Braskem SA (BAK) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's Second Quarter 2008 Earnings Conference Call. Today with us, we have Mr. Bernardo Gradin, CEO; 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 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 call 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 belief and assumptions of Braskem 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 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. Thank you all for participating in yet another Braskem quarterly earnings conference call, this time to discuss the Company's results in the second quarter of 2008.

First, I'd like to remind you that this release is based on consolidated information. That includes the full consolidation of the results of Ipiranga Quimica, Ipiranga Petroquimica, and Copesul. With the respective elimination of the minority interest of all these companies as well as the proportional consolidation in accordance with CVM-247 instructions of the interest in Cetrel S.A. Empresa de Protecao Ambiental. To enable analysis of the results in relation to prior periods, data for the six-month period ended on June 30th, 2007 are stated on a pro-forma basis.

So let's go to the next slide, number three, where we'll begin our comments. Brazilian demand for thermoplastic resin in the second quarter grew by 11% year on year, driven by the expansion of Brazilian economy, especially in the automotive, construction, and consumer electronic industries, as well as by the [rebutting] of inventories in the petrochemical chain. Braskem's strength and its leadership position in the market, growing it's domestic resin sales in the second quarter by 17% year on year to approximately 600,000 tons with a market share of 53%.

Braskem carried out scheduled maintenance stoppages at its petrochemical crackers in the Camacari and Southern Petrochemical complexes, which accounts for 50% of our production capacity. The stoppages lasted an average of 35 days and led to declines in annual production of 125,000 tons in ethylene and 64,000 in propylene. These scheduled stoppages made improvements to the plants that included an increase in annual ethylene capacity at the Southern Petrochemical Complex of 25,000 tons.

The average ARA price of naphtha in second Q '08 was $995 per ton, 48% higher than the $670 per ton registered in second Q '08 (sic) and 18% higher than the $842 per ton in the first Q '08. Naphtha prices maintained their upward trend, accompanying oil prices and setting a record high of $1,092 per ton in June 2008. In the first half '08, increase of 50% of naphtha prices impacted in R$601 million in cost of goods sold of the Company.

Braskem posted net income of R$383 million, growing by 362% in relation to the previous quarter. The main driver of net income growth in the quarter was a positive impact from foreign exchange variation in the financial results.

Let's go now to slide number four in which we will discuss the evolution of our strategic movement. The transaction involving the acquisition of the petrochemical office of the Ipiranga Group by Braskem and Petrobras was approved on July 9th by CADE, Brazil's antitrust authority, which effectively concluded the evaluation process by all antitrust agencies. In the same decision, CADE also approved the investment agreement with Petroquisa and Braskem.

On May the 30th, Braskem announced approval of the integration of the interest held by Petroquisa in the [capital of] Copesul, Ipiranga Petroquimica, Ipiranga Quimica, and Petroquimica Paulinia. As a result of this decision, Odebrecht signed a new shareholders' agreement with Petrobras that further reinforces the strategic alliance between the two companies. As a result of this agreement, there was a capital increase at Braskem in the amount of R$720.7 million through the issue of 46.9 million common shares and approximately 43 million class A preferred shares, with Petroquisa's interest in Braskem increasing from 6.8% to 23.1%.

Braskem is advancing in the technical and economic feasibility studies for installation of a green polyethylene project at its Southern Petrochemical Complex with investment estimated at between R$450 million and R$500 million. The plant will have annual production capacity of 200,000 tons and annual ethanol consumption of approximately 460 million liters, which will be sourced in the country's Southeast region.

The potential demand for green polyethylene already identified by Braskem is roughly three times higher than the plant's capacity, suggesting the opportunity for further investments in the production of polymers made from renewable raw materials.

On May 17th, Braskem, Petrobras, and PetroPeru signed an agreement to assess the technical and economic feasibility of installing an integrated project for the production of 700,000 to 1.2 million tons of polyethylene, using as feedstock the natural gas available in Peru. Peru holds current and potential natural gas reserves that are rich in ethane. The target markets of the new projects are countries along the western coast of the Americas. In addition, due to the easy access to the Pacific Ocean and infrastructure already available in the region, the project could become an important export platform to Asian markets.

