Braskem SA (BAK) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen. At this time, we would like to welcome everyone to the Braskem's first quarter 2008 earnings conference call. Today with us, we have Carlos Fadigas CFO and Luiz Henrique [Valverde] IRO for Braskem.

We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After Braskem remarks are completed, there will be a question and answer section. At that time, further instructions will be given. (OPERATOR INSTRUCTIONS).

We have a simultaneous webcast that may be accessed through Braskem's IR website www.braskem.com.br/ir. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay facility for this conference on the website.

We remind you that questions, which will be answered during the Q&A session, may be posted in advance in the website.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Braskem's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Braskem and could cause the results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to Mr. Luiz Valverde, Braskem's IRO. Mr. Valverde, you may begin your conference.

Good morning ladies and gentlemen. I'd like to thank everyone for participating in this quarterly Braskem conference call [to start] to discuss the first Q '08 results.

First, let me remind you that this conference call is based on consolidated information that includes 100% of the results of Ipiranga Quimica, Ipiranga Petroquimica and Copesul with the respective elimination of the minority interests at all these companies as well as the proportion of consolidation in accordance with CVM Instruction 247 of the interest in Cetrel Empresa de Protecao Ambiental.

To enable analysis of the results in relation to prior periods, data of fiscal year 2007 are stated on a pro forma basis. Well let's go now to the next slide, slide number three, where we are going to be begin our comment.

Slide number three represents the operating highlights in the quarter. Domestic demand for thermoplastic resins in the quarter grew by 10% year-on-year, driven by the growth in the Brazilian economy with the top performances posted by agricultural, automotive, construction and consumer electronic sectors and increases in disposable income.

Domestic resin volumes sold by Braskem rose to 506,000 tons in the quarter, 7% higher than in the first Q '07, following the growth of the Brazilian market where imports played an important role. This growth in resin sales once again was led by PVC sales, which posted year-on-year growth in the quarter of 13%. PVC production this first Q '08 totaled 130,000 tons, an all-time high and up 8% in relation to the fourth Q '07.

The capacity utilization rate rose to 104%, demonstrating the efforts made over the last year to increase the production and reliability of plant and the priority given to the production of more productive grades.

Braskem is committed to reduce its fixed costs and improving its competitiveness. In the first Q '08 selling, general and administrative expenses were reduced by R$83 million versus Q1 '07, reflecting the lower export volume in the period and the impacts of the program to reduce fixed costs.

As part of its program to integrate the petrochemical assets of the Ipiranga Group acquired in March of last year, Braskem estimates associated gains of $1.1 billion in net present value. It is accelerating the capture of synergies, registering as of March this year annual and recurring gains in EBITDA of approximately R$77 million. The company also captured more than R$59 million in other annual and recurring cash gains.

Braskem's capital expenditure totaled R$242 million in the first Q '08. It is worth to highlight the investment made in the PP plant located in Paulinia which amounted to R$26 million and the disbursement of R$50 million in the scheduled maintenance stoppages at Copesul's (inaudible) and Camacari (inaudible) petrochemical unit.

Let's go now to the next slide please. Slide four shows the strategic highlights in the quarter. In April '08, Braskem inaugurated a new polypropylene production unit in Paulinia, which is located in Sao Paulo state, the largest resin consumption market in South America.

With the operational startup of the industrial unit, which has annual production capacity of 350,000 tons, Braskem further strengthens its leadership position in Latin American polypropylene market, increasing its annual capacity in this product to 1.1 million tons and once again confirming its ability to manage projects within the initially planned costs and timetable.

On April 1, Braskem, Unipar and other selling shareholders concluded the transfer of its interest in Petroflex to Lanxess. As a result of the operation, Braskem sold 100% of its interest corresponding to 33.57% of the common shares and 33.46% of the preferred shares in Petroflex, which represented a pretax gain of R$116 million and cash inflow in April was approximately R$252 million.

In February, Braskem concluded the acquisition of 60% of the petrochemical assets of Ipiranga Group, represented by the 60% interest in Ipiranga Quimica. The conclusion of the acquisition of this petrochemical asset resulted in the final payment of R$638 million and allows the Investment Agreement signed with Petrobras in November last year to be implemented.

Under this agreement, the interests held by Petrobras and Petroquisa corresponding to 40% of Ipiranga Quimica, 26.5% of Copesul, 40% of the Petroquimica Paulinia as well as the option for the interest in Petroquimica Triunfo will be transferred to Braskem in exchange for approximately 103.4 million Braskem shares.

