Braskem SA (BAK) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem Second Quarter 2015 Earnings Conference Call. Today with us, we have Carlos Fadigas, CEO; Mario Augusto da Silva, CFO; and Roberta Varella, Investor Relations Director.

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 session. 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 on 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 management and information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstance 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 will turn the conference over to Roberta Varella, IR Director. Ms. Varella, you may begin your conference.

Good morning, ladies and gentlemen. Thank you for participating in another Braskem earnings conference call. Today, we will be commenting on our results for the second quarter and the first half of 2015.

We would like to remind you that pursuant to Federal Law 11,638 as of 2007, the results presented in today's presentation reflect the adoption of International Financial Reporting Standards. The financial information in today's presentation has been reviewed by an independent external auditor.

Now, let's go to next slide, where we will begin our comments.

On slide 3, we present the highlights for the second quarter of 2015. The average cracker capacity utilization rate was 93%. If we exclude the Rio de Janeiro site whose production limited by the continued feedstock supply issue, the capacity utilization rate came to 97%. The 5 percentage point expansion over the previous quarter was due to the increase in operational efficiency, as a result of process improvements from the past years. Also contributed to this performance, the recovery of part of the competitiveness of naphtha-based crackers worldwide due to cost production improvement in relation to the gas-based crackers and the (inaudible) opportunities in the international market.

The duration in the Brazilian economic scenario and the changes that we reviewed in the beginning of 2015 impacted the demand for thermoplastic resins in the second quarter, which totaled 1.2 million tons, 8% down over the same period last year. Braskem sales followed this trend and amounted 792,000 tons.

On the other hand, the difficult dynamics of international market and exchange rate level resulted in an increase in the export sales. Regarding resins, its export sales totaled 373,000 tons, 53% more than in second quarter of 2014 and 46% up from first quarter of 2015. Polypropylene sales by the US and Europe business unit reached 493,000 tons, 7% up on first quarter, mainly reflecting the improved performance of the US economy, which positively influenced the main factors related to consumers giving discounts.

Braskem recorded consolidated EBITDA of BRL2.6 billion. This expansion is explained by the better operation performance, the improvement of the contribution margin due to the recovery of resins and basic petrochemical spreads in the international markets and the depreciation of the Brazilian real. Thanks to the improvement in cash flow generation capacity, the Company's leverage as measured by the net debt to EBITDA ratio in US dollars stood at 2.27 times, 11% down on the previous quarter and 17% down on the same period of 2014. This was the Company's lowest leverage since 2007.

Construction of the Mexico complex continued to move ahead and [about 95%] complete at the end of the quarter. The first steam generation boiler was also inaugurated with the sanction for the function of the large turbines and equipments such as compressors and power generators. In line with Braskem's commitment to sustainable development, it was mentioned the launch this quarter of Braskem Labs. The program encourages companies to come up with innovative solutions for recurring problems in modern society through the use of plastics.

Now, let's go to the next slide, please. On slide 4, we discuss the performance of the Brazilian thermoplastic resin market and Braskem's sales in the second quarter and first half of 2015. The Brazilian thermoplastic resin market totaled 1.2 million tons, 15% down on first quarter, which had been positively impacted by the (inaudible) anticipation of product sales volume due to the resin price (inaudible) in the international markets. Further downward pressure came from the slowing of Brazil's economic activity and its impact on domestic demand. The exceptions were in those segments related to troubled business, which is (inaudible) productive and competitive to meet growing demand (inaudible).

In relation to second quarter of 2014, resin consumption was 8% down. Following the Brazilian market trend, Braskem sales totaled 792,000 tons in the second quarter of 2015. The Company ended the quarter with a market share of 66%. In the first half of the year, the Brazilian thermoplastic resins market totaled 2.6 million ton, in line with the (inaudible), Braskem sales were 1.7 million tons.