Let's go now to the next slide, slide number five, where we show the main indicators of Braskem's industrial performance. In the second quarter, PP plants operated at a capacity utilization rate of 89%, while PVC plants operated at the rate of 102%, confirming the improvement in plant reliability and making possible to accompany the growth in the domestic PVC market.

Meanwhile, the PE and ethylene plants operated at 73% and 74% capacity utilization rate respectively, mainly due to the scheduled maintenance stoppages at its two petrochemical crackers with average duration of 35 days providing the following benefits -- number one, increased productivity and production; and number two, improved operational reliability with another plant shutdown expected to occur in six years from now.

Resin production was 11% lower due to the lower availability of ethylene and propylene as a result of the scheduled maintenance stoppages. The investments made during these stoppages increased ethylene capacity from 2.48 million tons to 2.505 million annually, as well as polyethylene's capacity by 17,000 tons from 1.8 million tons to 1.832 million tons annually.

Let's move onto the next slide, slide number six, where we show the growth in Brazil's resin market as well as Braskem's share of this market. In the second quarter, domestic demand for thermoplastic resin, PE, PP, and PVC, maintained the same growth trend observed in the first quarter, supported by economic growth and an increase in per capita disposable income. In the second quarter, the level of resin demanded in the market as measured by domestic sales plus sales with export incentives plus imports grew by 11% in relation to a year earlier, led by the growth of 27% in PVC demand.

The tubes and connections, panels and shapes segment has registered very strong growth, reflecting the strong construction market, driven mainly by the growing use of credit in Brazil. Demand in the polyethylene, polypropylene, PVC market totaled 1.1 million tons in the second Q '08.

Total sales volume of thermoplastic resin domestic plus export sales at Braskem was 598,000 tons in the second quarter. Domestic resin sales in the quarter increased by 70% year-on-year, outpacing the growth in the Brazilian demand and is strengthening Braskem's leadership position in the market. In this context, market share in the second quarter was 53%, growing by 4 percentage points in relation to the previous quarter.

Let's go to slide number seven, where we present the main factors impacting the variation in EBITDA in the second quarter against the same quarter of 2007. Braskem's EBITDA in the second quarter was R$519 million, declining R$502 million from the EBITDA of R$921 million in the second quarter of 2007. The [purpose] of the commercial strategy aimed at keeping prices in the domestic market aligned with the price expressed in international markets had a positive impact of R1.3 billion.

The results of the program to reduce fixed costs and capture synergies had a positive impact of R$67 million on fixed costs and SG&A expenses. The increase of 48% in the average price of naphtha in dollar terms between the quarters from $670 to $990 per ton was a main factor in negative impact of R$1.2 billion in raw materials. The variation in the average exchange rate between the periods, with the Brazilian real appreciating by 60% against the US dollar, had a net negative impact of R$326 million, as shown on the slide.

The reduction in the total sales volume between the quarters was due to the decrease in the export volume and the impact of the scheduled maintenance stoppages and negatively affected the EBITDA in R$126 million. The negative impact of R$104 million basically consists of nonrecurring gains from the reversal of the provision for PIS and Cofins taxes of R$111 million in the second quarter of 2007.

Let's now move to slide number eight, in which we list the main factors impacting the variation in EBITDA in the quarter, this time in relation to the first quarter of this year. Braskem EBITDA, as I told you before amounted to R$519 million in the second Q '08. And it was R$64 million lower than the EBITDA of the first quarter, where it amounted to R$583 million.

The higher basic petrochemical prices and the success of the commercial policy of keeping prices in the domestic market aligned with the price expressed in the international market had a positive impact of R$166 million. Domestic resin sales volume, which accounted for 55% of the revenue in the domestic market grew by 17% for a positive impact of R$79 million, offsetting the drop in ethylene, propylene, and aromatics volumes, resulting from the scheduled stoppages in Triunfo and in Camacari in the quarter.