In early April, the Secretariat for Economic Monitoring and the Secretariat for Economic Law recommended to CADE, Brazil's antitrust and competition authority, the approval with no restrictions of the investment agreement between Petrobras and Braskem announced in November last year. The next step will be the evaluation by CADE itself.

In March, Braskem announced the production of butene from 100% renewable raw material. The production of this biobutene and the development of technology for its use in making polymers enabled Braskem to produce an even wider range of polyethylenes. As a result, Braskem received certification for the first linear low density polyethylene in the world made from renewable raw materials, confirming its technological leadership in the production of green polymers and its commitment to sustainable development.

Let's now move to the next slide, which is slide number five, in which we show the main indicators of our industrial performance. The first Q '08 the PP plant operated a capacity utilization rate of 96% while the PVC plants operated at 104%, confirming the trajectory of its improvement in plant reliability and allowing Braskem to accompany the growth in the domestic PVC market. Meanwhile the PE plants operated at 89% capacity utilization, primarily due to the scheduled maintenance stoppages. The ethylene capacity utilization rate was 95%.

Copesul concluded at the start of the first week of May the scheduled maintenance stoppage at one of its (inaudible) units. For this stoppage, as of May this year, roughly R$170 million was invested in maintenance and improvements in order to ensure an increase in the reliability and productivity of the plant as well as higher ethylene and propylene production volumes.

In the Polyolefins business, polypropylene production volume was practically stable in relation to the fourth Q '07 and first Q '07, while polyethylene production contracted by 2% versus fourth Q '07 and by 3% versus 1Q '07, primarily due to the moving forward to this quarter of the scheduled maintenance at the plant.

In the Vinyls business, the PVC production in the quarter grew to 130,000 tons, an all-time high, and 8% higher quarter-on-quarter and 12% higher year-on-year, maximizing in the results associated with the favorable moment in the domestic PVC market.

Let's move now to slide number six. On slide number six, we show the growth in Brazil's resin market as well as Braskem's shares this market. Domestic demand for thermoplastic resin began 2008 with the same growth trend observed in 2007, supported by economic growth and an increase in per capita disposable income.

In first Q '08, domestic demand for resin, as measured by domestic sales plus sales with export incentives plus imports, grew by 10% in relation to the first Q '07, led by the growth of 19% in PVC demand, which was driven by the construction industry. Demand in PE, PP and PVC market totaled 1,048,000 tons in the first Q '08.

Total sales volume of thermoplastic resins, domestic plus export sales at Braskem was 629,000 tons in the first Q '08. Domestic resin sales increased by 7% over first Q '07 supported by the growth in the Brazilian demand.

In the Polyolefins business, year-on-year domestic sales volume in the quarter grew by 6%, in line with the growth in the overall industry. PE and PP exports fell 38% in the same period. This result reflects Braskem's [strategy] of maximizing the possibility of its product and the need to build stocks to ensure adequate supply for its clients during the scheduled maintenance stoppages planned for the second quarter of this year.

In the Vinyl business, domestic PVC sales in the quarter grew by 13% year-on-year. Braskem is operating its PVC plants at maximum potential capacity and has projects to increase by approximately 50% this capacity in order to meet this growing demand for this resin.

In the near term, the company has decided to report resin to meet the domestic demand and in the first quarter imported 12,000 tons of PVC. In this scenario, Braskem once again confirmed its leadership position in Brazilian market with market share of 49% in the quarter.

Going to the next slide please, number seven. We show the main factor impacting EBITDA the first Q '08 in relation to Q1 '07. Braskem EBITDA in Q1 '08 was R$583 million, down R$270 million from the EBITDA of R$853 million reported Q1 '07.

The [strength] of our [commented] strategy which aims to keep prices in a domestic market aligned with those present in the international markets, generated a positive impact of R$1.22 billion. Between the two quarters, fixed costs and SG&A expenses declined by R$108 million, [would highlight to number one] Braskem's selling expenses that amounted to R$93 million in the first Q '08, declining by R$75 million in relation to the first Q '07.

The main factors of this impact were number one, lower expenses with provision for doubtful accounts of R$23 million due to the adjustment of provision for doubtful accounts booked in Politeno in first Q '07. Number two, a reduction in fixed selling expenses of R$3 million as a result of the program to cut fixed costs. And number three, a decline in expenses as a result of the lower export volume, the better management of logistics and product transfers, and a change in the allocation of some expenses in order to align accounting practices across companies.

