Braskem SA (BAK) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's Second Quarter of 2017 Earnings Conference Call. Today with us we have Fernando Musa, CEO; Pedro Freitas, CFO; and Pedro Teixeira, IR 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-ri.com.br and the MZiQ 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 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 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 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, IR and Controller Director. Mr. Teixeira, you may begin your conference.

Hello, good afternoon, ladies and gentlemen. Thanks for participating in one -- second quarter earnings conference call. Let's start into the core presentation, moving straight to our Slide #3, when we will -- where we will highlight the results of our operations in Brazil. So in Brazil, the crackers operated at an average utilization rate of 93%. It was 2 percentage points down when compared to the first quarter 2017, mainly as a result of a scheduled shutdown in our cracker in São Paulo, which lasted for approximately 12 days. But apart from that, it was a good quarter in terms of operations, that was -- there was a good performance in our cracker, and we achieved a record utilization rate, production in our cracker in new generator, which is the one that is gas-based.

The Brazilian demand recovered a little bit. There was -- it achieved 1.3 million tons in second quarter 2017, and it was a growth by 2% when compared by -- with the first quarter 2017 and a growth by 4% when compared to the second quarter 2016. In this quarter, the company posted in the Brazilian market 835,000 tons of resin. In terms of exports, the company reduced the export of resins by 12% when compared with the first quarter, as a consequence of the shutdown that occurred in the second quarter 2017, and 19% when compared to the second quarter 2016, mainly because the company is prioritizing the volume created in domestic market because it generates a better margin when compared to exports.

In terms of basic petrochemicals, we have a huge production of basic petrochemicals. We are exporting a relevant amount, and there was an increase by 6% in this quarter when compared with the second quarter 2016 because of the very good margin that we are getting in the international market with this basic petrochemicals project.

The operations in Brazil generated an EBITDA BRL 2.4 billion, equivalent to $750 million -- around $750 million. And this includes the results of our divestment of the capital gains that we have obtained with the divestments of our former distributor -- chemical distributor, quantiQ, that occurred in April. And the result in Brazil, we achieved a 74% of the consolidated results of Braskem.

Moving to Slide #4. It shows some graphs that highlight the results in Brazil. So we achieved an EBITDA margin in this quarter of 26%. Here, it considers the divestment -- the results as a consequence of the divestment of quantiQ that occurred in April. Without this -- the impact of BRL 277 million of capital gains that effected results in Brazil, in this quarter, EBITDA would be 10% smaller than what was achieved in the first quarter, especially affected by the compression in the basic petrochemicals prices. In fact, the basic petrochemicals prices in the first quarter was incredibly high in the international market. So it was not effectively compression. It was just the fact that the petrochemicals -- the basic petrochemical price returned to the regular levels, and this happened in the second quarter, so affected the results of our units in -- of the results in Brazil in this quarter.

Moving to Slide #5. We are focused here -- we are focusing here in the results of our operations in the U.S., in Europe and also in Mexico. Beginning in -- with U.S. and Europe, we made an adjustment in our nominal capacity. It will not impact on new investment. We increased the nominal capacity of the units in Europe by 80,000 tons per year. So we are now considering a total nominal capacity in the U.S. of 625,000 tons per year. The company has made several minor investments, revamps, adjustments over the years, and the prior capacity -- the nominal capacity that we were considering didn't represent exactly the capacity of the company. So we decided to make this adjustment by 80,000 tons per year. So already considering this new cap -- utilization capacity, utilization rate of the PP plant in U.S. and Europe achieved a 95%. It was 6% down when compared with the first quarter 2017, mainly because of an unscheduled shutdown of our Schkopau plant in Germany, which lasted for 15 days. So this affected the utilization rate in Europe and in the region.

In terms of sales, the total sales in U.S. and Europe from this plant achieved 516,000 tons. It was a decrease by 1% -- 3% when compared to the first quarter 2017 and an increase by 6% when compared to the second quarter 2016. In -- U.S. and Europe posted an EBITDA of $120 million equivalent to BRL 385 million and represented 12% of the consolidated results of all segments of Braskem.