Moving on to slide 5. On slide 5, we present the factors that influenced EBITDA in the second quarter of 2015 in comparison with the previous quarter. Consolidated EBITDA totaled BRL2.6 billion. The average US dollar appreciation generated a positive impact of BRL230 million, with a positive net revenue impact of BRL784 million and a negative cost impact of BRL554 million. In US dollars, EBITDA was $850 million, an increase [around 17%], mainly reflecting the better operating performance and improvements in the contribution margin as a result of the recovery of thermoplastic resin and basic petrochemical spreads in the international market.

Now, let's go to slide 6. On slide 6, we present the factors that influenced EBITDA in the second quarter of 2015 in comparison with the same period last year. The BRL1.5 billion EBITDA expansion is explained by the appreciation of the average US dollar, which generated a positive impact of BRL914 million, with a positive effect of [BRL3.1 billion] on revenue and a negative effect of BRL2.2 billion on cost. The better operation performance, the higher total sales volume and the recovery of thermoplastic resin spreads in the international market, which offset the lower basic petrochemical spreads.

Moving on to slide 7. This slide shows Braskem's debt. Since the investment made in Mexico project by the subsidiary Braskem Idesa is financing under our project finance model with (inaudible) in the project's own cash generation, the analysis presented here exclude this amount. In this context, on June 3, 2015, the Company's gross debt totaled $7.3 billion, 2% up on March 31, 2015. In Brazilian real, however, debt fell by 2%, reflecting the impact from the 3% US dollar depreciation in the end of the period. [70%] of gross debt was dollar denominated. Cash and cash equivalents stood at $1.5 billion. As a result, net debt came to $5.9 billion, up by 3%. In Brazilian real, net debt remained [flat] over first quarter of 2015. 75% of net debt was denominated in US dollar.

In line with the liquidity strategy, Braskem also maintains two stand-by credit facilities in the amount of $750 million and BRL500 million, which do not include any restrictive covenants on withdrawals during times of adverse market. EBITDA growth of 16% in [the last 12 months] had a positive impact on leverage measured by the net debt to EBITDA ratio, which improved from 2.55 times to 2.27 times. When measured in US dollar, 11% down on the previous quarter. This is the lowest leverage since 2007. Leverage in Brazilian real came to 2.59 times, down by 22%.

On June 3, the average debt term stood at 16 years. Considering dollar denominated debt only, the average term was around 21 years. In July, the credit rating agencies (inaudible) outlook from stable to negative. As a consequence, the agencies also changed the outlook of 21 Brazilian companies among them Braskem's outlook from stable to negative. It's worth emphasizing that only 4% of total debt matures in 2015 and that the Company's high level of liquidity ensures that it has sufficient cash and cash equivalents to cover the payment of obligations maturing in the next 33 months, including the stand-by credit facilities (inaudible) 46 months.

Moving on now to the next slide. Slide 8 shows our CapEx in the first half of 2015. Braskem invested BRL798 million in the period or BRL516 million, excluding the Mexican project. Of this total, around 90% or BRL483 million was allocated to industrial operation, including investments relating to improving operational efficiency and productivity. The reminder was allocated to other strategic projects such as the production of UTEC in La Porte in United States. Regarding the Mexican project, which is scheduled for operation to start by the end of 2015, Braskem invested $105 million or BRL282 million in the first half of the year.

Now, let's go to the last slide. On slide 9, we will talk about the global scenario and Braskem's priorities. [Reduced] growth of the US economy in the first quarter of 2015 led International Monetary Fund to revise its annual global growth estimate now from 3.5% to 3.3%. However, it believes that the gradual recovery of economic activity in the developed markets, which constitute (inaudible) global GDP growth versus to-date remains intact. Regarding China, the GDP outlook expansion remained the same, (inaudible). Even the policies adopted by the government ensure more sustainable growth sending a rate factor associated with the global economy are related to rate of financial market volatility especially in Asia and the impact in Greek debt negotiation and its potential impact on the Eurozone and the world economy.