In first Q '08 general and administrative expenses were R$167 million, down from R$176 million in first Q '07. Excluding the impact of a non-recurring revenue in the amount of R$17 million first Q '07, this reduction was R$26 million. This non-recurring revenue consists of an adjustment in the provision for future disbursement by Braskem in the event of liquidation of the Petros plant, which involves Braskem employees formerly employed by Copene.

The decline in general and administrative expenses already reflects the results of the program to cut fixed cuts announced to the market and implemented by Braskem as of fourth Q '07 with an impact in the quarter of R$5 million.

The increase of 52% in the average price of naphtha (inaudible) between the two quarters from R$555 dollars per ton in first Q '07 to R$842 per ton in first Q '08, was the main factor in (inaudible) the impact of R$1.3 billion of raw material cost. Another factor contributing to this negative result was energy costs which includes electricity, crude oil and natural gas.

The variation in the average exchange rate between the periods with the Brazilian real depreciating by 80% against the US dollar, had a negative net impact of R$195 million, as shown on the slide.

The contraction in Braskem sales volume of roughly 10%, due mainly to the reduction of exports into the [field] of its stocks finished products ahead of the scheduled maintenance stoppages that are planned, had a negative impact of R$103 million.

Now moving onto the next slide, number eight, we show the main factor impacting the variation in EBITDA in the first Q '08 in relation to fourth Q '07. So EBITDA in the first Q '08 was R$65 million lower than the EBITDA of the fourth Q '07. The fourth Q '07 we had an EBITDA R$648 million.

So Braskem's commercial strategy again, which aims to keep prices in the domestic market aligned with those [prices] in the international markets generated a positive impact of R$188 million.

Between the two quarters fixed costs and SG&A expenses declined by R$112 million. Selling expenses were R$17 million lower in this quarter, primarily due to number one the reduction in fixed selling expenses as a result of the projection to cut fixed costs. Number two, a decline in expenses as a result of the lower fourth quarter. The better management of logistics and product terms is in a change in the allocation of some expense to align accounting practice across companies, being both companies, Braskem, Ipiranga and Copesul.

General and administrative expenses declined by R$9 million, mainly due to lower expenses with outsourced services. The increase of 5% in the average price of naphtha in dollar terms between the two quarters from $803 per ton in the fourth Q '07 to $842 returned in first Q '08, was a main factor in the negative impact of R$263 million of raw material costs.

The contraction in Braskem's total sales volume of roughly 12% as a result of the (inaudible) in stocks, mentioned on the previous slide, had a negative impact of R$89 million. This is also due to the reduction in the sales volume exported that occurred in the first Q '08 and compared to the fourth Q '07.

The variation average exchange rate between periods with the Brazilian real depreciating by 3% against the US dollar, had a negative net impact of R$32 million, as shown on this slide.

Now moving to next slide, slide number nine. The simplified statement of income shows a comparison of the main [lines] of Braskem's results in the first quarter of 2007 and 2008. Despite the fact that we have already commented on the first Q '08 performance, it's worthy mentioning some specific points.

Firstly Braskem's net revenue in first Q '08 amounted to R$4.4 billion. This is in line with revenue of the first Q '07. The main factor that impacted this performance were number one, a 7% increase in domestic resin sales volumes, and number two a 9% increase in real denominated price of our resin. On the other hand, there was a negative impact from lower prices for aromatics, mainly benzene, which had an impact of R$112 million in the lower ethylene and propylene sales volume.

EBITDA (inaudible) for the first Q '08 amounted to R$583 million, R$270 million lower than the first Q '07. The company's solid operating performance with high capacity utilization rates, efficient sales policy, and reduction in fixed costs in the quarter was negatively affected by rising raw material costs. Braskem's first Q '08 EBITDA margin was 13.2%, virtually in line with fourth Q '07.

First Q '08 the consolidated net financial result was in excess of R$200 million, versus an excess of R$104 million in first Q '07, which represents an increase in excess of [R$96 million in the half]. This increase was mainly due to the difference in foreign exchange rate variations, its (inaudible) and its impact on the financial results.

