Vibra Energia S A : Conference Call Transcript 3Q22

Vibra Energia S.A.

Conference Call Transcript

3Q22 Results

November 11th, 2022

Operator:

Good morning, ladies and gentlemen, and welcome to Vibra's 3Q22 earnings conference.

This conference is being recorded, and the video may be accessed at the Company's website, www.mziq.com. The presentation is also available for download.

We would like to inform you that all participants will be connected in listen-only mode during the presentation. Later, we will open the floor for questions, when further instructions will be provided.

Before moving on, I would like to reinforce that forward-looking statements are based on beliefs and assumptions of Vibra's management, as well as information currently available to the Company. These statements may involve risks and uncertainties, as they refer to future events and, therefore, rely on circumstances that may or may not materialize. Investors, analysts and journalists must consider that events relating to the macroeconomic environment, the industry and other factors that may lead to materially different results than those expressed in such forward-looking statements.

Joining us for this conference are Mr. Andre Natal, Interim CEO and CFO of Vibra as well as a few of the Company's executives. Let me now turn it over to Mr. Andre Natal, who will begin the presentation. Please, Mr. Natal, you may proceed.

André Natal:

Good morning, everyone. It's a pleasure to be here to talk about our 3Q22 earnings results. We will be sharing a short presentation, after which my colleagues and I will be available to answer any questions you may have.

So in this first slide, we have the highlights of this quarter. Our overall adjusted EBITDA was R$925 million. And over the course of the presentation, I will talk exactly about the context we faced during this quarter, especially with regard to changes in commodity prices, owing mostly to the changes in tax structures.

And to us, this result clearly shows the Company's resilience as well as the industry's resilience in the face of these price fluctuations and overall volatility to maintain quite substantial results even in the face of the most challenging context. When we look at the overall volume of sales during this quarter, we reached 10.3 million m³. This was a 12% increase over 2Q22. Obviously, there's a seasonal aspect.

But even when we compare to last year, our volume essentially remained flat with the addition that last year, we had consumption of 600 m³ in 3Q21. So correcting for the effect of thermal plants, we also see significant growth in the year-over-year comparison.

The adjusted EBITDA, combined with that volume, provided us an adjusted EBITDA margin of R$90 per m³. I can tell you a little bit of the background. But if you remember, we used to have results of about R$60, R$65 per m³ in favorable environments. And today, against a

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very challenging context, we are seeing R$90 per m³, which shows how this business hasevolved in terms of efficiency and how well it is expected to do in the next few years.

On the other hand, when we look at the normalized EBITDA margin, which is another indicator that we provide to the market systematically, we see in this number, R$250 per meter m³, the highest normalized EBITDA margin for the Company. So the result of this loss in inventories, and we will be talking about the magnitude of that later.

On the other hand, I think this result shows our pricing power and our ability to coordinate our margins and pricing and the entire operational and commercial operations of the Company within our composition to really face up to the changes in commodity prices. In long time horizons, we consider ourselves as neutral in terms of buyer and seller of these commodities. So our position is neutrally zero.

And I think that we can show during this quarter that we can act quickly to face up to these effects. And we did report the highest normalized result for this quarter, and we believe that we can give this visibility to our investors to help them understand precisely what's behind the underlying result; of course, excluding the effects of these changes in commodities. This is a quite significant result in our opinion.

Our results are still very efficient in the Company. We are still in the trend of a base 0 budget. Even before privatization, we have invested about R$2 billion in terms of recurring annual revenue, which has removed us from the position of high cost and narrower margin. So we are now reversing that position, making the most of our scale and our power to generate results.

Lastly, I would like to highlight our service stations results, which was the same as the previous quarter, but we added in that nearly 200 service stations, which is a very significant rate within the industry. And we feel that this is indicative of a number of things, including how much investors in Brazil have realized Vibra's value proposition and how much we have added to their business. So this increase is, in a way, a way to secure future market share. So as we consistently outperformed the market in the opening of service stations, we have been increasing our footprint, which the market has been feeling. And this is what has translated into our sales figures.

So moving on, we have a longer history. Everyone who has kept track of this industry knows of this history. So looking at our volume, and if we had a similar chart for our market share, we would see a consistent improvement, which is not a product of asymmetric behaviors or price wars. It's actually a consequence of our operation in the market and the way we add and create value for our clients and our clients' clients, which has earned us this place of preeminence in the market. We do not want to improve in an artificial way.