The increase of 18% in the average price of naphtha in dollar terms between the quarters -- naphtha went up from $842 per ton to $990 per ton -- it was the main factor in the negative impact of R$193 million on raw materials. The variation in the average exchange rate between the periods with the Brazilian real appreciating by 5% against the US dollar had a negative impact of R$61 million, as shown on the slide. Fixed costs and SG&A expenses had a negative contribution of R$39 million mainly due to higher selling expenses.

And slide number nine presents a simplified income statement with the main lines from Braskem's results in the comparison periods. Basically, we have already commented on the performance in the second Q '08. However, I'd like to point out some additional points.

Braskem posted net revenue in the quarter of R$4.4 billion in line with the previous quarter. It is important to point out the increase of 18% in domestic resin sales volumes and the increase of 22% in the net revenue of caustic soda, reflecting higher prices and sales volumes, which were offset by a drop of 6% in sales revenue from ethylene, propylene, and aromatics, due to the lower production in the period of these products, primarily due to the scheduled maintenance stoppages.

Compared with the second quarter of 2007, revenue fell by 11% as a result of two main factors. First one was a decrease in revenue from aromatics, ethylene, and propylene of R$247 million. And the second one was the lower revenue from the processing of condensate, which had an impact of R$283 million.

In dollar terms, the net revenue in the second Q '08 was $2.66 billion, expressing a 5% increase as compared to the first Q '08 and a 6% increase in comparison to the second Q '07. In this metric, the net revenue increased from $4.606 billion to $5.2 billion, and upside of 13%, making evident the impact of the appreciation of the Brazilian real against the US dollar. EBITDA -- we got into EBITDA. We have already analyzed in detail on the two previous slides.

Regarding the consolidated net financial result in the quarter, it was a financial income of R$407 million versus an expense of R$59 million in the second quarter of 2007, representing a gain of R$466 million. This result was mainly due to the difference in foreign exchange variation between the periods and its impact on the net financial result, as well as to the lower interest accrued in the period.

In relation to the first quarter this year, the net financial result improved by R$607 million. Once again, the primary factor was the impact of foreign exchange variation between the two periods, since the appreciation in the Brazilian real against the US dollar in the quarter was only 9% versus only 1% in the first Q 2008.

Starting this quarter, the difference between net income before minority interest and net income includes only the minority interest in Cetrel. The interest of Petrobras in the petrochemical assets of the Ipiranga Group were incorporated at the end of May. Net income in the quarter was R$383 million, heavily impacted by the foreign currency variation in the period. Year-to-date, Braskem recorded net income of R$465 million compared with R$408 million n the same six-month period of last year.

Let's now move onto slide number 10, in which we present an amortization schedule of Braskem debt, its allocation by currency, and the cash position on June 30th, 2008. On June 30th, 2008, Braskem's gross debt stood at R$8.8 billion, 6% lower than at March 31st, 2008, as a result of the payment of loans maturing in the short term and of the positive impact from foreign exchange variation the amount of R$589 million, which was partially offset by the full consolidation of Petroquimica Paulinia, representing a negative impact of R$277 million. In the quarter, the Company paid R$300 million in dividends. And R$252 million was received from the sale of the interest in Petroflex.

At the end of this quarter, the balance of cash and cash equivalents was down 5% and amounted to R$1.8 billion, impacted primarily by the payment of R$300 million in dividends, as already mentioned, and also the realization of R$555 million in investments. These two facts were partially mitigated by the receipt of R$252 million from the sale of Petroflex.

The average debt term increased from 9.7 years in March '08 to 10.5 years as a result of the substitution of part of the bridge loan due in 2008 with the $500 million bond issue coming due in 2018. Braskem continues to work to substitute the remainder of this bridge loan with structure operation debt. We will lengthen even further the average term of its debt, which already has an annual payment [required] that is adequate for the Company's cash generation.

At the end of June, 70% of debt was denominated in US dollars, a proportion slightly inferior to the 73% observed in March. Despite the reduction in net debt, the Company's financial leverage as measured by the ratio of net debt to EBITDA in the last 12 months, was -- which stood at 2.56 times in the first quarter rose to 2.78 times in the second quarter, mainly reflecting the decline in EBITDA over the last 12 months.