Excluding the effects of foreign exchange rate variations and monetary variations, the financial result in the quarter was R$176 million versus R$257 million in the first Q '07, which represents a decline of approximately R$81 million year-on-year. This decline composed chiefly of first number one, a reduction of R$36 million in interest and vendor due the lower volume of vendor operations and a reduction in the average cost of dollar-denominated debt, which fell from 8.6% per annum in first Q '07 to 7% per annum in first Q '08.

Number two, lower expenses with CPMF, IOF and income taxes and bank charges of R$17 million. Number three, the reduction in other financial expenses and interest of tax debits in the amount of R$14 million. And number four, the changes in investment profile with a higher impact on interest line in financial income in the amount of R$13 million.

As a result, net income before minority interests, being those minority interests Petrobras share in Ipiranga Group petrochemical assets reached approximately R$120 million, while first Q '08 net income stood at [R$83 million] as we show in this slide.

Well going to the next slide, number ten, we show our debt amortization schedule, its allocation by currency and the cash balance as of March 31, 2008.

So at the end of the first Q '08, Braskem's gross debt was R$9.4 billion, 12% higher than gross debt at December 31, '07. This increase was chiefly due to the following factors. Number one, the payment of the last installment of the acquisition of the petrochemical assets of Ipiranga Group, with an impact of R$638 million. Number two, the settlement of the earn-out from the acquisition of Politeno which required a disbursement of R$247 million. And number three, R$242 million for operational investment and maintenance stoppages in the quarter. Additionally, operating cash flow was compromised by the temporary increase in stocks with impacting cash and cash equivalents that declined by 40% to R$1.9 million in the quarter.

The average debt term fell from 11 years at the close of '07 to ten years at the close of March this year. The shorter debt profile was impacted by the last tranche of the bridge loan of $1.2 billion, which was used to acquire the petrochemical assets of Ipiranga Group and to delist Copesul. Braskem is working to substitute this operation by structured operations that will lengthen the average term of its debt which already has an annual payment profile that is adequate for the company's cash generation.

On April 30, Standard & Poor's upgraded Brazil's credit rating to BBB minus, which represents investment grade. The new rating will increase the access by Brazilian companies to offshore capital, whether through direct placements abroad, growth of foreign investment on the Sao Paulo stock exchange for, Bovespa, or the inflow of funds into production sectors, with positive repercussions for Brazil's economy and with impacts on onshore rates and economic growth. In view of this development the company hopes to refinance its bridge loans at highly competitive terms.

At the end of March '08, US dollar denominated debt accounted for 73% of total debt, in line with the 71% at the close of fourth Q '07. The company's financial leverage as measured by the ratio of net debt to EBITDA in the previous 12 months, which stood at 1.93 tonnes in the fourth Q '07, rose to 2.56 times in first Q '08, due to the increase in net debt mentioned above and the decline in EBITDA in the last 12 months.

On this last slide we present the outlook for 2008. The global macroeconomic outlook, while affected in the short term by uncertainties in the US economy and their effects on the rest of the world, points to growth in the global economy of more than 3% per year.

It is also clear that Brazil finds itself better prepared to face a potential slowdown in global growth rates, given its improved macroeconomic situation, as well the stability of the economy, which was ratified by the recent upgrade in Brazil's credit rating to investment grade by Standard & Poor's.

Braskem expects Brazilian industry to grow by 4.5% in 2008, driven by stronger domestic demand as a result of the higher disposable income and the greater availability of credit at competitive rates and longer terms. Under these assumptions the Brazilian market for thermoplastic resins should grow approximately 10%. Braskem expects to benefit from this environment due to its market leadership and unique range of products and services based on (inaudible) technology and innovation.

Braskem expects to increase the affordability of its basic petrochemical production units with gains in productivity and efficiency as a result of the two scheduled maintenance stoppages now being carried out. First one, at the Olefins 1 unit of Copesul, where the maintenance stoppage was concluded in early May, as mentioned earlier. And number two, at the Olefins 1 unit at Camacari Complex which will begin its stoppage on May 25, with total expected downtime of 30 days.

In the consolidation process of the petrochemical assets with Ipiranga and Copesul, a series of opportunities to capture synergies were identified, with expected gains of $1.1 billion in net present value. This amount comprises opportunities on various different fronts, in particular in the industrial and commercial areas which represent almost half of the expected amount, and in the financial area, with gains of close to $400 million of synergies that will be accelerated with the incorporation of the assets which should be concluded by the end of this year.