From the expenses' perspective, we continue to see those expenses within the expected and even below our targets. We had very aggressive expense reduction targets for this year. We were even able to exceed what we had in 2020. And we have been monitoring month by month in greater detail all of those initiatives. And the net balance of these initiatives has been an operating expense even below the targets we had for the year.

Lastly, our EBITDA. As you can see, this is our reported EBITDA. So it includes the effects of the losses and gains in stock, losses and gains in several aspects, but it's definitely clear how consistent the Company has been increasing its results, which is now obtaining significantly better results than it was just a few years ago, all of that without foregoing its resilience in the market. So we see that this increase in margin is a product of our ability to stay at the cusp and making our customers realize the value of what we are doing.

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Next, we make it absolutely clear the effects that we faced over the course of this quarter, which made this a really challenging quarter, especially because of the dramatic shifts in prices. Part of these shifts are connected with the international fuel pricing movements, which are still significantly volatile, less so than they were in the second and first quarter, but still significantly above the historical average. But the most substantial part of this decline in prices, which has come to as high as 40% in a few products, has to do with the tax shift, especially because of the rise in prices that we had been seeing until that point.

In June, we saw first a change in the PIS/COFINS contribution over a few fuels back in March. And then over the course of June, we also saw the reduction in PMPF's benchmark price, which became a moving average for 6 months, and also a decrease in the highest ICMS, the interstate goods and services tax, which affected our EBITDA margin, which are about 100, 120, but we saw decreases in gasoline prices that were beyond R$3,000 per m³. So several times our entire margin.

So if the same movement took place over the course of the year in a gradual way, this would be significantly different in the way we would respond as compared to when it takes place the way it did. And this chart shows how dramatic that shift was. And even still, it seems to me that the Company was able to face up to the situation by capturing margins and better understanding pricing, and therefore, being able to mitigate this effect, generating a still consistent and considerable result.

In the next slide, we talk a little bit about our retail operation. We have over 8,000 points of sale in our retail structure. And we believe that even though this is already the most significant operation in Brazil and has reported very significant results over the past couple of years, we are convinced there's still a great potential to explore in the quality of our operations and standardization of a customer journey as well as the addition of value using convenience stores, we believe that we found the right partnerships in that area, and we believe there's huge potential to be explored with initiatives that are still not being well seized here in Brazil when compared to other countries in Latin America.

So here, we highlight a few of these initiatives, but the Company is truly engaged in a very deep strategic effort in the sense that we want to look at ways that we still have not followed. And we do believe there are a number of opportunities that we could seize.

In branded gas stations, we added 51 during this quarter. I have already talked about the change year-over-year, and a very consistent track record for several years now. Again, this shows that everything that we say on the top and all the strength that we have with the Company's retail is actually translating in a perceived value by resellers, both that work with us and do not, but who begin to join us via these negotiations.

Something else that's important to highlight, as we saw in the previous slide, is much of this shift in prices, especially given the change in taxes, affected gasoline. So therefore, also affecting ethanol. So 100% of this shift is focused on retail because there's virtually no sale of that in B2B operations. So the losses that we attribute to the decrease in stocks, and this is just to put this into perspective. Our entire EBITDA for the previous quarter was R$1.6 billion, and this was an all-time high for the Company. And the EBITDA that we have for this year is higher than that alone. So R$1.6 billion is in resale. This effect obviously gives us a much more significant decrease in EBITDA.

Next, we talk about the B2B segment, which shows all of I just said. We also saw a loss in stocks, but it is still less concentrated because this was restricted to shifts that we saw, especially in diesel, which were much milder results because as they were connected to

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changes in prices and not so much in the changes in taxes, seeing as diesel already had taxrates lower than the ceiling that have been established. So our B2B operations remain on significantly high levels, and we were able to face up to virtually the entire shift in prices by broadening our margins in restocking.

Also, we have good news in aviation. We saw a significant increase in value of virtually 34% versus the previous year. So this was obviously the industry that took the highest toll from the pandemic, but we are already seeing the levels very close to what we have before the pandemic. So this really goes to show how thriving this industry is. We are seeing record- breaking results in this segment after the effects of the pandemic in 2020. Over the course of 2022, we were able to obtain such huge results. And I think this is striking, and it shows the resilience of our segment.

We went from a result of nearly a 90% decrease to a place where we have a very substantial EBITDA, which exceeds any result that the Company has had in the past.