Let's now move to slide number -- the last slide, which is slide number 11, in which we present our outlook for 2008. The global economic scenario continues to be positively influenced by emerging markets, especially the strong levels of growth in the so-called BRIC countries, Brazil, Russia, India, and China, led by China with registered strong growth of 10% in the first quarter of this year. On the other hand, the expectations persist of a slowdown in the US economy. The combination of these factors should result in global economic growth of approximately 4% in 2008.

Regarding the petrochemical sector, it continues to present high prices for some plastic resins, despite expectations of [nuance] and capacity coming online over the next few years. The continuation of this level of price is mainly explained by four reasons -- first, delays in the stock up of new capacity in Iran; number two, uncertainties concerning other stock ups of new capacity in view of the strong global demand for resources and engineering services for large-scale projects and the considerable increase in the value of investments.

Number three, continued strong demand for resins in Asia and Latin America, and number four, the shutdown of less competitive capacity and the reduction in ethylene capacity utilization by major players in the global petrochemical industry in regions with lower demand growth, such as Europe and the US.

In this context, Braskem believes that a startup of new capacity will take place. But this new capacity will take place at a more gradual pace than previously estimated by the market, allowing the spread between resin and naphtha price to remain at high levels through 2008.

Braskem also expects Brazilian GDP to grow by 4.5% in '08, driven by stronger domestic demand as a result of the higher disposable income and the greater availability of credit lines at competitive rates and longer term. Under this assumption and in view of the growth of sales in the first half of the year, the Brazilian market for thermoplastic resin should grow between 10% and 12% in 2008 with significant demand from the construction, automotive, consumer electronics, and agribusiness industries, among others.

Braskem expects to benefit from this environment, drawing on its market leadership and unique range of products and services based on up-to-date technology and innovation, always pursuing the highest levels of profitability for its assets. The scenario in the second half of the year appears especially favorable since Braskem projects high capacity utilization rates at its four basic petrochemical production units, due to the productivity and efficiency gains from scheduled maintenance stoppages carried out already in the second Q '08 and also because of the fact that there are scheduled stoppages expected to occur at integrated and nonintegrated PE and PP producers in Brazil in the second half of 2008.

Regarding the synergies of the acquisition of petrochemical assets of the Ipiranga Group, we estimate capturing synergies of $1.1 billion and we expect to have them captured until the end of 2009. In addition to this program, the program to reduce fixed costs and expenses continues with estimated gains of R$100 million in both annual and recurring basis.

On the strategic front, Braskem plans to conclude the process to acquire the petrochemical assets of Ipiranga Group with incorporation of these assets by the end of September 2008. Among the expansion projects designed to increase competitiveness by gaining access to competitively priced raw materials are two joint ventures with Pequiven in Venezuela.

During 2008, this joint venture, especially Propilsur, the polypropylene project will work to structure their project finance in collaboration with export credit agencies, development banks, and private banks, and to complete the studies and engineering plants for the two projects. Braskem and Pequiven will make a final investment decision once these studies are complete with the studies related to the polypropylene project expected to be concluded before the close of this year.

Well, this concludes our presentation. And now, let's move to the Q&A session. Thank you very much.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS)

Our first question comes from Hassan Ahmed, HSBC. Go ahead, please.

Morning, guys. Or I guess good afternoon to you. Over the June and July time period, we heard a couple of chemical companies -- actually quite a few chemical companies, be they Dow or Eastman or Huntsman and even Braskem, come out and announce fairly aggressive price hikes. So, my question is twofold. First, how are those -- how are the buyers essentially reacting to these price hikes? And secondly, will these hikes stick in the current declining energy price environment?

Good morning, Hassan. Bernardo Gradin speaking.

Hi there.

The prices we announced in Brazil back in May was 20% in the following two months.

Right.

Today, we have 17% -- I'm sorry -- yes, in dollar terms, 17% already implemented. Your second part of question, we understand that there is a strong demand sustained for the third quarter in Brazil. So, the domestic demand is here. There is a stoppage of [Quarto] that will happen also on the third quarter. So, our strategy on the second quarter was to position ourselves on the market share, preparing ourselves for the second semester.