Among the expansions projects designed to increase our core competitiveness, are two joint ventures with Pequiven in Venezuela. During '08, these joint ventures will work to structure their project finance, in collaboration with export credit agencies and private and development banks.

Also Braskem and Pequiven shall complete the economic and feasibility studies for the two projects. Braskem and Pequiven will make then a final investment decision once the studies are complete. And in the case of the polypropylene project, Braskem expects to present the project to the Board of Directors in 2008.

On innovation front, Braskem plans to present to the Board of Directors by the end of the first half this year, the project for a new plants capable of producing 200,000 tons of green polyethylene per year from sugarcane ethanol scheduled to come on line in 2010.

With the conclusion of the acquisition of the petrochemical assets of the Ipiranga Group, Braskem is now concentrating on investment agreements with Petrobras, [Petroquisa's] integration with Braskem of the interest of Petrobras and Petroquisa in these assets and in Petroquimica Paulinia with the corresponding increase in their interest in Braskem, which should occur before the close of the second quarter.

Well we'll now move on to the Q&A session. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for a moment to compile the Q&A roster. Thank you. Our first question is coming from [Paula Carvasy] with [Atto].

Hi good morning everyone. I have actually three questions. First question relates to the growth in the domestic market, which is total market growing at 10%, Braskem's domestic sales growing at 7%, arguably suffering from the impact of increasing imports. So I would like you to comment on what your view on potential growth of the imports eventually jeopardizing the boom of domestic market for local players? That's the first question.

The second question relates to prices passed through. If we calculate the average prices for polyethylene and polypropylene in between this quarter and the previous quarter, the average increase is between 1% and 2% versus an expectation of 2% to 4% as proposed by the company in the last quarter. So I would like to understand why was it more difficult to pass through prices? And when you look at the PVC in particular, it fell some 4%.

And then the last question relates to you views on -- given the increasing imports and polypropylene being one of the resins suffering more, how do you see the increase in capacity coming onstream this year? Your 150,000 tons plus Unipar's capacity of 190,000 tons or so coming towards the end of the year?

Hi Paula, good morning -- good afternoon this is Carlos Fadigas speaking.

First of all, relating to the growth of the market, we had this 10% growth in the Brazilian domestic market and, as you pointed out, our sales grew by 7%. The difference between the growth in the market and our growth is really explained by the growth in the imported products. I think that several things led to a certain increase in the imported products, especially in this quarter. And these effects are the continued appreciation of the real, but mainly the economic situation in the US. And that's mainly where the imported products came from.

In our point of view, this trend has reached its limit, basically because of the logistics constraints both in the US and in Brazil. In the US, you have different packaging for the products, whereas you move products in bulk, you have difficulties in finding containers and some other things. But also in Brazil, as we all know here in Brazil, the very big difficulty is with [jam at ports], with strikes and everything. So logistics is one thing.

The other thing is that we don't expect any deepening in the difficulties for the US economy. We may not see an improvement in the very short term, but we don't expect any deepening in the slowing of the growth of the US economy. That's another thing.

And on top of that, we do have the ability to limit, to a certain extent, the import of products as we see these as a consequence of our pricing power and the prices we have in Brazil. So yes, we had an increase. We've had certain increases in the past; you'll see further reductions after a while. We do think the same thing is going to happen and we don't think we're going to have a continuous increase in imports in Brazil.

Regarding prices, price in reais stayed relatively flat between the fourth quarter and the first quarter, as you said. You always have to take into consideration the variations in the exchange rate. If we compare the exchange rate here at the end of the year to the end of the quarter, it was almost flat. But throughout the quarter we had the currency, the Brazilian currency, gaining more value around the month of February.

So when you take that into consideration, you see that we increased the price in US dollars for around 3%. So the combination of a certain level of imports and the volatility in the exchange rate, that it actually makes our life a little bit more difficult than the appreciation itself. But the volatility led us to have a lower increase in price than we wanted to have in reais, although we had a 3% increase in price in US dollars.

For the second quarter and the third quarter, we do expect to have the already mentioned 10% increase in Brazilian reais as we also see increase in the prices externally. We had increase in prices of around 6% to 10% if you talk about PP and PE, especially if you take as reference the Asian prices. And we do plan to realign prices internally and therefore increase our price in reais to realign prices in Brazil from the international price.