In Mexico, the PE plants operated at an average utilization rate of 83%. It was smaller than what was posted in the first quarter when we posted 97% of utilization rate. We created some operational adjustments and reduced the level of ethane by our supplier in Mexico in this second quarter. The PE production amounted 217,000 tons, 13% lower in this quarter when compared with the first quarter for the same reasons. And -- but we were able to post the majority of sales in the Mexican market, so more than 50% of the total sales that was placed was allocated in domestic market. The Mexican facilities posted an EBITDA of $142 million, equivalent to BRL 456 million, already represents 14% of the consolidated EBITDA of all segments of Braskem.

Slide #6 shows some highlights about the U.S. and Europe. These -- I'm going to just focus on the spreads because they are very regular and very stable in the range of $570 in the U.S. and around $500 in Europe. There was an increase in spreads due to a greater demand that we created in the second quarter in Europe. However, the results of the company was decreased by -- the EBITDA decreased from $188 million in the second -- in the first quarter to $120 million in the second quarter 2017. We had the Schkopau unscheduled shutdown and also some inventory effects that affected the result in this region.

Moving to Slide #7. It shows some highlights of the Mexican operations. You can see the impact that we created in the operational rates from 97% to 83%. In an average, the utilization rate in Mexico, we have in the -- in year-to-date, 90% of utilization rate. And we expect a more stable utilization rate over the following quarters. On the graph showing -- on the left lower side of the slide, it shows the EBITDA that's actually did $142 million and an -- and equivalent to an EBITDA margin of 52%. The spread on the left -- on the right lower side of the slide shows, there were -- they decreased by 5% when compared to the first quarter with -- as a consequence of the new capacity of PE that are currently on phase in U.S.

Moving to Slide #8. It shows the consolidated results of the company. EBITDA reached $945 million in this quarter, equivalent to BRL 3 billion, which was an increase by 10% when compared to the second quarter 2016, mainly because in the second quarter 2016, we didn't have Mexico facility to full operation what we have right now. And also, it was impacted by the capital gain of our divestments of quantiQ that occurred in April. The net income of the company reached BRL 1 billion and this -- on our -- year-to-date, the net income already amounted BRL 3 billion, which is equivalent to BRL 3.6 per share of Braskem. I would skip the net debt and the leverage ratio, I'm going to talk later in the following slide. It is important to remember that the company has paid in this quarter BRL 607 million to the authorities that were -- that was already paid BRL 607 million. There were 2 payments that occurred in second quarter, one to the SEC, equivalent to $65 million and another to -- of CFH 30 million to the Swiss authorities, and there was another payment that occurred in the first quarter of $95 million to the Department of Justice.

Moving to Slide #9. It shows the increase in terms of EBITDA from the second quarter 2016 to the first -- second quarter 2017. The results are mainly related to volumes, and these volumes came from Mexico because in the second quarter 2016, we did in Mexico full operation. It was on the -- on its ramp-up phase. And also, the capital gain that we obtained with divestments from quantiQ.

Moving to Slide #10. And here, it shows the leverage and the amortization profile of the company. The company achieved a net debt of $6 billion -- $5.1 billion, very stable when compared with the first quarter of 2017. We closed the quarter -- we ended the quarter with a cash position of BRL 2.3 billion, around that -- $2.3 billion, $900 million -- around USD 900 million was invested in U.S. dollars, and USD 1.3 billion were invested in reals. The leverage ratio, posted in this quarter 1.63x. The leverage ratio is calculated by dividing the net debt by the year-to-date -- the last 12 months net debt to EBITDA of the company. So we reached 1.6x in the second quarter. If you consider the liabilities, the obligations towards the authorities, the leverage ratio achieved at about 1.85x this quarter, very stable and very comfortable.

Moving to Slide #12 -- #11. In this slide, we discussed about the investments of the company. The company has an investment plan without considering the new investments of PP plants in the U.S. that was approved by the Board of Braskem very recently. But without that, we have an investment plan of BRL 1.8 billion. Among that, we have already invested BRL 700 million and the majority of that was an investment in Brazil and among these investments of BRL 585 million that was invested in Brazil in the first half of 2017, BRL 559 million was related to the project to diversify feedstock in -- profile in our cracker in Bahia, which already reached 63% of completion and is expected to be concluded by the end of 2017.

