Braskem SA (BAK) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Braskem's unreviewed by the auditors first quarter of 2017 earnings conference call. Today with us we have Fernando Musa, CEO; and Pedro Teixeira, Investor Relations and Controller Director. We would like to inform you that this event is being recorded. (Operator Instructions)

After Braskem remarks are completed, there will be a question-and-answer session. (Operator Instructions)

We have simultaneous webcast that may be accessed through Braskem's IR website at www.braskem-ir.com.br and the Engage-X platform where the slide presentation is available for download. 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 Events 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 on information clearly 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 the 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 Pedro Teixeira, Investor Relations and Controller Director. Please, Mr. Teixeira, you may begin your conference.

Good afternoon, everyone. Thank you for participating in the first quarter 2017 earnings conference call of Braskem.

Moving in our presentation to Slide #3. It's important to report that although the company continued to make progress in -- on the required evaluation of its (inaudible) internal control as announced to the market in its material fact dated February 2002 and March 2008 -- 2017, the company has not yet concluded its work with independent auditors, which have made it impossible to report the information duly reviewed by auditors. However, in order to keep the market informed on its operational and financial performance, the company reports today its financial information unreviewed by the auditors for the first quarter 2017.

Beginning our presentation on Slide #4 where we tackled the results of the operations in Braskem -- of Braskem in Brazil during the first quarter. It's -- the highlights are as follows: the company reached (inaudible) rate in its cracker in Brazil of 95%, 6 percentage points up when compared to the fourth quarter 2016, and 5 percentage points up from the fourth quarter 2016, remembering that in the fourth quarter, we had a stoppage for maintenance in the cracker in Bahia. And also in the first quarter 2017, the company run its cracker in Rio de Janeiro at a very high utilization rate with higher supply of local feedstock and also imported -- maintained a small amount from the U.S. to run its cracker in Rio de Janeiro at even higher utilization rate.

The Brazilian demand reached 1.2 million tons in the first quarter 2017. It was increased by 5% when compared to the first quarter 2016, and demand became stable when compared to the fourth quarter 2016. The company market share expanded by 2%. The company sold in the market, in the Brazilian market, 844,000 tons, which represents an increase of 8% from the first quarter 2016, above the increase, the overall increase of the market, does represent an increase in its market share. The results of exports were very positive as well. The company increased its export of resin by 3.5% as compared to the first quarter 2016, and the export of basic petrochemicals increased by 27% when compared to the first quarter 2016.

EBITDA generated by the facilities and the operations in Brazil reached $761 million and represented 68% of the consolidated EBITDA of the company.

Moving to Slide #5. I just want to point out the 2 graphs on the lower side of the slide. The first one show the evolution of the EBITDA in Brazil, and there was an increase in EBITDA margin from 18% to 25% in operation and integrations in Brazil. An important factor here, aside of the good utilization rate and the level of exports, were the fact that price of basic petrochemicals went very up in this first quarter, then the margins in Brazil were pushed up from 18% to 25%. The resin spread on the lower side of the slide show that the spreads were somehow stable during this quarter and increased just by 1%. So the main fact here was the margin generated by the petrochemical -- the basic petrochemicals segment in Brazil.

Moving to Slide #6. We are going to talk a little bit about the results in the U.S., Europe and Mexico. Beginning with U.S. and Europe. The utilization rate in those regions reached 101%, 1% higher than the first quarter of 2016, and 4 percentage points higher as compared to the fourth quarter 2016, remembering that in the fourth quarter of last year, there was a scheduled shutdown of Marcus Hook unit, a facility that we have in U.S.

In this quarter, we reached new record of sales in U.S. and Europe. We accounted 534,000 tons. That increased by 7% when compared to the first quarter 2016, 6% when compared to the fourth quarter 2016. The EBITDA of U.S. and Europe together represented 17% of the total EBITDA of the company and equivalent to $188 million. It is important to report that in January, the new plant in La Porte, Texas have begun its operation to produce the UTEC resin, which enabled -- would enable the company to better serve its clients in North America as well as Europe through exports from U.S.