Regarding the new polypropylene capacity; the imports are actually a space that we plan to occupy with the domestic production. So rather than seeing this as a difficulty, we see this as an opportunity. So what do we want you do is to work to replace imported polypropylene with the additional polypropylene that we're going to start producing.

We also have to take into consideration that we still have to have the ramp-up of these new plants. And therefore you have a certain time to work on the replacement of the imported PP and to market to the products that we have.

And finally, the polypropylene is a resin that has had a good rate of growth over time, and that will also help us to find a space because the demand growth will come. And therefore that will also help us to place the additional capacity we're going to have in the region, more generally speaking.

Okay. So you believe it's going to be possible to replace imports, still increasing prices throughout this year?

I'm not saying it's going to be easy, for sure it's going to be challenging, but I do believe we can, at the same time, increase prices because prices are increasing externally, and replace imported products at the same time. That's our goal and that's what we plan to do.

We've seen PP imports in the past also go up and down and we don't see a reason why we couldn't better supply our customers with a plant located in Sao Paolo instead of an imported product coming from be it the US or Asia.

Okay. Thank you very much.

Thank you Paula.

Thank you. Our next question is coming from Hassan Ahmed with HSBC.

Good afternoon guys. Question about some of this additional capacity in ethylene that's coming online, particularly in the Middle East. If my numbers are correct, there are essentially five new crackers that should come online through the course of the next 12 months. So I guess my question is that, clearly, there will be some global slackening in supply demand balances. But obviously Brazil as it stands, in terms of operating rates, particularly looking at your numbers, seems to look very, very strong with an expectation of continued strength.

So I guess the question is, do you think that you in Brazil would be relatively insulated from this global slackening supply demand situation?

Hassan, good afternoon to you. We do believe that we're going to have a rather different market in Brazil, mainly driven by the growth in the Brazilian economy. When we look at what we've seen in Brazilian economy, for instance the automotive industry is growing at 30% year-over-year for the beginning of this year. With the investment rate we've already seen further increases in the expectation of the growth of the Brazilian market.

And so, we have a very, very good economy with what we like to call an internally generated growth dynamic and therefore we believe we are going to have a growth in demand in Brazil that will help us market the products and keep the margins as high as we can.

On top of that, we've always had a tradition of having a spread over international prices that comes from several things. It comes from the services we provide to the client, technical assistance, the fact that we invoice the clients in Brazilian reais, the difficulties to import products in Brazil, the value-added products that we produce with our innovation technology center. And when you combine it all, that's what have been sustaining these spreads we have over the international market.

So although we do expect to have a reduction in utilization rates worldwide and a certain reduction in the spreads, we do believe that Brazil's going to be much more protected and we will have better utilization rates and better margins than the rest of the world. Be it because of all the several reasons that have helped us keep the spread or be it because of the very unique, I would say, economic conditions we have in the country now.

When I talk to the Middle Eastern producers, the recurring theme seems to be that they sit there and say, why should we even export product to the Americas, keeping in mind how ridiculously high transportation costs are? We're looking at $100 to $150 a ton to send, let's say, a product from Saudi Arabia to even North America, versus $7 dollar a ton, believe it or not, to send that product to China. But obviously in this quarter, I would imagine there was some North American product that came into Brazil as well.

My next question is, who do you think, going forward, would be the marginal producer? Because this was a bit of a strange quarter where the last several quarters basically, ethylene prices seem to have coupled with naphtha prices in North America. But in this quarter they seem to have come down a bit. So going forward, do you think this link between ethylene and naphtha prices will continue? And if so, do you think it will be the North American producer that would be the marginal producer, hence the price factor, or do you think it'll be the Chinese producer?

Hassan, we've seen this small gap between the ethylene producers and the naphtha producers. It's definitely related with the price of aromatics, and we don't expect it to continue the way it is right now. We do expect a [momentaneous] increase in olefin prices -- I'm sorry in aromatic prices, especially with the beginning of the [driving] season in the US and therefore the naphtha producers should gain more competitiveness in this future dynamic.

And having said that, it's not really easy to project who's going to be the marginal producer. I think that both the Asian producers -- some European producers based on naphtha will also have some difficulties in reaching a competitive position. That's something we'll have to wait to see.

Okay. Thank you so much.

Thank you very much.

Thank you. At this time, Braskem will take a question from the webcast.

We have a question that came to us through the Internet, coming from [Phillippe Santos] from Raymond James. He's asking what are the expectations for prices over the next quarters.