The Brazilian outlook remains challenging. Given the deterioration in the economic scenario, annual GDP is expected to shrink by 1.80%. As for the petrochemical industry, the scenario remains positive. However, with the end of the scheduled and unscheduled maintenance shutdowns, particularly in Europe and Asia and the consequent migration of production, petrochemical spreads in international markets are expected to be narrow than in the second quarter. (inaudible) related to deflations in Chinese demand, geopolitical issues in the Middle East and North Africa, and the recent negotiations (inaudible) on Iran which may put further pressure on oil price.

In this context, Braskem's strategy remains (inaudible) on the development markets of petrochemical and plastics chain and investments in project designed to diversify the fixed cost mix and improve global cost competitiveness to renew on a competitive basis (inaudible) and completion of the construction of the integrated project in Mexico and its operation to start up at the end of 2015. In line with its commitment to financial healthy and cost discipline, it intends to (inaudible) implement a program to reduce fixed cost, which on a nominal basis should generate annual savings of between BRL300 million and BRL400 million.

That bring us to the end of our presentation and we will now go to the question-and-answer session.

Thank you. The floor is now open for questions. (Operator Instructions) Mr. Frank McGann, Bank of America.

I was just wondering perhaps two things. One is as you're looking forward and you're looking at the economy, obviously it's quite weak and I was wondering how you're seeing overall demand trends as you've come through the second quarter and the beginning of the third quarter, how that compares to what your original expectations were.

And then secondly, with the weaker economy more of your product potentially can be sold into the export market, I was wondering how you are viewing that as and the potential effect that could have on the margins on those products sold as exports versus sold in the domestic market.

Hello, Frank. This is Carlos Fadigas speaking. When we, taking about demand, when you compare the first half of this year with last year, we are down 1%, but the economic situation in Brazil has deteriorated over time. We started the year with a forecast for GDP that was close to zero. And at this point the average, the consensus or the average opinion in Brazil is that GDP is going to go down about 2%. So that's for GDP. For resins, as I mentioned to you, we are down 1% when you compare the first half of this year to the last year.

Our best projection at this point is that demand in Brazil will end the year roughly 2% lower than it was last year. Having said that over the last weeks eventually, two months, but especially the last weeks, the political situation in Brazil has further deteriorated. So I wouldn't say we have a different number, I just would say that the level of uncertainty has increased. We have more uncertainty at this point. What our customers are saying is that the final customer right now are also buying, I would say, just the amount needed to keep the business running. So they are also seeing uncertainty, they are avoiding any type of inventory and the final demand is also weaker. It varies, domestic and durable to consumer goods, it's negative throughout most of the spectrum. (inaudible) in Brazil and its demand for plastics is still a positive one, but apart from that, most of the segments are in the negative, eventually neutral.

So, maybe as a wrap up, I would say, higher level of certainty, negative scenario at this point, lots of demand for resin of roughly 2%, but we have to keep an eye on that to understand how the political situation will evolve and as a consequence of that how the economic situation will evolve. Naturally, we -- the top priority, now addressing your second question about export, our top priority is to allocate the products to the domestic markets where we have better results, I'd say. The secondary market would be Latin America and then exports to overseas. The growth in exports reflect the -- we really wants to keep the (inaudible) improve. What I am trying to say is that, the exports you make -- you don't make up the demand in Brazil, but it's still positive margin, still helps run the plants close to full capacity if possible.

Having said that, if you think about minus 2% (inaudible) minus 3, minus 4, but speak about minus 2, it's not a dramatic change based on what we had last year. So, the dynamic around the spread, the dynamic around the US, the weakening of the Brazilian real is much more important to the results of Braskem and (inaudible) 2% of what was one of the (inaudible) in Brazil should be exported. I hope, I've answered your question.

Ms. Christina Ronac, HSBC.

These are some quotes in newspapers talking about the naphtha contract with Petrobras that there was something about 50-50 chance you can get it done by the end of this month or not. Can you provide us any color on how that's progressing and any more detail on what Petrobras is asking for versus what you are willing to do, if you can give kind of some idea of how far apart you and Petrobras are on (inaudible) new long-term contract?