Sure.

So, we will remained focused on the spread margins. We'll remain focused on sustaining the high prices that we obtained the end of July. There's still some effort for August. But our focus will remain on the spreads.

Right. So, from the sounds of it, it seems that margins should expand fairly nicely sequentially Q2 to Q3.

We're confident that the third quarter will be attractive. I would not put objectives on how the margins will be.

Sure, sure.

But we are very much confident that the third quarter will be an opportunity for Braskem.

Superb. Thanks very much.

The next question is from Frank McGann, Merrill Lynch. Go ahead, sir.

Yes, if I could ask two questions -- one is in terms of the competitive outlook in Brazil, particularly with regards to imports, what you're seeing, particularly in markets like PVC, which where perhaps there's more product available coming from the US and other markets, which I believe you highlighted earlier. And then secondly, the status of the negotiations with Petrobras for potentially a discount in terms of naphtha, what types of terms are you looking for there? And secondly, if you are able to secure that, what or how much if any would you have to pass along potentially to your own customers?

Let me start with the first question. Yes, there has been an import pressure, not only in PVC, but also in polypropylene. PVC, we see a decline on the imports. We did imports ourselves on the second quarter. And we understand that there are some logistical barriers for much higher expansion of imports on a sustainable basis in Brazil.

The second question -- well, negotiations with Petrobras are not easy. They are complex. And we have a very important momentum today. We have new circumstances. First, Petrobras has a [susheterie] goal in the petrochemical sector different from the past. There is a consolidation of the Brazilian petrochemical industry in two large groups. We have to think of the future. And we have to involve the entire chain on becoming a global player, a global competitive player and not only a strong domestic player or regional player.

So, the idea on the new negotiation of a contract that after 30 years expired on the end of June is of bringing a concept of integrated chain and a concept of international competitiveness on the entire chain. So, the conflict is, you would comprehend that, much more than just prices. We are not talking about discounts. We're talking about a structural aspect for the new contract that could comprehend the entire chain.

So, we're talking about export policy, our quality of naphtha raw material and products for the entire chain, synergies with the refineries -- between the refineries and the crackers, payment terms for working capital in the entire chain, potential joint vestments for incremental raw material solutions, and of course, price conditions.

It is a complex negotiation. We estimate that such negotiation we will endure for the next semester. We're optimistic that by the end of the year, we'll have a solution. But again, it's a long-term concept that we've been discussing. Our intentions with the negotiations is, of course, to have the right concept for the future and then coming to the details.

Thank you very much.

Thank you.

The next question is from Denis Parisien, Santander. Go ahead, please.

Morning. Sorry. Thanks for the call. I'm wondering -- two questions, if I may -- one, I think you mentioned the possibility of financing the remainder of the bridge loan with structured transactions. I was wondering if you could give us some color on that. Are you talking about new [fijiques] or export prepayments or something else? If you could give us any color on timing, size, and the type of transaction.

And secondly, if you could give us more color on your comments at the end of your presentation regarding the delays of upcoming capacity expansions in Iran, some capacity shutdowns elsewhere in the world. In the past, you've given us some pretty good color in terms of what you thought the global capacity utilization was and some more long-range views on capacity utilization and spreads going out maybe beyond the next six months, but into 2009 and 2010. Thanks very much.

Hi, Denis. This is Carlos Fadigas speaking. Just to comment on the refinancing of the bridge loan, just remind, we borrowed a bridge loan of $1.2 billion last year. We have already refinanced $500 million of this bridge loan with a bond we issued on last May. And we are right now finalizing authorization. It's going to be an export prepayment of an amount of $500 million.

This transaction's going to be led by the three banks that lent us the bridge loan, Citibank, Calyon, and ABN Amro now in Brazil, ABN Amro's center there in Brazil. And we are bringing this transaction to the market actually at the end of this week. So, end of this week, beginning of next week. It's a five-year transaction with a two-year grace period. And we are right now inviting a group of banks to joint this transaction at [Analace]. And we hope we will have the whole thing finalized within the next 45 days.

