Pet Center Comercio e Participações S A : Videoconference Transcript Acquisition Petix

PETZ

PETIX ACQUISITION VIDEO CONFERENCE EDITED TRANSCRIPT

JANUARY 26TH, 2022

Operator: Good morning and thank you for waiting. Welcome to our video conference from Pet Center Comércio e Participações S.A., Petz, to talk about the acquisition of Petix. Today with us, we have Mr. Sergio Zimerman, founder and CEO; Aline Penna, CFO and Director of RI and New Businesses at Petz; and to represent Petix, we have Mr. Rogerio Haddad, founder and CEO, and Luiz Fernando Lourenço, founder and Marketing and Commercial Director.

This event is being recorded and all participants will only listen to the video conference during the Petz presentation. After that, we will start the Q&A session when more instructions will be given.

The replay of this event will be available right after its conclusion. As a reminder, all webcast participants can send questions via the website.

Now I would like to hand the floor to Mr. Sergio Zimerman, CEO of Petz. He will start the presentation. Sergio, the floor is yours.

Mr. Sergio Zimerman: Thank you very much. Good morning, good morning to all of you. Thank you once again for your interest and for your time so we can share another piece of good news coming from Petz.

In the beginning of last year, we announced our new vision, a vision that intends to build a worldwide recognized ecosystem by 2025. And today we are taking another important step towards that direction.

Petix represents everything we believe in when it comes to building a differentiated ecosystem. It is a company that has embedded competitive differentiators in its productive process. And they are not related to the production of commodities, and this was something that I mentioned in previous calls with all of you. I said that Petz has absolutely no interest in acquiring industries that are just producing a commodity product. But we are interested in acquiring industries that have a competitive advantage and that have brands that create a difference in the mindset of consumers. And these are the companies that are completely related to our vision of ecosystem as I will explain to you in this presentation.

So, if we can talk a little bit about Petix now. The main Petix brand is called Super Secão, and they have been in the market for more than 15 years. It was founded in 2007. At the time I had met the founders ever since the beginning of the company, and I'm sure that they remember the first meeting we had. They were just creating the company and they were telling

me about the plans that they had for the dog pad industry. And at the time I told them 'if you do as you said, you will become leaders in the market', because it is a market that is not really professional and, because they come from Citibank background, they had a very clear vision about how to create a valuable business and how to create a brand. And I was certain that, if they put everything they were saying into practice, they would be successful. And that's what happened. So, now it's a pleasure and a joy to join them 15 years later so we can keep moving together, leveraging Petix not only in Brazil but all over the world, especially in the United States.

So, as a competitive advantage, Petix has a proprietary production technology. It's exclusive to them. They are eco-friendly. They solve a step, which is an environmental issue, which is the waste generated from the diaper industry. Millions of millions of diapers in the world are sent to landfills due to issues in production that generates a problem and Petix is the only one to have a direct contract with the diaper manufacturers. So, they collect this material, and they give this material a second life. Material that otherwise would be ending up in landfills.

Petix is a Top-of-Mind brand in the market, one of the most recognized brands in this segment. And they are aligned with our purpose of bringing leaders from each segment into our ecosystem. So, we are bringing a leader brand, a brand that consumers look for in different stores just so they get the product that they're looking for. They have a highly effective distribution structure with 8000 pet shops in their coverage, some they work with directly and others they work with through distributors. And they have entry level brands for the food business. If you were talking about dog food, for example, they would offer a standard dog food sold in supermarkets and a super-premium option sold in the specialized channel, which is the Super Secão brand.

The founders, Rogerio and Luiz, like I said, I met them when they were founding the company. They come from the financial market, from Citibank, with a very good view of the world, good know how on how to build a company and, in the 15 years they worked together, they were able to build a leading company. And, like in other acquisitions that we did, we were not only worried about acquiring a new company, but to have them as partners. They have a lot to contribute to the other companies that belong to our group, and we are extremely excited because, not only we are bringing more companies to our ecosystem, but we are bringing more people, people that have a very privileged mindset in terms of strategy and execution. And we can benefit from all those elements.

I also would like to highlight two key elements of Petix. Krister, who is working… actually, Krister, who is the partner for the American market, Krister is the partner focusing on the American market. He's developing the

US market and is one of Luiz and Rogerio's partners, and two managers, Andre and Ezequiel. Andre is the CFO of the company. He also comes with a financial background, more than four years in Petix. And Ezequiel, who has had a career in major industry. He worked at Ambev, Falconi. For more than a year he has been working at Petix and he's improving the manufacturing process.

Regarding shares of partners, Rogerio has 49%, Luiz has 22% and Krister owns 15%. The three of them will remain connected to the company, all with Petz shares in a structure of lock-up for the next 3, 4 or 5 years.

Some important figures from Petix now. The gross revenue was BRL 135 million in 2021, with a CAGR of 29% of growth in revenue between 2019 and 2021. And let's remember that Petix has the largest manufacturer park of dog pads in Latin America. The penetration in the category, if we consider the participation of revenue coming from non-food products, is 8% in the North, 10 in the Northeast, 12 in Midwest. And you can see how much this brand is well distributed throughout Brazil within Petz. Our challenge and our potential is to have the same distribution or other retailers since the concentration is higher in the Southeast in Brazil.