The lubricant business is a business that we have been in for over 40 years with a very significant business operation. And this was spread between B2B and B2C before, but everything that we understand to be important in capturing opportunities in our core segments, and we understand this to be a core business for the Company, we still see huge potential to explore.

So in an effort to give more autonomy and visibility and speed up this industry, we decided to highlight this business along the same lines as other companies have who have even been doing corporate movements to really highlight or shine a spotlight in this industry. So we are trying to give more agility and more visibility to its results. We already have a significant operation in Latin America. Ours is the second best position in Brazil.

And the entire development that we achieved over the last 3 or 4 years was not visible to the market precisely because this was not a business that we would highlight in our reports. And we understand that it was important to give the market visibility of this business. And the year before privatization, this was a business that had R$170 million, R$180 million EBITDA. And only in the 9M22, we had a R$316 million EBITDA. So we can only think about the results that we can deliver in the year as a whole.

So this is a business of significant unit margins. This obviously has an important aspect in terms of increasing the CPV and the imports of access to raw materials. So there's a number of initiatives in terms of efficiency, but a number of initiatives from the sales and market perspective as well in the sense of opening authorized distributors, which have given a lot more focus in autonomy and direction.

In our sales bridge, we have better control of this channel in a better way to reach the client or the customer and to rightly position our products for end customers, which has translated into more opportunities to widen our margins. And we are now glad to be able to give more visibility to all of investors to these results that we have today.

Here strategic initiatives that we had over the past year were all within what we had established for the Company within the context of energy transition. This is something that is not up to us. This is something that is a trend for the entire world. And it's ongoing, and we will continue to develop, and after a strategic assessment that we had as a company also within our Board, which showed us that these were important initiatives that we needed to make to become an integrated energy company to be able to provide to these clients that we have had for 30, 40 years these solutions. And what we want is to be able to provide whatever source of energy these clients may require in the next few years. So although

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these are only small initiatives, only small moves, but they were only small moves becausethere wasn't really a company or an operation underway for renewable energy in Brazil.

And what we understand to be the end game of these moves is we are within Vibra creating this company be by integrated effort, we understand that we need to look at these trends by integrating all of them into a single business, which is what we call renewables. Of course, we have Comerc highlight in the first slide because this was the most significant investment because this was already consolidated and united many of the possible verticals in this type of business with distributed energy management trading. So it already combined all of the fronts where we already had an interest to operate. But obviously, we added other movements to this platform that the market already knows about. And we understand that so far, these were very successful moves.

So one of the advantages here or one of the purposes of opening up to this business was to show to the market that not only will we have thriving results in these businesses moving forward with strong EBITDA, but there's already an EBITDA that we are making and that perhaps the market is not pricing when thinking about Vibra.

So when we look at Comerc's at stake results and the results referring to Vibra's stake of 48.70%, we already see R$40 million. This is about half. So you can already calculate that's about R$80 million over the quarter. By running the numbers in a linear way, we can already have a very simple idea of a few hundred in EBITDA, which is what the Company is making today, were we to extrapolate to 3Q. So it's already an EBITDA level that seems very much dismissed when pricing Vibra and other companies.

Now another reason why we wanted to show these figures to you is to show that there's a huge pipeline of projects. So this is the starting EBITDA, but there's a significant set of projects that will provide for an increase, and a significant increase, in this business. We believe that this will virtually increase by virtually 5x what we had today.

And therefore, the total generation for the Company where we to combine all of these, here, we have a combined CG, and even solar and wind power sources. We expect to have a generation that's 5x higher than it is today in a very short period of time.

So these are the 2 things that we wanted to provide visibility to the market even so that the market can keep track of these projects over time, and these make up a significant part of the value that we believe this asset provides.

And we would like to highlight that this is still the beginning of the journey. We have joined Comerc in March, when we closed the deal, and in May we had the secondary. And since then, we have been looking very closely at all the potential synergies and exploring the best commercial, and other ways to explore those synergies. We have over 400 businesses that we closed together with Comerc, working with Vibra's clients, and we see a huge potential that's yet to be realized in this partnership.

Since we announced the acquisition, we can already see an increase in the number of clients in Comerc's management that's growing by over 40%. I would like to highlight that the integration of Targus, which was the previous trader that we began to call Vibra Comercializadora was absolutely successfully integrated, and we can hardly say who came from where. The companies are absolutely integrated, and results are very significant in terms of what we were able to accomplish and add to this company's book over a short period of time. So over R$400 million that were added to the Company's trading book. I am talking about a VPL that's already locked into the Company's results.

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