Petrobras Distribuidora S A : Conference Call Transcript 2Q21 Results

Petrobras Distribuidora S.A.

Webcast/Conference Call

2Q21 Results

August 11, 2021

Operator:

Good morning, ladies and gentlemen. Welcome to BR Distribuidora 2Q21 earnings conference call and webcast with analysts and investors.

We would like to inform you that all participants will attend the webcast and conference call as listeners only. After the presentation, there will be a Q&A session when further instructions will be given. Should any of you require assistance during the transmission, please request the help of an operator by dialing *0.

Joining us today are Mr. Wilson Ferreira Junior, CEO, and Mr. André Natal, CFO and IRO.

We would like to remind you that this meeting is being recorded. This presentation may contain forward-looking statements. These statements are the expectations of the Company's executives about future economic conditions, in addition to the sector where we operate, the performance and financial results of the Company, amongst other things. The terms 'predict', 'believe', 'expect', 'forecast'. 'intent', 'plan', 'project, 'objective', 'should' and other such terms are used to identify such forward-looking statements, which evidently involve risks and uncertainties seen or not seen by the Company, and do not therefore provide an assurance as to the Company's future results. These future results 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 of future development. The figures informed for 2019 onwards are estimates or targets.

Now, I hand it over to the CEO of BR Distribuidora, Mr. Wilson Ferreira Junior, who will deliver his presentation. The floor is yours. Mr. Ferreira Junior.

Wilson Ferreira Junior:

Good morning. I would like to thank you all for joining our earnings conference call for the 2Q21. I will start with a brief conversation, a brief presentation with nine slides.

Let us start with the first slide, with the highlights of the Company for the 2Q21. We have an EBITDA of R$115 per m³, and we also achieved the lowest level of expenses of R$51 per m³. We have also been expanding the number of service stations, 312 new service stations were added compared to the 2Q20, and we also added 1.6 p.p. in market share compared to the 2Q20.

Now, let us move on to the next slide. The most important event in the quarter was our follow- on one offer. This made BR Distribuidora a true corporation. Here, you can see the results of this work that changed our base as of the 2nd of August 2021, 1.155 billion shares is our total number of shares, 70,584 different share holders and 2,621 funds. More than 50% of our

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base consists of long shareholders, and we have almost 68,000 individuals in our shareholder base.

You can see the pie charts showing the number of individuals and legal entities in our shareholder base, as well as the domestic and foreign participation. 43% of our shares are in the hands of foreign shareholders and 57% with domestic shareholders.

Our liquidity almost doubled, reaching almost R$400 million per day. That was a very important transaction for BR Distribuidora, and also very significant for Brazil and for Petrobras itself.

On the right hand side, you can see that that was the largest transaction in the capital market in 2021, over R$23 billion the of demand and 160 orders in our book.

Petrobras was able to monetize R$11.4 billion of its participation of 37.5%, and you can see the evolution here in this chart, showing how BR Distribuidora has become a true corporation.

Now I am going to share the data for our quarter. First, I would like to reaffirm our commitment to becoming one of the most efficient companies in terms of expenses. We have had a decrease of almost 40% in expenses, getting to R$51 per m³ compared to 2019, the year before the pandemic, because that is a fair comparison, considering all the events that happened in 2020 with the pandemic. Our EBITDA is R$115 per m³, a 47% increase, and our debt over leverage was 1.4x in the 2Q21.

In the next slide, you can see data about our market and BR's participation. In fuel and sales, in April and May, actually more April than May, we still suffered the impact of the second wave of the pandemic, so there was an increase of 20% compared to the 2Q20, and a 3% reduction compared to the 2Q19.

In terms of liquid fuel, BR recovered from 2020 to 2021, there was a 28% increase, but there was also a drop of 3% compared to 2019. In the last 12 months there was an increase of 2% in the Brazilian market and 7% in the market served by BR Distribuidora, So BR Distribuidora has had a better performance here in this market.

And here in the right-hand side, you can see the months of April and May that the Brazilian market was hit hard, but there was an increase of 26%. And the trajectory of BR's market share in the quarter, we went from 26.9 in April to 29 in June. So we see important signs of a recovery in the economy because of the vaccination rate and the economic recovery that the fuel market is keeping up with. BR Distribuidora has benefited from that, growing in volumes and market share.

On the next slide, we see numbers of the market impacted by Covid-19. We can see the Otto cycle, diesel. In the chart, we see that 2021 was better than 2020, but the months of April and May were worse than 2019, which is the most important reference base that we have.

If we look at BR's total sales, including the month of July, we saw that the months of March, April and May were hit. In terms of personality, that is the lowest quarter of the year, but there was a good recovery in terms of total sales as well as market share.

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At the bottom of the slide, you can see the Otto cycle growing from April to July by 14%, actually considering both Otto cycle and diesel. And the benefits that we shared with our follow-on with the greater thermal dispatch in Brazil, we have reached 350,000 m³ of fuel oil in June 21. Compared to the month of April and May, these numbers more than doubled. The same behavior can be seen in aviation. There was a 70% increase in market share, so a recovery in the aviation segment as well.

So in terms of total numbers and in fuel, you see that our Company is well positioned, and also for aviation, but there were significant variations in our volumes, as you can see.

On our next flight, you can see the main projects of the Company. We talked about this during our follow-on offer. We have forecasted a reduction of R$250 million for 2022, additional reductions to be implemented in 2021. More than 300 action plans were established, with more than 50% of them already complete, with expected additional recurring savings of R$250 million.

