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26 junho, 2023

Profitability and sustainability are the focuses of Taurus with the new Stock-Based Compensation Program

*LRCA Defense Consulting - 26/06/2023

In the Extraordinary and Ordinary General Assembly held on April 28, 2023, Taurus Armas S.A. approved the Stock-Based Compensation Plan, replacing the previously approved Stock Option Grant Plan.

As participants in the program, Salesio Nuhs, Sergio Castilho Sgrillo Filho, Leonardo Brum Sesti, Eduardo Minghelli, Bret Vorhees (Taurus USA), and David McCallum (Taurus USA) were elected as Directors and were offered Stock Rights, according to the terms approved by the company's Board of Directors.

Using company stocks as a form of rewarding administrators
The use of company stocks as a means of rewarding administrators is not exactly new. DuPont implemented its first stock bonus plan in the United States in 1904. The granting of stock options, also known as stock options, as part of the compensation for leadership positions, became widely adopted by large companies in the 1970s and 1980s. As it represented a small portion of executive compensation, its impact was relatively minor at the time.

However, in the last decade, this practice has taken on a new dimension with the advent of technology companies and their innovative and typically more aggressive compensation programs compared to traditional industries. The major difference is that not only is the portion represented by stocks in the employee's compensation mix much more significant, but also the eligible population for stocks is much larger. Additionally, younger companies like modern startups have used stocks to attract the best talent, as these individuals see the potential for long-term gains when making a career move.

Impacts on companies' market value
This trend has brought up a previously less relevant question: what impact does this mechanism have on companies' market value?

One significant consequence for a company's value is its ability to retain top executives. It is an impact that is difficult to measure but nonetheless tangible and relevant. When making a decision to invest in a company, one of the main factors considered by conscientious investors is the existence of an equity-based incentive program and its effectiveness in ensuring the long-term commitment of executives.

As a strategy for profitability, longevity, and sustainability, companies implement long-term equity incentive plans to align the interests of their administrators with those of their shareholders, thereby maximizing performance. By receiving the same unit of value that shareholders use as a measure of their wealth, executives are encouraged to make decisions as true partners, pursuing the long-term success of the company.

Such plans are also used as an effective tool to attract and retain key professionals for the business. Currently, the inclusion of this type of incentive is part of most executive compensation packages.

In summary, it can be said that the granting of equity is an excellent way to align the interests of the company and its administrators, encourage long-term commitment, and enhance competitiveness in attracting new talent. Therefore, companies with a strong long-term incentive program will certainly be preferred by conscientious investors and will see their market value amplified in an eventual IPO or when raising capital through an equity increase.

Avoiding distortions in short and medium-term share performance

One alternative to avoid potential distortions in short and medium-term share performance is to extend the duration of the plan. In the long term, movements related to macroeconomics and the sector tend to offset each other, and stock prices converge towards their intrinsic value, reflecting the impact of management decisions. Additionally, a plan with a longer vesting period (the period after which recipients can sell their shares) also aligns management with the shareholder's perspective, which typically has a long-term outlook.

Restricted Stock Units (RSUs) - Taurus' choice for its program
The compensation mechanism of RSUs is similar to Stock Options (SOP), where the recipient also needs to remain with the company for a predetermined period (vesting period). The difference is that the shares are automatically delivered to the recipient without the need to exercise an option. It is important to note that this type of compensation does not establish a fixed value per share. At the end of the vesting period, the recipient receives the agreed-upon quantity of shares on one or more dates (vesting dates), as specified in the contract, as is the case with Taurus.

Unlike Stock Options, which may require recipients to incur expenses to purchase the shares, RSUs are an expense borne by the company. In other words, the recipient receives the shares free and clear, without the need for any payment or other consideration.

For Taurus, the vesting period of its Stock-Based Compensation Plan will extend from 04/28/2024 to 03/30/2029, as follows:
- 04/28/2024: 20% of the shares;
- 03/30/2025: 10% of the shares;
- 03/30/2026: 10% of the shares;
- 03/30/2027: 10% of the shares;
- 03/30/2028: 10% of the shares;
- 03/30/2029: 40% of the shares.

In the United States, Taurus' main competitors, Smith & Wesson Brands Inc. and Sturm, Ruger & Co, Inc., also utilize a Restricted Stock Unit-based compensation plan. The recent adoption of this plan by the Brazilian multinational represents another step towards aligning best practices and administrative strategies with its competitors, which could facilitate a potential future listing of the company on a US stock exchange.

In a winning team, you don't make changes
This football maxim is also highly applicable to companies that are achieving success in their businesses due to the excellence of their administrators, making it worthwhile to invest in keeping them on board.

Assuming the role of Global CEO of Taurus Firearms in 2018, the experienced executive Salesio Nuhs assembled a competent team of executives and decisively propelled the necessary transformations, accomplishing the most iconic corporate turnaround of this century in Brazil. This success extended to both the Brazilian and American units, where the headquarters was relocated to Georgia in 2019 (with numerous advantages). The local CEO was replaced with a dynamic and experienced executive, and production, sales, marketing, and market intelligence processes were optimized, resulting in a prompt response to consumer needs and desires.