In Mexico, the PE plants operated at an average utilization rate of 97%. So the company is kind of reaching what was expected. The total production was 250,000 tons. If we analyze this, we are going to reach to 1 million tons of production in a given year, so it's very close to 100% of the capacity of the new complex. In terms of sales in this quarter, we sold 264,000 tons, so we were able to sell more than what was produced, and there wasn't a reduction in the inventory levels in Mexico. And the Mexico complex reached an EBITDA of $171 million, representing 50% -- 15% of the company consolidated segment.

Moving to Slide #7. Just to highlight 2 factors on the U.S. and Europe. On the U.S. and Europe front, first, the sales -- the record of sales from 500 -- an average of 500 in the latest quarter of 2016 to 534 in the first quarter 2017. And also, this led to an increase in the EBITDA generation from 103 to 188 in the first quarter 2017. The demand is very strong in U.S., and so we are able to achieve better results. The margin in the U.S. and Europe are relatively stable, 3% down in U.S., 3% high in Europe, and an average -- weighted average between the region, it will be a slightly decrease quarter-on-quarter.

Moving to Slide #8. This gives a little bit more information about the operation in Mexico. As you can see here on the graph on the up left side of the slide, it shows a very robust utilization rate in the range of 97% to 94% since December last year. We have an average utilization rate in Mexico of 97% this quarter. And on the right side of the slide, you can see that there was an important increase on the amount of products placed in Mexico. It also increased the amount exported because we did produce more than as compared to the fourth quarter 2016. However, we increased more the amount placed in Mexico in that what we expect to occur in the future, the more the company get stable, the more it will place products in Mexico (inaudible) export-generating operator value to the company. The EBITDA margin reached 57%, so the company's benefit by the difference -- by the spread between PE in the U.S. [Gulf] that reached $1.1 per ton -- $1,191 per ton, and the same price in the region, the Noble Group referenced that was $173 per ton, generating a gross spread of almost more than $1,000 per ton.

Moving to Slide #9, the consolidated results of the company. I'm going to go very fast in here. Just to point out that the EBITDA reached $1.1 billion this quarter, equivalent to BRL 3.6 billion, so it's 45% greater than what we achieved a year ago. The consolidated net income of the company, at the parent level, reached BRL 1.8 billion. And with such a good result (inaudible) , the company was able to deleverage. So we reached a net debt-to-EBITDA ratio in U.S. dollars of 1.57, one of the lowest that we had during the last 10 years. The company also paid this quarter 95 -- around $95 million returning to the portion of the U.S. Department of Justice under the global settlement that was executed with the authorities back in December 2016.

On Slide #10, it shows the comparison of the first quarter 2016 EBITDA and the EBITDA generated in the first quarter 2017. As you can see here, what played in favor of the company was the greatest amount -- greatest volumes sold in all regions in U.S., in Europe, in Brazil, and especially in Mexico. We're having the projects reaching a higher utilization rate. And also, a contribution margin, the spreads were very positive, with an important contribution from the basic petrochemical spreads.

On Slide #11, it shows the cash balance, cash and equivalent balance of the company that have reached $2.2 billion in this quarter. And it's a very -- it's moved amortization (inaudible) debt. We have a gross debt of $7.4 billion and a net debt of $5.2 billion, with an average term of 17.1 and an average cost of 5.64% per year. And on the chart, on the lower side of the slide, you can see that the leverage has decreased from 1.68 to 1.67, without considering the effect of the global settlement, but considering the global settlement as the debt, as an additional debt obligation of the company, even though there was a decrease from 1.96 to 1.82x, the company remains investment-grade by Fitch and S&P.