As I've mentioned before when I was answering [Paula Carvasy's] question, we plan to increase prices in Brazil in reais in 10% over the next two quarters. So we're starting to realign our price with international prices and we do believe we can raise prices as much as 3%, 4% over the second quarter, and altogether up 10% over the next two quarters.

So that's something we have already been working on since the beginning of the quarter and I believe it's going to be implemented, especially because prices internationally have gone up as well. So that's our strategy.

We still have to keep an eye on exchange rates because in the end of the day, the reference price for this market is the US dollar-denominated price and with the volatility, we have to adjust our strategy due to the exchange rate we have. But [it goes] to increase price 10% over the next two quarters.

Thank you. (OPERATOR INSTRUCTIONS). Our next question is coming from [Eric Orlam] with ING.

Hi, good afternoon everybody. Could you just tell us what the CapEx budget is for 2008 and if possible 2009?

And then also I'd just like to talk to you about your debt policy. I believe you were targeting a 2.5 times net leverage ratio. There's been some speculation in the market or in the press about some forthcoming bond issuance or export receivable issuance. If you could comment on that?

And then as part of that comment, with the investment grade rating by S&P, clearly that's a positive for all of the Brazilian corporate sector. Does that make you more inclined to try to achieve an investment grade rating? You could have been investment grade already, I suppose, under rating agency guidelines, but does the investment grade rating for the country impact your thinking at all? Thank you.

Okay Eric, the CapEx projected for the year is R$1.3 billion. That is going to be invested in several different projects including productivity, quality, increasing capacity, altogether R$1.3 billion.

We have already made investments of around R$240 million 'til the end of the first quarter. And for 2009, we are for getting the same number, R$1.3 billion for the next year.

Regarding the issuance of debt or an export prepayment. What we are planning to do right now, we are considering some of these transactions to refinance the bridge loan. We borrowed $1.2 billion last year; we borrowed a two-year bridge loan. We have two years to pay each drawdown that we made, and we've been drawing down this credit line over the last one year. So we have now one year left to repay the first drawdown, but we actually have two years to repay the last drawdown that we made last February, February of 2008.

So we do have a lot of time to do that. We are taking our time. It's been a good strategy because we considered going to the market by the end of last year and beginning of this year. And I do believe that the fact that we didn't go to the market benefited the company with the investment grade.

We've seen our bonds in the secondary market trading with the yield that is tighter 20 to 30 basis points when compared to the yield before the investment grade. So there is a potential benefit in the issuance of a new bond at the lower yield now once the company has the investment grade.

But these are transactions that we are considering to do right now. We have these $1.2 billion of bridge loan; we don't have no urgency in refinancing that. And over the next three to four months, we plan to already have decided and maybe implemented both transactions.

So we are right now working on the first quarter results, to announce the results update, all the informations we have and we may consider going to the market at a certain point in the near future.

Regarding the investment grade, and regarding the financial policy that we've mentioned. First of all, we do not have a target of net debt over EBITDA for the company. We have seen the net debt over EBITDA of the company going up and down as a result of its strategy.

So we want to have, at the same time, a certain level of leverage that is considered to be healthy. And I do think that 2.5 is a very healthy leverage. But on top of that, what we have as the main drive is this growth strategy of the company. So we ended 2006 for instance with a net debt over EBITDA ratio that was higher than 2.5. We made an acquisition in 2007 that helped us reduce this ratio. The investments that are going to be made in Venezuela will be project financed, meaning that we won't consolidate the totality of the debt.

So in the end of the day, we want to keep the leverage as low as we can, but at the same time, we won't miss any opportunity to keep Braskem growing. And it means keeping the investment base at R$1.3 per year investment in Venezuela and so on.

And from what we've been reading from the market in terms of cost of our debt, the market has been accepting quite well the growth strategy of the company and the current leverage we have.

I could also extend my answer to comment the average life of the debt, the EBITDA capacity and everything, but I think I've mentioned the most important things to mention on financial policy.

Regarding investment grade, we do want to become investment grade. We do believe we will become investment grade; we're working to get there. We have a BB plus with all three rating agencies right now. We already have one of these agencies with a positive outlook for Braskem, which gave us a positive outlook at the time we bought Copesul. So we believe the question of time.

Working on the refinancing of the bridge loan, we believe will help Braskem get closer to the investment grade. And working on the capture of the synergies of the acquisition will also help us get close to the investment grade.