In terms of transportation, our target is of R$90 million to be fully implemented in 2022. This is an expansion of the program started in 2019. We have implemented an optimization system called Control Tower, using artificial intelligence, and this is now being expanded. 45% of the logistics network has already been covered. We have already captured R$10 million in savings, and by the end of the year, we expect to have the transportation of our products to QAV, chemicals and non-wheeled forms to get to those R$90 million.

There are also some important aspects related to the package of retiring 250 assets in our property portfolio, with a partner already selected, at the final stage of due diligence. And this partner will make an important action on this.

We have made the direct sales of six stations, amounting to R$29 million, and we expect to sell another eight service stations in the 3Q.

In terms of logistic assets, we have identified 25 opportunities of optimization, either through sharing, retirement or other types of negotiations. We have a potential generation of R$130 million by the end of 2021, and we already have one asset negotiated at around R$22 million of cash.

ESGAS was also included in the privatization program by the government of the State of Espírito Santo, with divestments earmarked by BR for 2022. With this set of actions, we will have R$640 million in additional annual EBITDA.

On the next flight, you can see our trading. We had already seen in the market this need to complement our trading, and we are structuring our ethanol trading company, which is near completion, and also a derivatives trading company, which is near completion.

In terms of convenience stores, this process is being concluded at CADE, and we understand that, starting in September, we will be able to have our joint venture with Americanas starting operations.

Lubricants, we have modernized our lubricant factory with an increase of 70% of the productive capacity, 80% of those modernization and expansion have already been completed. We are reformulating our sales channels, establishing authorized dealers. 25%

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of the schedule has now been completed, and we are improving the source of base stocks imported directly by BR. We also have partnerships with suppliers to add more than R$120 million in 2022.

In terms of pension plans, we have a new plan structured and communicated to the workforce being analyzed by PREVIC. We expect members to start (16:20 TECHNICAL DIFFICULTY). This could bring us a potential reduction in actuarial liability that we currently have.

With these eight measures that I have just shared with you, we can add around R$640 million additional annual EBITDA to be fully achieved in 2022.

On the next slide, I would like to mention that in the quarter we implemented two important actions. The first one, the approval of the payout, our interest on capital for our shareholders. That was in addition to the R$700 million barrels already stated that will be paid, and the R$1.1 billion that was already paid this year.

So we have been remunerating our shareholders strongly and working hard to maintain value creation, considering the perspectives of the Company. R$614 million also in our share buyback program.

I would like to conclude by saying that in 16 weeks we have been developing our strategic review and our ESG vision. We have had three workshops with all of the directors and executives of the Company, with our Board of Directors taking part as well. We have reassessed the context of this scenario of our industry.

At the second workshop, focused on reformulating the strategy, detailing the main strategic portfolio choices, looking at BR of the future and validating strategic plans. And 10 days ago, we concluded the reformulation of our strategy, defining ESG vision and the changes to the organization and governance, breaking down our macro indicators and targets, and we are now defining our equity story.

And on BR Day 2021, on the 1st of September, we would like to share that with the market. We will have then the opportunity of sharing our long term vision for the BR with all of you.

I would like to thank you once again for joining us in our earnings conference call, and together with Natal, we are now available for questions.

Regis Cardoso, Credit Suisse:

Thank you for taking my question, and congratulations on your presentation. You were talking about the direct sales of ethanol, but I would like to hear from you about this broader regulatory discussion, the pertinent topics today within this context of changing the rules of flagging for service stations. Do you have exclusivity clauses in your contracts? And what are the effects that you expect from the direct sales of ethanol in terms of collection of distribution taxes?

And also, the public consultation about the reduction of penalties in cases of fraud in service stations. And there was also something about removing one decimal from the prices at the pump. Can you please tell us about these regulatory issues in a broader way, please?

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Wilson Ferreira Junior:

Sure. I will try to give you a broad overview on this, and then Natal and Henry, our Legal Director, can give you further information. This was an announcement that surprised all of us in the market, and it is probably happening as we speak.

But in general, this process has been able to sell, and it is something that can happen today. Consumers have the option of buying from white flag, or no trademarked service stations. The choice of consumers buying from these white flag stations is already possible. But BR is the network that grows the most because of the pack of benefits that we offer to consumers.

Consumers can rest assured about the quality of the product that is being sold in our service stations. There is a lot of confidence in terms of the quality of the products and services provided by our service stations.

You also have convenience services available, loyalty program and all of that, not only fuel, is something that is part of the value proposition, and consumers are very sensitive to that. And our goal is to offer a network that makes available to consumers not only the best product, but also the best service and the confidence for consumers when it comes to taxes and tariffs that are paid and so on.

This type of value proposition will create a new business model. It is a very clear one, and the relationship that we have with the dealers is a contractual relationship. This is an option that dealers do, a choice they make to offer to their consumers this differentiated value proposition in terms of quality of products and services.

But this is a bilateral negotiation that is guided by a contract with financial clauses that remain unchanged. If you look at the official data today, the difference in prices of fuel sold by white flag service station and trademark stations was of less than R$0.01 last month, and for diesel, less than R$0.04. So once again, this is a consumers' choice. They may choose to go to a widespread service station in order to save money, but that is not what they are choosing. They are choosing trademark service stations because they offer high quality products and services.

And of course, we respect all contracts that have been signed, and they have been signed to guarantee the offer of products and services of high quality, the services that we offer and the management of the network. We have a program of surveillance of deals to guarantee high quality of products offered to consumers. And of course, there will be a lot of debate about the provisional measures, which will only be put in force 90 days after the announcement, with all of the debates that will happen in the Congress.

And four BR, we have a competitive edge, because we have high quality of products and services offered. So we will respect the contracts and we will keep the same growth perspective for our network. We intend to keep our network differentiated and completely set apart some other white flag service stations.

Natal, do you have any comments about the direct sales issue?

André Natal:

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