Moving to Slide #12. It shows the investment that the company did, and it considered the [operational] investment (inaudible) subsidiaries had contributions to the Mexican project. The company invested in this quarter around BRL 285 million, which is equivalent to 16% of the total amount expected to be invested in the full year of 2017. Two important contribution in the amount invested, BRL 20 million was related to the feedstock diversification project that we had in Bahia that reached a completion (inaudible) completion ratio of 39% in United States, and Europe, we can highlight an investment of $8.7 million, which is related to the service of a new PE facility in United States that is yet to be approved by the board.

Moving to Slide #13. We have the PE capacity expansion. The forecast for 2017 has decreased from 7.5 million tons that were expected to come online on the fourth quarter 2016 to 6.8 million tons that is now expected to come online in 2017. That was -- the decrease was mainly driven by postponement of some projects that were expected to become operational in 2017 in India and in China. This led to a review by the spreads expected for 2017 by the consulting companies. The spreads for 2017 were expected to be in the range of 560 in 2000 -- when we were in the fourth quarter 2017. But now we will revise it up to around $700 per ton for the whole year of 2017.

Moving to Slide #14. This slide tries to demonstrate how we perceived the first quarter 2017 and what we expect to occur in the 9 months of 2017. So we had and (inaudible) in a volume perspective, a result that were in line with the fourth quarter 2016. There was an increase in comparison to the first quarter 2017, but the volumes were in line which was posted in the fourth -- first quarter 2017. And we expect that these volumes, the demand in Brazil gradually increase over the following quarters, especially in the second semester of 2017.

In Brazil, we had a very positive effect from the basic petrochemical spread. The spreads in PE, however, we understand and we expect that these 2 spreads will be reduced in the following quarters, PE and basic petrochemicals. On the other hand, we expect that the spreads for PVC will increase over the next -- the following quarters, given the lack of investments of new PVC plants worldwide.

So in Brazil, we expect the EBITDA generation for the following quarters to become smaller than what was posted in the first quarter 2017. In the U.S. and Europe, we have a very stable situation, very stable demand. PP spreads were slightly lower than in this quarter, mainly pushed by U.S. spreads. But we expect the spreads in U.S. to become greater as new refineries start coming on line. Again, they had a stoppage -- they had stopped for maintenance in the first quarter 2017, and the new EHP facility -- there will be a new EHP facility that shall become operation by the end of the first semester, beginning of the second semester 2017. So we expect that the level of EBITDA for U.S. and Europe to become relatively stable over the next quarters.

In Mexico, the -- we expect to push more volume to the domestic -- to place -- to allocate more volumes to the domestic market as compared to export. This should generate a greater amount of value added price -- the price in Mexico are better than the export prices to some regions, especially to Asia, where we queue our exporting -- an important amount of product from exporting on any quarter -- to an important amount of volume from Mexico. Likewise, in Brazil, the PE spreads in the region in U.S. Gulf should reduce by the end of 2017. So spreads in Mexico, we expect that it will be reduced over the next quarters. In general, we expect, somehow, some level of stabilization in the EBITDA generation in Mexico.

Turning to the last slide. These are the key concentrations of the company. First one, the company is concentrated in productivity and competitiveness and to focus to be in the first quartile operator. (inaudible) is another key concentration to have a very -- a better balance between naphtha and gas production. And also, geographic diversification, to expand the global presence, we gain scale in PE and PP, and to have contributions from international operations above 50%, as you note during the presentation that results from outside of Brazil represented 32% on a consolidated basis. So the intention of the company is to grow these, gain scale in PE and PP. And all of these 3 key concentrations will be founded on reputation and governance. So the company intends to have a key objective, which is to trend Braskem images and reputation, advancing in many of its initiative in terms of compliance, sustainability, innovation and people management.

Thank you, all, for your attention. And I invite you to participate on the question-and-answer section.

(Operator Instructions) Mr. Hassan Ahmed from Alembic Global would like to make a question.