Regarding debt, since the new team took charge, strict expense control and cost management have been established, starting from the Engineering Department during the planning and development of new products. Coupled with comprehensive financial restructuring, what we see today is that the company's leverage, as measured by the ratio of the last 12 months' EBITDA to net debt on 31/03/23, dropped from a rate of 11.2 (in 2014) to just 0.15 at the end of 1Q23. This indicates that 15% of the annual cash generation measured by EBITDA would be sufficient to fully repay the bank debt recorded on 31/03/2023.

Salesio also created the CITE - Integrated Technology and Engineering Center Brazil/USA, centralizing all the development of new firearms and disruptive technologies (such as graphene, niobium, DLC, and long-fiber polymer) in Brazil. The CITE is fueled by the company's Market Intelligence Sector, which seeks to anticipate market trends as well as consumer needs and desires.

In 2020, the company entered into a joint venture with the powerful Jindal Group to produce firearms in India. The factory, which is expected to start operations soon, is already participating in substantial tenders to supply weapons to the enormous armed forces, police, and paramilitary forces of the country, as well as its untapped and massive civilian market.

The executive and his team created a strategic expansion project for 2020/2025 with the goal of making Taurus the largest and best manufacturer of small arms in the world, achieving part of this objective three years ahead of schedule. As part of this initiative, a Supplier Condominium was established alongside the company, and state-of-the-art Autonomous Manufacturing Cells, based on robotics and artificial intelligence, are about to come into operation, working through Value-Driven Processes.

Alongside the establishment of the Logistics Train process and the construction of new facilities (CITE, Shooting Range, Logistics Center, laboratories, and administration), the synthesis will culminate in the transformation of Taurus into an Industry 4.0, enabling the company to also become a hub for supplying finished products, kits, and parts to the US and Indian units.

Under his leadership, Taurus established agreements and partnerships with important Brazilian universities, with a focus on the University of Caxias do Sul and Unisinos, aiming to develop new and disruptive materials (graphene and niobium), as well as contribute to the training and improvement of highly specialized human resources.

In 2022, Taurus and CBC finalized the creation of the joint venture CBC Taurus Arabia Holding, LLC., aiming to enable more efficient pursuit and anticipation of business opportunities in this relevant market, especially considering the Saudi Arabian government's plans to establish a local defense industry base, as part of the "Vision 2030" strategy, which is very similar to the Make in India and Atma Nirbhar Bharat initiatives of the Indian government.

The high standard of quality, technology, and innovation that has come to characterize Taurus, especially since 2018, has received numerous national awards and 38 international awards, including the most prestigious ones in the firearms industry in the United States. The brand has received seven awards from the National Rifle Association, one of the most prestigious awards in the US firearms industry, and its products have been chosen as the firearm of the year 14 times. Since 2018, Taurus has been winning approximately three major American awards every two years.

In a prestigious live event held on May 2nd, Taurus Armas S.A. presented its 1st Sustainability Report and hosted a panel discussing the ESG theme. On this occasion, the company shared its efforts and achievements in social, environmental, and governance management, consolidating its actions regarding the ESG agenda. The release of the ESG report marked a new milestone in the company's history, solidifying Taurus as the first strategic ESG defense company.

In summary, under the proactive leadership of its Global CEO and executives, Taurus is successfully carrying out its homework, namely:

- Completing its turnaround, focusing on quality, technology, and sales/distribution dynamics.
- Significantly increasing its numbers (production, sales, profits, EBITDA), becoming a global benchmark in the market and the world's largest seller of small arms.
- Drastically reducing its debt and leverage to comfortable levels.
- Capitalizing on the atypical years of 2020 and 2021, achieving historic results.
- Increasing its market share in the current largest market in the world (USA).
- Soon starting production in India, a country representing the largest and most untapped global market for modern small arms in the military and civilian sectors.
- Establishing a joint venture with CBC in Saudi Arabia to leverage the Vision 2030 initiative and supply weapons to that country and others in the Middle East, where it currently has no presence.
- Establishing agreements with universities for the development of new materials and the training or improvement of specialized human resources.
- Resuming significant dividend payments to its shareholders in 2022 and making it a strategic objective going forward, including interim payments.
- Implementing a share buyback program to enhance shareholder value and meet the Equity-Based Remuneration Plan.
- Establishing itself as the first Brazilian strategic defense company with ESG principles and operations.
- Its exceptional performance has led American investment funds to already hold more than 4% of the company, with a focus on Vanguard and BlackRock, two of the largest investors in light weapon manufacturers in the USA.
- Creating a stock-based remuneration program for its key executives, aiming for profitability, longevity, and sustainability.
- Organizing itself to enter the coveted Law Enforcement market in the USA.

Furthermore, Salesio is also known for his ability to choose, lead, and motivate key employees of the company, as evidenced by assembling an enviable team of competent and dynamic executives who contribute decisively to achieving Taurus' objectives.

The ongoing examples of work, dedication, and seriousness demonstrated by Salesio Nuhs and his executives serve as beacons that inspire and guide the company's 3,500 employees, engaging them and making them vital participants in the undeniable achievements of the company.

Therefore, by deciding to further empower their top team of executives by making them shareholders of the company, the competent Board of Directors of Taurus Armas not only recognizes their abilities and dedication but also demonstrates once again that they are fully aligned with the most modern management practices and the aspirations of their shareholders.

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