So we do know what the rating agencies want to see to upgrade us and we are working in every single item to become investment grade at a certain point. That's the goal of the financial area. But as I mentioned, growing Braskem, making value creation expansions and acquisitions is the most important thing.

Great. Thank you.

Thank you. Our next question is coming from Gustavo Gattass with UBS.

Hi, (inaudible) I have three quick questions here; two of them relate to Venezuela. First off, you mentioned a R$1.3 billion CapEx figure for 2009 being similar to the one that you have this year. I just want to have an idea, does that already include potential investments in Venezuela or is that something that might be revised?

Gustavo, this number is for capital expenditures in the plants we have right now. For instance, the first project in Venezuela is the PP project, as you know; it's a $800 million to $900 million project. Out of the total investment, we plan to invest 15%. So in the end of the day, we are talking about a total investment of around $130 million over two years, $45 million. So once we have all the final numbers for Venezuela and once we have these approved by the Braskem Board, we may add to this number around $45 million per year -- I'm sorry $60 million something per year that represents the equity on the Venezuelan investment.

Once we have the PE project approved, and we plan to approve this closer to the end of next year, then we're going to have a new number for 2010. But as you can see, this number does not dramatically change the R$1.3 billion we've mentioned. If you translate this, $60 million, $70 million of investment per year in Venezuela into reais, you may be growing this R$1.3 billion in 10% actually to account for Venezuela.

Okay. And second question I had on Venezuela. I know you guys have come to this over and over and over again, but I always try. Is there any additional clarity that you guys can give us on what is being targeted for cost benefit for the cracker in Venezuela, or are we still on the conceptual idea that it's going to be on a parity with Saudi Arabia?

Gustavo, we've made several progress with Pequiven and with (inaudible) on the price of the gas, on working on the contracts of this gas, on price policy, on the competitiveness of the project. So at the same time, I can't give you more information than what we have right now because we haven't come to the final investment business case of this plan, to be shown to the Board of Braskem, to be approved, and then to be announced to the market.

But at the same time, I can't add more information to that. I can tell you that the project is going forward and as we see price of oil going up, projects are getting more and more competitive. So it's not a question of things haven't changed; they've been changing in the sense that they've been evolving. I just don't have the final information to give to you and to give to the market on the progress we've made and on the final study of both plants actually, polypropylene and polyethylene.

We've only approved the expense for the final study on January. January 15 this year, the Board gave us $90 million, in total $180 million adding Venezuelan investment. So we're still working on it and at the right time, we're going to come to the market and announce all the details.

What I can also tell you is that investing in gas-based expansions is a priority for Braskem. Not only because of essential price benefits, real price benefits, but also because of the naturally healthy diversification of raw materials. So we are also pursuing the alternatives in Peru, in Bolivia; we are moving forward with the Venezuelan project. So things are evolving.

Okay. My last question has to do with consolidation of the Ipiranga assets and effectively the deal with Petrobras. It's more of a generic question, but you've mentioned the timing of what you're expecting. Can you give us any timing on when the synergies might start being captured?

Well the synergies have already been captured. We've captured on analyzed terms actually R$77 million in the first quarter. So we just have to divide that by four. If that's before EBITDA around R$40 million, after EBITDA it's actually closer to R$50 million. We are having a very interesting and good income tax benefit in Copesul that, as you know, used to pay 34% of its profits in income tax.

So if you add these two numbers, you won't see it all in the EBITDA because part of it is post-EBITDA. But if you add these two numbers, you already see on analyzed terms the capture of more than R$120 million in analyzed terms.

On top of that, we have already captured around R$60 million on analyzed terms, with the cost reduction program we have inside Braskem. So on top of working on the projects and everything, we are working very hard to capture the synergies. And I don't want to announce any number different from the $1.1 billion net present value but what we've actually seen once now we are working together as one team, is that we have potential for more than that.

So I think that it's going to come with time once we are more confident with any new number. But the synergies have already been captured and we do expect to accelerate the pace of capture of the synergies towards the end of the year.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). We'll pause for a moment to compile the Q&A roster. At this time, there appears to be no further questions. I'll turn the floor back over to management for any closing remarks.

Well I'd just like to thank you all for the participation, thank you all for the interest and wish you all a happy weekend and happy Mothers Day. Thank you all. Bye bye.

Thank you. This does conclude today's conference call. You may now disconnect.