Obviously, a strong quarter, and you highlighted a couple of interesting things. One was the strength within the sort of basic petrochemicals segment. You talked about sort of expanding spreads and the like. And thereafter, you talked about a certain degree of compression in the near term. So at least in my mind, as I take a look, obviously, the raws did what they did and the sort of ethylene, polyethylene did what they did in Q1, but I think, a large part of the story was also what coproducts did, right? I mean, obviously, butadiene was very strong, as was propylene through the course of Q1, which since then seems to have come down fairly hard. So a 2-part question about that. One is what is your near-term view about the direction these coproducts take Q2, Q3? And the second part of that is that, is this a signal for ethylene pricing to go up? And what I mean by that is that, obviously, global utilization rates, particularly for ethylene, remain very strong. So if coproduct values come down, that means the margin compresses, and if it does in an environment where utilization rates are north of 90% globally, that in it -- and in a turnaround period as well, that could potentially signal a rise in ethylene prices in the near term. So I would love to hear your views about these 2 points.

Good afternoon, everybody. Good afternoon, Hassan. I think, as you said, the first quarter was pretty exceptional in the sense that coproducts have been very strong, driven by a series of factors. Butadiene, as you mentioned, was a very special case. Propylene U.S. also spiked significantly. And they have returned to more normal pricing and, therefore, more normal spreads since the end of the quarter. So my expectation for the back end of the year is that it will revert to a "normal spread." If we understand normal spread we see with the oil prices, where they have been recently, and therefore, it's similar to slightly better than the average of last year for the coproducts. As far the ethylene pricing, I think, here, there's a combination of the coproducts, but also the start-up of the plants that are ethane-based only, which would put pressure on the PE pricing. So for the integrated players, it can be more about the integrated PE margin. And for the nonintegrated, you're probably right, ethylene pricing could be rising in U.S. and Europe in the near term, given the coproduct pricing reduction potentially putting a little bit more stress on the ethylene to polyethylene spreads going forward.

Very helpful. Now as a follow-up, moving slightly upstream. Obviously, we saw a certain degree of strength on the propane side of things within the U.S. in particular, and a variety of reasons. Obviously, oil was a bit muted, but it seems that you saw heightened sort of export demand out of the U.S. for propane. But thereafter, through the course of, call it, January, February, March, propane was rising. And now that, too, has moderated a bit. And as I sit there and look at the amount of -- so 2 things, at least in my mind. One is obviously the oil side of things, the [E&P guys] keep drilling in the U.S., so obviously, more and more NGLs keep coming out. And the second part of it is that here in the U.S., at least it seems, that there's been a fair amount of gas processing capacity that's been added. So again, sort of slightly related to the first question as well. I mean, with these dynamics, with oil sort of, call it, at or above $50 a barrel Brent, with the amount of gas processing capacity that exists in the U.S., despite sort of increased use of LPG across the globe and more and more propane sort of exports out of the U.S., don't you think that, barring sort of huge spikes in oil prices, don't you think that propane prices would be relatively tepid going forward? And in line with that, would provide some sort of upside gap to ethylene pricing here as well?

Yes. I think, if we go back to a couple of the elements you mentioned, I think, the last few months have been a clear demonstration of this trend of the drilling E&P industry in the U.S. that clearly adapts itself to a $45 to $55 barrel of oil pricing, which is generating very strong production and we've got a lot of NGLs coming as byproducts. So even though there was a spike in propane pricing, I'm with you that there should be abundance of ethane and propane in the U.S. despite the increased capacity to export propane. And the ethylene cracking, we'll be flipping back and forth between ethane, propane based on availability and, therefore, pricing of those 2 markets, which kind of creates a smoothing effect on the cost in the U.S. If we go back to the last few weeks, 1.5 months ago, the best route for production of ethylene in the U.S. was naphtha, go figure, right? Who would have thought we would see that. And now it's flipped back. But it's within a range that is pretty tight. Still very competitive no matter what the route is in the U.S. to other regions in the world, with the exception maybe of the Middle East. So I think, if there is no shock driving prices down for oil, we should see the abundance of feedstock in U.S. last for quite a while now that the industry -- the oil industry, the (inaudible) oil, the shale oil industry, they adapt itself, again, let's call it $50 oil. And this is probably good news for U.S.-based producers, both ethylene but also on the propane chain because the PDHs will be competitive and, therefore, propane price should be competitive globally, which tends to be a positive news for Braskem, given our very large exposure to propylene in the U.S.

