment of the crisis.

Number one, at the end of 2019, we had carried out a transformational process, and this is beginning because we started this process between our employees and third parties. During the last quarter of 2019, there were more or less 5,400 people (staff). And today, we are talking about 3,700 people (staff).

This is an important figure when we start to understand the crisis. So our solid position has a strong underpinning that is the strategy regarding our organization. Our debts were maturing in the beginning of April and our financial team spearheaded by Andre where we have funding to roll out the debt. This was an old debenture that was focused on only one maturity date.

We had already worked on this before the prices, and it was important to resolve this and negotiate it.

It is also very important to mention and it was very important for the 1Q, and was to have within our initiatives regarding sourcing. We have all our trading areas, looking for alternatives, not only regarding our purchasing products and byproducts and also to see our import alternatives. This was important, and this is something that we will discuss in detail.

Another ongoing initiative regarding logistics, we optimized our transportation companies.

And this is important, we saw our figures, and I believe that we have made progress in this third initiative.

And we have a fourth initiative, that is managing expenses. Everything that had been done had to be reinforced after the crisis, and we also made progress in our pricing initiatives. Our entire team is strongly driven to quickly implement our pricing system.

When the crisis started, these are words that we always use in our management, and we decided to include as a motto. That would be "awareness", "responsibility" and "solidarity". And we said that we will continue using these three mantras regarding all the decisions that we made, regarding our customers, regarding our suppliers, regarding our team, that we cherish so much.

"Awareness" because this is a serious problem for society. Of course, this crisis is going to pass. We always believe on a positive side that everything ends, but we have to be aware that this is a problem. "Responsibility" that we have for stakeholders, our investors, our employees, our customers, our suppliers. And "solidarity" is an important pillar, I believe that is a strong pillar from human being. And as a company, this is a very important value for us.

As I mentioned, over 3,700 employees. We have 68% of them working remotely, and the rest are in the operations. And I would like to thank our team that is present in the operations, in all the areas, state, federal, municipalities, and they are working only in essential services.

They are also working with our resellers. They are also working with our convenience stores. So we have 95 bases and 99 aviation operations.

Therefore, I would like to thank the team that is working in the operations. And there is a new safety protocol, these recommendations from WHO, from our Health Ministry. Also, we are thanking our bases, not only the team that is working there, but all the entry and exit of trucks and truck drivers that have to go into our bases to take fuel to Brazil. They were also takingtemperatures, and were also adopting hygiene procedures according to the recommendations of the WHO and our Ministry of Health.

When we talk about solidarity, we would like to highlight that we are strongly focused on this. This is a strong value for BR. All BR culture is to serve Brazil, so we donated ethanol and fuel to universities, to Fiocruz and to the Red Cross. A recent partnership with Petrobras were also carrying out with donations to the governments, to municipalities. So this is the way we can cooperate.

Regarding the truck drivers, we take care of these customers that are customers of our resellers, and we have been very careful to guarantee whatever it is possible to show that they can have meals in the highways, also book online medical appointments. We have also made a great effort here in BR Distribuidora to be of support to these customers that are so important for our chain, because the truck drivers provide a great service to Brazil, because most of the fuel that is transported in Brazil is done through highways.

Also, BR has its headquarters in Rio de Janeiro, and we have supported the community that surround us. We have a partnership with Circo Crescer e Viver that allows us to promote the solidarity with the surrounding community and we give them also basic staple and other things that we can help them in terms of hygiene. This is something of solidarity.

The definition of crisis for us is still seeing a drop of demand. This is something that affects other sectors and also the drop of the price of commodities, fuel, and this also affects the price of byproducts and also our business and our matrixes. So there is a reduction of demand, and there is a reduction in the price of the commodity.

Regarding demand, we felt the first impact in the beginning of the crisis, and this was very strong, and we mentioned this in our release. And we do have a number of challenges that we are dealing with. But during the 20 days of crisis at the end of March, the impact was strong. So we are talking about a drop in the Otto cycle of 56%. The Otto cycle that is gasoline and ethanol.

The circulation of cars also dropped a lot. Diesel data represents a great drop. We identified that there was economic activity in the beginning of March, but subsequently because of the drop of the circulation of cars in the cities, there was a drop of 25%. Aviation, that is very important for BR, initially, had a slight drop, but now the drops are greater.

When we see the most recent data, it is obvious that these are data that we still have to confirm, if it is a trend. The volume of diesel, we can see that they are going back to pre-crisis levels. And in a certain way, this gives us confidence that we will go back to normal levels. So the resumption of diesel consumption is positive because this means that the economy is reactivating itself. And although we are the greatest distributor, this is a very good indicator and we can see that the economic activity is reactivating itself, and this is a good signal for all of us.

Regarding the Otto cycle. We see that there is a drop regarding pre-crisis. But far from the 55%, there is an improvement. But although there is a drop when we compare it to pre-crisis, that is 50%. There was a drop of 85%. We have seen recovery signals according to our last analysis.