The 50-50, I think, came out through the press to give a phone call on my comment. Yes during the press conference, I actually said I'd like to avoid leaving specific chances of signing a long-term contract. So what I said was I'd like to avoid, say, putting a chance on that, so just we're 50-50. So that's what I said.

To give more color on where we are right now. First of all, (inaudible) is two teams, the Braskem team and Petrobras team (inaudible). I myself will be at Petrobras next Monday, we'll have a meeting there. Exactly Petrobras announced a conference. So we are engaged, we are meeting, we are discussing. I see the effort from both sides not only Braskem is motivated and focused on finding a solution, and Petrobras is doing the same. We've put what we believe should be a creative alternative on the table, a formula that varies -- that could go from -- the initial suggestion was 90% of (inaudible) European reference price, jumped [210%] of that and that would vary with the price of the naphtha.

The higher the price goes, the better for the oil producers, the naphtha producers the worst, tougher for the buyer. Therefore it would be a discount -- the lower it goes, it's tough for the naphtha (inaudible) petrochemical companies with pretty -- be a premium on top of that, so that was our proposal.

Petrobras' team is at the same, I would say, position we had before. I don't know how familiar you are there, but over time Petrobras claim that they have used -- roughly half of the naphtha, they use to supply us, as to the gasoline boom and therefore they claim that to supply the petrochemical sector they have to import now. Because of that their position is that we should compensate them for the cost of financing in Europe and bringing back to Brazil. That's a position that we disagree with, we have always been supplied by the naphtha produced locally, we have nothing to do with the growth of the natural gasoline and we view that actually grew [70%] over the least five years. It's a rare case of huge demand growth for gasoline and that has to do with the price of gasoline being both for actually subsidized to some citizens for a very long period of time. But this gives you some of the bedrocks.

So our position is, we put some alternative on the table that we feel is creative and could accommodate the change in these markets over time. So if we are to sign a longer-term contract, it should be a formula that could accommodate for different scenarios going forward, specialized position remains the one that we should concentrate and what it cost (inaudible) the end of this month of August, the current quarter, the current extension of the contract, we'll finish by the end of this month. And we have until the end of the month should come up with a solution. I do hope we find a solution. This then allow us to sign a long-term contract. If we don't, I think that at a certain point, (inaudible) will have to face what we discussed the possibility of going after another extension. But having said that, we always need to focus on trying to find the long term solution. I hope I have given you some more color on the above discussion.

Thank you. And if you don't mind, can you also clarify the (inaudible) out there on the contrast Petrobras has denied, that 6 billion number the Pet prosecutor has come up with. But Petrobras -- sorry, I don't want you to speak on their behalf, but they wrote a vague letter staying there was something odd about the contract and they're investigating it. Could we know what they were referring to and if there is something odd about the contract, I think, something about a wrong signature? I don't know if you have more explanation on what may be going on there?

Yes. Only the comment I can make, Christina, because as you know that are delicate. It came on top of that as you said, I wouldn't like to speak on behalf of Petrobras. I'll tell you what I read through the press and you already self see kind of common knowledge in Brazil. Petrobras, especially the current officers, the new Board, new officers, they (inaudible) most of the things that were decided and signed and gone in the past. So they are going through the very extensive internal audits about everything that has been done in the past and this has been very public in all the so-called wrong doings, things that happened and so on. So that's what we read.

My understanding is that one of the analysis they made about its several decisions over quarters was around these naphtha contracts. And the information we have is that among all the internal compliance and (inaudible) procedures there were some of them that weren't properly addressed. That's all I know. Having said that the same documents that (inaudible) these lack of full compliance with governance rules, they also mention the same documents, they also mention (inaudible). They were not able to find any loss to Petrobras. And on this topic, there is extensive material supporting the conditions at the time of the negotiation and how the contracts did not bring a loss to Petrobras. That's also part of the documents we had access to, but there are several decisions made in the past that they have revisited, re-analyzed, scrutinized and checked against all the compliance and governance procedures of Petrobras. This contract is one of them. That's all I can address.

(Operator Instructions). Mr. Pedro Medeiros, Citigroup.