Some data, some interesting data for you now. We have more than 90% of Petix being sold through specialized channel. The food channel is just a doorway as I mentioned before. In 2021, the category grew more than 35% within Petz. Petix share within the category inside our stores is 47%. So, we have several suppliers, but Petix alone represents almost 50% of our share and that is as a result of the 15 years of partnerships we have had. And they are also the manufacturers of our private brand product, and it's worth highlighting the strategic reasons of this. When we decided to manufacture our private brand product, it was one of the few cases where we didn't have the ability to do a competitive process to decide with whom we would produce. Because Petix was the only company that had the manufacturing capabilities for our private brand product and that creates a very important competitive advantage for us.

Talking a little bit now about the characteristics of the product, of the dog pad. It's a product with a high recurrence. Today, they sell between 350,000 pads, with low penetration yet, so around 10% of penetration. We understand that there is a growth potential, and this is completely related to be treating pets as humans, and that is going to evolve more in the coming years. Of course, we will drive growth, investing in machinery and technology to increase the productivity and make this product more affordable to consumers, and increase the penetration of the product in the market. Like I said, the fact that pets are seen as humans increases the adoption of dog pads, urbanization, verticalization of cities, these are all factors that contribute to the increased use of dog pads.

I would like to remind you that in 2004, 2005 when I started the company, dog pads was a category that was pretty much not sold. Very few units were sold back then. And in the past ten years, the category started gaining momentum and, without a doubt, in the past ten years it is a category that has grown systematically above market averages. Like it happens every year, not only inside Petz, but in the market as a whole, it is a category of product that every year outgrows the market average. I also would like to remind you that this is a fragmented market, more than 15 suppliers in the Brazilian market covering this product, and this company is 100% focused on the manufacturing of diapers and dog pads with a brand that is recognized by consumers.

They have sustainable initiatives. Consumers are more aware of the ESG topic, they are more aware about the importance of manufacturing products that are sustainable. And Petix has a concern. They pay attention to the details of the packaging, for example. They have an agreement with Braskem. Braskem has already granted them with the I'm green seal. They are the only company to own that seal in the segment with the goal of reducing the environmental impact that their products have through these policies that they have of using products that are better for the environment.

Now talking about the main topics of our investment thesis. Like I mentioned in the beginning, this is a company with national importance. They are Top of Mind in the segment which is essential for us. They have an exclusive technology which they own, and which is sustainable, and these are three important pillars when it comes to the competitive advantage. At the same time, this is in agreement with our concern of making our company more ESG compliant. They have a very interesting presence in the US market. I will talk more about our plans for the American market later on today. And they have a team that is fully prepared and engaged with everything that is happening. And especially after the establishment of our partnership, everything will be done and accelerated with a lot more financial resources, so they do bigger, better and faster investments to collect results generated from a higher penetration in the market that will be very interesting.

The Super Secão product is produced from diapers that the big industries would put to waste in their manufacturing process. So, they have a high absorption because of the quality of the raw material and the gel that is used for human diapers. The Super Secão brand is positioned as a premium product, so they always have a premium comparison to the more commodity brands. The other dog pad brands are always positioned a little bit below the Super Secão level. And as I mentioned before, they have a very nice distribution. They are well spread throughout the country. A

survey of recognition was conducted, and they reached a 73 level with their Super Secão brand, way above and almost double of the competition brands, that reached 38% of brand strength. And they are positioned at the top brand level, close to levels that the Coca Cola brand has in their segment.

It is an eco-friendly product. Cellulose for more than 600 diapers that would end up in landfills, now have another destination because of this product. They have a manufacturing product which is a zero-waste product. I had the opportunity of visiting their plant and it is a very interesting product. It basically avoids all types of waste and of course that benefits nature. And as I mentioned, they were the first ones to launch a dog pad manufacturer from plastic generated from sugar cane and that granted them the I'm green seal from Braskem.

The plant is located in the city of Monte Mor, in the state of Sao Paulo, and the technology is exactly this. They collect diapers, human diapers, that would go to waste. And they put that in a machine that's unique in the segment that basically separates all the different components of the human diapers. And like I said, it's a zero-waste product. All the materials are properly treated and reused in the manufacturing process. The plastic, for example, is used for the civil construction industry.

The production of the dog pads, like I mentioned, they have the largest industrial park for that segment, and we have a focus on investing more in machines that will improve the productivity since the market is growing very fast. This segment has this characteristic that sometimes is not, they're not able to follow the growth of demand. So, our plan is to increase the offer of products, so we don't suffer any type of restrictions. The final product is differentiated with the highest absorption rate available in the market.

Talking about the opportunity in the US market now where they already have 2400 stores in the United States with their products. They are present in all 50 states. More than 1000 Amazon ratings giving them a score between 4.4, actually an average score of 4.4, in a level that goes from up to 5, which is a really very relevant score at Amazon. Amazon consider any rating above 4 to be highly satisfactory, so the recognition of the product is a reality, and I would like to highlight that for you.

Even though the US market for dog pads exists, the market there was created with a different concept. It was created based on China with a product that is called 'slim'. It basically has pretty much no gel inside of them and very low quality. And it enters the US market through the mass market. So, the great retailers are Walmart and other major retailers. So, the specialized market is not really interested in that product since it was