With these two transactions, with the bond and the export prepayment, we will probably refinance $1 billion out of the $1.2 billion. We still have something around a year and a half to refinance the remaining $200 million. And we haven't defined how we want to do that right now. We still have some time. We're going to wait to see how the market evolves over the end of this year to see what we do with the remaining $200 million. But just to put in perspective, with an EBITDA of around $1.5 billion, $1.6 billion, with a cash position of more than $1 billion, $200 million is really not a big issue to be refinanced or to be repaid out of the bridge loan.

I'll pass on to Bernardo to comment on the cycle and additional capacities.

Thanks. Denis, hello. Good morning.

Morning.

The forecast we have for 2009 based on ethylene capacity and the information we've had from our consultants and our main clients is that there should be an increase of 9 million tons on the supply side. And that may be -- talk about a quarter or so. So, we'll prepare ourselves for a mid-cycle happening next year. And prepare ourselves, I'm talking about concentrating on setting up the synergies [aligned] on cost reductions and a positioning on the domestic markets for next year.

We understand also that such a mid-cycle is expected. We think that it will be milder than originally thought. I'm talking about two years ago. But we'll keep our teams focused on cost reduction, the American economy, and how China and the emerging markets will sustain growth on the demand side.

And margins next year, can you give us a little bit of color there, how much they might compress, even though it's a milder mid-cycle event, but any color in terms of where we might end up on average 2009?

Denis, it's hard to forecast average margin for the next year. Again, it's Fadigas speaking. What we have in our hands is the operational rate for next year that has been revised upwards year-after-year. So now, we are probably looking into an 89, 88, probably even better than that operating rate. That translates in mid- to better-than-mid-cycle profitability.

Another important point is that, as you probably know, logistic issues play in our favor. Most of this additional capacity comes on stream in the Middle East is targeting the demand in Asia. So, to a certain extent, the South American market is protected by additional costs of transportation and other difficulties to move products into Brazil, that in the end it translates into better margins that Braskem has had over the last several years.

On top of that, the additional demand on domestic market is very strong. As you know, Brazil's growing between 4.5%, maybe 5%. For the next year, it may be lower than that. But the Brazilian domestic market has a very different dynamic right now than the developed economies, should help us sustain margins. And finally, although we see some economic slowdown in the central economies, mainly Western Europe, Eastern Europe, and the US, we also seen the emerging economies quite strong, mainly India, China, and again Brazil.

So, with the combination of all these effects, we are hoping to fight to keep the margins at mid- to better-than-mid-cycle profitability. But again, it's hard to give a number because it all is going to vary also with the price of oil and with the price of naphtha as a consequence of that.

Denis, I think that next quarter, it should be more clear on the expectations that we may draw for next year.

Great. Thank you very much, gentlemen.

The next question is from [Felipe Santez], Raymond James. Go ahead, sir.

Yes, just one general question about the green polymer. How do you see the demand from the market? How is the development of the investment? Thank you.

Thank you. The investment's in the final phase for -- final estimates for the presentation for the Board. We expect to present the project to the board next month. The initial numbers are very attractive. The numbers that we have from the demand side are over three times the capacity that we intend to offer on end of 2010. We're very optimistic about the project and opinion that we'll be able to charge in international practice for the first three or four years of the project.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question is from Gustavo Gattass, UBS. Go ahead, please.

Good afternoon, guys. I had two quick questions. The first one, Bernardo, just wanted to come back to the point you made on the price increases just to clarify it. You mentioned that you had already captured 17% out of the 20% that you were looking for, price increase. And I just wanted -- really wanted to check. Is that 17% in local currency or is it in dollars? And if it is in dollars, what's your base? Is it -- is the base May or June that you're looking at?

In local currencies, the price went up 7.5% combined --

Okay.

In dollar terms, it went 17% and the base was May.

Okay. Perfect. The second question that I had regards ethanol and the financials for the green polyethylene unit. Do you already have a view on how you're going to contract the ethanol if it's going to be a long-term price that has any relation to naphtha or if it's going to be domestic ethanol prices?