Mr. Bruno Montanari from Morgan Stanley would like to make a question.

Just a couple of questions about the reporting schedule. Given that the auditors have not signed off on Q4 and Q1 now on the revision. One, when do we expect that process to be concluded? And then, second, as it pertains to your debt, how much of those debt instruments you have a reporting covenant on? And are you in compliance yet with those reporting covenants?

Bruno, as far as the work with the auditors, I would say we're in the final stages of that process. We've been working very hard since last year with them. As we mentioned several times in our communications to the market, the dialogue is all around internal controls and procedures. It has nothing to do with the numbers, for which we do not expect any relevant changes to the numbers, unaudited numbers that we've been communicating both for '16, but also for the first quarter. So as far as the deadline, I would say soon. It's hard to pinpoint exactly when, given that some of the (inaudible) and analysis that the auditors are conducting might lead to 1 or 2 additional questions, and then it's a matter of doing these additional tests. And as I said, we believe we are close to the end of that process, but we are not able to pinpoint a specific date. As far as the debt is concerned, we have 120 days for most of the debt that has covenants around certification of the financial statements. Those have a 60-day period of cure after we receive a notification. And we've been working with the few ones that have asked about it. And we've been discussing and negotiating with the creditors around this. They have been very receptive given that the financial results, the operational results have been very strong, the cash flow generation has been very strong. So this is a process that we've been managing, and it's -- if we're able to finalize the process with the auditors sooner rather than later, this should resolve itself in the near future.

Mr. Frank McGann from Merrill Lynch would like to make a question.

Two questions, if I might. One, just to follow up on the discussion we've had in the past related to ethane supply in Mexico and how you are seeing that situation right now, whether you see risks over the next 2 to 3 years that there could be potentially some restriction in supply? And then, secondly, working capital, which saw a major increase over the use of funds rather for working capital in this quarter. I mean, just had some of the quirkiest calls that there has been some deliberate decisions made from a commercial standpoint to -- that have led or contributed rather. I was just wondering if you could give a little bit more color on what decision you've made and why you've changed now to -- that's led to a little bit of demand for funds for working capital?

Okay. Frank, before I answer your 2 questions, just a clarification which I might have miscommunicated. We did not receive any notification from any creditors. We've been in dialogues with different agents to update them on the state of work with the auditors. And as I said, we believe that we're getting close to the end of the process, and the dialogue has been very positive. Going back to your question, ethane in Mexico. As we've seen from the utilization rate at the complex, supply has been very, very good, stable, enabling us to run very strong, close to 100% of our capacity. The availability of ethane in the country is still an issue, just as (inaudible) and the availability of reserves is there. PEMEX has been facing some challenges given some issues at a couple of their platforms that are relevant for these natural gas flow, and this has led to some curtailments that have impacted the industry but not our projects, given the very strong contract that we have and over $5 billion investments that was incentivized way back by the auction of the long-term contracts by the government and PEMEX, which has created a desire by, I would say, both the government and PEMEX to make sure that its project is successful. And I think the data is showing that they've been able to put together a very strong project, that it has been successful from an operational point of view and is fulfilling its mission to serve the local market, moving upward in the mix of sold internally versus exported. As naturally, we progress in the relationship with the client. So as I said, we have very strong contract. The national interest of having a successful project is very high. And at the recent past has shown that the supply has been strong. On top of that, the project has been project-financed with 17 banks, including multilateral, reviewing the contracts. And I would say, we're comfortable with our contract situation. Of course, the more PEMEX is able to restore its system to provide an abundance of ethane to the industry, and including to ourselves, I mean, we'll be able to try the limits of our plants and maybe even go above 100%, as we've been doing in some plants around the world. As far as the working capital discussion, we have a series of feedstock supply contracts over the last couple of years, given the need for investment in Mexico and other investments. We've made specific actions to pursue fund contracts that had longer payment terms. And this would, of course, come with a tradeoff as far as pricing and the economic side of the equation. With the improved cash flow generation in the last 3 quarters, the (inaudible) investment in Mexico, we started to make deliberate actions to balance those tradeoff between term -- payment terms and the economic side on the feedstock, and this is a process that probably was a little bit stronger in the first quarter, combined with a series of other actions from an operational point of view that also led to a reduction of the accounts payable accounts. If we think about the future, and there was a big change, as I said, in this tradeoff between the economic aspect and the financial aspect, there's still some opportunities to do this arbitrage going forward, but it should be smaller compared to what we've seen in the last couple of quarters. That's it.