Now, subsequently, after the crisis, we had stressed scenarios, and we studied this together with our Board. We saw the resilience of our cash flow and financial structure. We have low leverage. But during that moment, we worked with very stressed scenarios because this was something that we could see in terms of demand. This is why we strengthened the liquidity position of the Company, although we had carried out funding for the debt that matured in April. We also reinforced our cash flow of R$ 2.5 billion in order to guarantee more liquidity to be in a steady spot and to guarantee the resilience of our company.

When we thought about expense management, we started to control CAPEX, and we started creating targets of expense management and we counted with the conservative financial management that we have always had in the Company. We submitted to the Board and to our shareholders because until we do not know what the results will be, we are requesting a postponement of the payment of dividends.

As soon as we have this visibility, we intend to pay out the JCP of R$500 million and the additional dividend of R$500 million that are part of our good financial practices, that is to maintain our leverage at a good level and not to retain cash in the Company. Nonetheless, we have to have visibility of refusal results to guarantee the long-lasting existence of the Company.

Within the mantras of "awareness" and "responsibility", that is the underpinning of a very important ecosystem not only of our employees and our team, but also our suppliers, Petrobras' refineries, the ethanol producers and biodiesel producers, our carriers that work with us, our resellers, our TRR, the aviation customers, industrial companies, transportation companies, urban transportation companies. We are always making the best decisions, taking all of them into account. And this is important because this is "solidarity".

And this is something that is important. We did not declare any force majeure in any of our contracts, for example, in our labor unions as well. So we have been very careful. And we do know that BR is responsible and enhanced financial structure to guarantee that we are able to help our ecosystem because this is a very important point of value. And when the crisis is over, I believe that we will be strengthened.

Regarding our resellers, of course, everything that we did with our customers was always a specific case by case, every situation of each customer of each reseller of each industry that underwent the different financial situation, we were very careful for each case.

We are always finding the best solution, taking into account the responsibility that we have with our customers, suppliers and investments, we were very careful as well to work as partners with our resellers to provide them the best sales conditions and quick drops of refinery prices of the international market, we were very careful to convey these prices. And also bearing in mind the financial soundness of our customers because sometimes our customers have a very low level of activity. So therefore, we are strongly focused on this.

Any results of market share please us, but what was important was to support our customer base and our resellers, because we have different economic groups. You have small, medium, great resellers, and we were very careful in supporting this according to our pricing strategy. And because in reality, there was a great impact because there was a drop in the price of commodity.

We are talking about R$ 700 per m³. And those that follow us know that our margins are around R$ 150 m³. A drop like this in the prices of the refineries that are reflected on the international market, these are drop that have never been seen. And although with certain recovery during the month of June, we still continue focusing on this.

Our responsibility as BR is to guarantee that our ecosystem will provide this crisis and will exit this crisis as a strengthened business regarding all of our customers. So this is a moment of crisis, a moment of crisis management. We are strongly focused on this, and we are still thinking how we are going to come back and following up the statistics of new cases and the new numbers of debt and the occupation of IT used in order to see how this new reality will be from here on.

Despite the crisis, we have to remember our image, the Petrobras brand, BR distributor. So we have an image that reflects the concept of energy that we want to convey and we want to give to Brazil and green and yellow characterizes our company. We also are ending the divestment of the CDGN. We created a partnership in order to succeed. Also a partnership with Golar Power in LNG. We also have initiatives from here on.

And recently, we are providing support to resell. We created a partnership with Lojas

Americanas, B2W in terms of payments. Electronic payments, we gave the reseller the opportunity to have a contactless payment option, which is very important in our relationship with the group Lojas Americanas. We identified a very good opportunity that we offer to our retail and we will be following their results in the upcoming quarters.

I would like to thank, again, our employees that are working remotely and the ones that are working in our operations. We know it is not easy to work remotely because you have your family, you have your children around you. And I believe that we have interacted a lot through lives, through testimonials. Therefore, I would like to thank everyone.

And once again, we can go to our Q&A. Andre will help me.

Andre Hachem, Itaú:

Thank Rafael for your presentation. I have two questions. The first is regarding the competitive environment. I want to know how the independents are going to behave? Do you believe that they will be weak because they do not have a distributor supporting them? I would like to know what your perception about the competitive environment? And how do you see the progression of the volumes in the past month?

And I want to understand how you see the soundness of the network? Is there a risk or is there a deterioration of maturity when we see the 2Q? So how do you see your portfolio of accounts receivables for the 2Q? And I would like to know about your view in terms of your industrial and aviation customers?

Rafael Grisolia:

Andre, this is Rafael. Thank you for your questions and for participating. Regarding the competitive environment, our interpretation is that it is a market that post-crisis will have a lower demand. And the situation takes into account the price dynamics. And here, we have