That's a very important question. And the alternatives are being presented to the Board next month. There are advantages and disadvantages of having the price linked to naphtha. We have negotiations with potential suppliers on both aspects. On having a fixed price contract, there is some costs, and another alternative on having prices of ethanol linked to oil. Such decision will be made next month. And also, on the next quarter, I'll be able to clarify that for you.

Okay. Perfect. Thank you.

The next question is from [Walter Bianchi], [Fundamenza]. Go ahead, please.

Good afternoon, gentlemen. Just to come back about these price increases, you had a price drop in polypropylene and polyethylene from the second quarter to the first quarter of around 5% or 6%, especially the polypropylene price. And you had mentioned a 3% increase in June and 4% increase in July, a total of 7.5%. Could you please tell what exactly is even level of the third quarter price compared to the second and to the first quarter price?

Walter, it's Fadigas speaking. We -- the line wasn't very good. What I understood is that you want us to comment on the price for the third quarter compared to the second quarter. Is that correct?

That's right. That's right, compared to the second and to the first quarter of 2008.

Okay. I'd like to clarify some aspects on pricing on the side of Braskem. We have the opportunity to discuss pricing with you guys every 90 days. And that's when we outline our strategy for the quarter that is beginning, the quarter ahead of us. The point is you have to bear in mind, we have to adjust prices to exchange rate fluctuations.

That's exactly what happened in the last of -- in the end of the first quarter, when we said we wanted to increase prices by 20%. And right after that, the Brazilian real got stronger by 10%. So, we had to adjust the Brazilian price to the exchange rate once we always said that the international market and Braskem realigns its prices to international price. And that's where we have to rely on exchange rate.

Another important thing is that you have also to keep an eye actually on international price as well. So, realigning price with international price has to take into consideration what is going to happen to price internationally. And thirdly, we also have to keep an eye on cost of raw materials. So, it's very hard to comment on the prices on --

Quarterly basis.

-- quarterly basis as we actually manage that almost on a weekly basis. And we have to adjust the dynamic of inflow of products coming through import to the group of the Brazilian domestic market.

So, what we are doing right now, we are realigning our price with international prices. We are getting back to the level of profitability we've had in the past. If you look at average spreads and average margins of Braskem, you see that Braskem from '03 to '07 had 18% EBITDA margin. And actually, we went through some squeeze in margin because of the very sharp increase in naphtha prices. So, as we see prices of oil and naphtha stabilizing and as we have now time to catch up with the recent increases in naphtha prices, that's what we want to do. We want to get back to the level of profitability we've always had.

How this is going to translate into prices in reais is very hard to say because of the things I've mentioned to you -- exchange rate, prices of resins internationally, and price of raw materials. So, that's probably the main guidance we can give to you. The price should affect the level of profitability. I don't think it's going to happen over the next 90 days because it's going to take some more time to implement increasing price to get to where we want to be. And we simply can't give you a number in percentage points of price in Brazilian reais because of these factors.

Walter, Bernardo speaking. I understand the concerns you have on pricing. But let me -- allow me to tell you that the way I see it and the way I like to have my team see it is that we should be able to deliver sustainable and strong margins. So, it will be dynamic on not only in the near future, but also for the entire year. Our focus will be on margins.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS).

Being no further questions, this concludes today's question-and-answer session. I would like to invite Mr. Valverde to proceed with his closing statements. Please go ahead, sir.

I'll pass onto Bernardo Gradin.

Ladies and gentlemen, thank you very much for participating on our conference call. I would like to thank you for following our Company. And we, as I said, we estimate that the next quarter will be a good opportunity for us on the domestic market in terms of how we will sustain a market share. We are also optimistic about the quarter without an extra duration. We don't think that will be an extraordinary quarter. We think that we will position ourselves in a quite strong way. Thank you again and we'll see each other next quarter.

This does conclude the Braskem's Second Quarter 2008 Earnings Conference Call Audio Conference for today. Thank you very much for your participation. Have a good day.