This is actually a follow-up to the Portuguese version of the call. We talked a bit about the outlook for demand from China and how the outlook for demand for a number of polymers is working and how you guys are seeing this market. But I was wondering if you can talk a bit about what kind of impacts does this start-up of a number of [CTO and NPO] facilities in China, they are still previewed to start for this year and early 2016 may have on the market, can the increased capacity be easily absorbed by the outlook of demand?

China is actually one of the reasons in the world where capacity being added, I mean, it's mainly if we talk about polymers, more specific about -- especially about polyethylene, if you ask we believe in China. For several years now we've been tracking the capacity addition in China and other chemicals, not only ethylene addition in China, it's called olefins in China, (inaudible) where they're going to be adding how this project where they didn't have enough water, the water in the right place and so on.

So how capacity -- I'm not an expert in China, but what I've learned over time especially over the last five years is that these huge drop especially in polymers never happened the way that it was forecasted. It has happened in (inaudible) in the past and years ago (inaudible) but never happened in the material way with polyethylene and polypropylene.

So if are to think about the additions of capacities of ethylene, the forecast for the next several years starting with 2016, going all the way to 2018, what we see actually is that it's kind of a balance. Actually, it's not changed especially in polyethylene in more dramatically in 2018 because of the US, not because of China, but for the certain number we have give an idea. For this year is an addition of capacity (inaudible) we had 6 million from Brazil. That's some talk of a market, it's [$130 million] on a -- globally, we are growing 3% a year, ethylene would grow slightly above that, if we get 4% growth on top of that. We will need exactly 5 million. So that's why I'm mentioning as we look forward even with China, we see kind of a balance of capacity.

If China would account roughly (inaudible) capacity, some more is forecasted for 2018, but between now and 2018, it's never more than 2 million tons, and that's already put in this (inaudible) 7 million tons per year. So I do not see China with 2 million per year (inaudible). We will be adding in a total of between 5 million and 7 million per year. The forecast we have for next year is 7.3 million and then 6.7 million tons in the following year. So we are talking -- if not, for the balance, we have to grow in demand, we are talking about eventually 1 million tons additional, talk about market is 130 million tons. So I don't see that as immaterial.

And to be honest with you, after thinking back in the last -- of the last decade, all the threats with additional capacity coming with new release and that never impacted the market at one single time, changed spread over time, and all the concerns with China for several years now has been spread over time, project has been canceled, project has been delayed.

Maybe wrong, but there was (inaudible) is United States, because it's disciplined, because of its continuing capacity, because of the players during this plan. So I think that -- yes, we can always have, I may be wrong and always have a surprise coming from China from the supply side, but (inaudible) in the US, I don't see the huge wave of polyethylene and even polypropylene. And they've managed to put some other markets in a tougher position. They've managed a huge capacity (inaudible)is not going to a good time, but not the case with the resins we produce (inaudible) and will remain for some time. So, that's few of the data point on China.

(Operator Instructions) I will turn over to the Company for closing remarks.

I'd like to thank you all for participating and a very long call in Portuguese, we ended up having a short call in English. I'd like to thank you all for joining us in this call in English.

I'll finish by saying that I'm glad we had a good operational performance in the second quarter. It came at the right time of operational performance, because the margins were actually captured. The weaker Brazilian real finally is bringing back their competitiveness to the Brazilian industry. So when these two provisions presented themselves, we were able to act on that and to capture the margins for Braskem and reached a record EBITDA in this quarter.

As we did that, we also kept walking (inaudible) long term. So we signing off the conference call (technical difficulty) we hope to have it finalized soon. So we want to have energy (inaudible). So it's going to be after someone else to think about it in the future, not to this management. And as we working on the margin in the second quarter, we also kept focus on the product mix. So all-in-all, despite the news in Brazil, despite the political environment, economic environment in Brazil, I'm glad to see that the team kept the focus and we delivered good results.

Thank you all for participating in the call, and I wish you all have a good weekend.

Thank you. This concludes today's Braskem's earnings conference call. You may disconnect your lines at this time.