Mrs. Sarah Leshner from Barclays would like to make a question.

I have a questions on your expectations for (inaudible), particularly the timing of cash flows. We know that certain metrics need to be achieved before either of the shareholders will see repayment of debt or will receive dividend. So I was just wondering what your expectations are regarding a timeline for that?

Hello, Sarah. As we've seen, the operational results and financial results of the project have been very strong. Having said that, most of the cash flow will be dedicated to doing the working capital and facing the financial divisions of the project finance. We do not expect the project to distribute cash flow to the partners, to the sponsors in '17. Based on the results in '18 and depending on the cycle and what happens with the spreads, this could be something that will be discussed during '18 if we deleverage the project more or we decide to distribute dividends to the 2 sponsors. It's a ballot for '18. Again, it will depend a lot on what happens to the ethane to PE spreads in the region.

Okay. Great. Just to clarify, you're referring to both the repayment of the shareholder loans for that timing, in addition to payment of dividends?

Yes. Any cash flow paid out to the sponsors should happen after the end of '17, depending on the operational and financial results.

I'll turn over to the company for closing remarks.

Thank you all for participating in the call, as I hope I was clear during the presentation and dialogue, we had a very strong first quarter, this was driven by the international scenario, but also by the ability of Braskem teams around the world to operate very efficiently and, therefore, capture all the opportunities that was out there for us and transform that into good operational and financial results. We had an exceptional first quarter. We do expect that from an operational point of view, we'll continue to have good performance. From a spread point of view, we mentioned a couple of dimensions where we should see a small decline on those spreads in the back end of the year compared to first quarter, but we still see a healthy cash flow generation for the rest of the year. The Mexico Project, which was a key strategic investment for the company and very relevant commitment, is reaching stability from an operational point of view and is progressing in its strategy of increasing the volume that is used to serve local clients. And as we continue to progress on that dimension, we will see even more stability by giving stronger and stronger relationships with customers close by to our operations.

As we think about the PP business in the U.S., another relevant aspect to our cash flow generation, we expect to have a healthy year, especially given the propylene expected behavior. And market demand continues to be healthy, which contributes to our expectation of getting the fund investment decision on our new PP plants, given the fact that the market is still a net importer and is expected to continue to increase the imports of PP to serve the local demand. So this is another relevant project that, as we finalize the study, will be taken to the board in the near future.

Finally, I want to emphasize that we've been investing a lot of time and effort in improving our compliance systems, both as part of our obligation, given the global sentiment, but also given our belief that this will help the company be a stronger, better-managed company. We developed a compliance program that has over 150 individual initiatives as of today. Out of those, 60 have already been fully implemented, and we're working on the other 90 as we speak. And this is the program that we expect to evolve as we continue to implement actions, we'll certainly be able to define new initiatives to continuing that journey to have a stronger compliance system for Braskem.

So once again, thank you very much for listening to our results. A very good quarter. And looking forward to talking to you at the end of the second quarter. Thanks.

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