As I said, this CapEx of BRL 1.8 billion for the year, it does not consider the new PP plant in the U.S. that was approved by the board. The approved investment -- the total approved investment is up to $675 million. We already are checking how much of that will be invested in the first half -- in the second half of 2017. But we understand that it should be in the range of 60% of this amount. In terms of capacity, this facility should reach a total capacity of 450,000 tons of polypropylene in -- per year and the startup is expected for 2020. And this new investment is aligned with the -- completed with a strategy of Braskem to diversify its feedstock profile, because the feedstock will be propylene. And also to expand geographically in the Americas and increase our leadership in the PP business in U.S.

Moving to Slide #12. It shows our compliance program. This is a very relevant point for us. We are beginning the evolution of the compliance program. The compliance program is formed by 10 projects, which is composed by 154 initiatives. So in this second quarter, 12 new initiatives were concluded. So it was increase in the number of key members in Compliance department in Mexico and in U.S. There was a development in global training plan on the Compliance for team members. There was a development in global communication plan for disseminating the Compliance commitment to conduct its business with ethics, integrity and transparency, and improving processes and defining protocols for investigating reports of violations. So in total amount, the 154 initiatives, it was already completed 62. So the project is moving forward, and it's a priority for the company.

Moving to Slide #13. This chart shows the evolution of the expected expansions for 2017 from renowned consulting companies. And what we are seeing here is that, the expected amount of PE that is about to come to -- in 2017 is reducing over time. So in the first quarter 2016, it was expected by the consulting firms, a total of 7.5 million tons of PE in 2017. This amount was reduced by to -- by 9%, reaching 6.8 million when we read the same report in the first quarter 2017. And now, the reduction -- the total expected capacity of PE, the new capacity for 2017 has -- had already reduced it to 6.7 million. So some of the capacity were canceled, some of the capacity -- new capacity were postponed. So the total capacity -- in fact what happened to the total capacity that we expect for 2017 is lower than what we expected a couple of months ago. This is positive to the point that the impact in spread for PE that we have now should be a bit lower than what we expected in the prior quarters.

Moving to Slide #14, and now we are getting to the end of our presentation. This chart -- this slide, it shows -- it aims to show how we see our business in the second quarter when compared -- second half of the year when compared with the first half of the year. So beginning in terms of volumes in Brazil. The market increased by 4%. We expect the demand in Brazil to increase, but this should increase a bit less than the 4%. So as an average, we expect for the year around 2%, 3% for 2017 when compared with 2016. With respect to spreads that affects even the region, we expect to -- the PP spreads to remain relatively stable. Within the new capacity that's coming online in the U.S., for the second half of the year, we expect a little bit pressure of PE spreads in the second half. Spreads for PVC should recovery a little bit. That's our expectation. And spreads for basic petrochemicals in the second half should be smaller than in the first half of the year. That was extraordinarily high in the second -- in the first half of 2017.

Moving to U.S. and Europe. In terms of demand, it should be relatively stable. In U.S., the demand is growing a little bit higher than in Europe, but we don't expect too much movement in this region. But we do expect some improvement in the spreads of PP in -- especially in the U.S. with the new capacity of propylene. So putting some pressure reduction in our fixed [Op]costs. So with new capacity of propylene in U.S., this should generate better spreads of PP in the region.

In Mexico, the market remains -- we expect the market to remain very healthy. Spreads in the region, yes, should be pressured by the new capacity of PE in the region. And that's pretty much how we see the evolution of our key business over the next half of the year.

And finally, moving to the last slide. It shows our 4 main concentrations of the company. The big priorities. So the first one, it's related to productivity and competitiveness. The focus of the company is on the operational and commercial efficiency. Second, in feedstock diversification, it's something that the company is already doing. And as a consequence of that, are our new facilities in Mexico. So the company, on the long run, expect to have a lower concentration in terms of feedstock, on the naphtha, and a greater concentration in terms of gas. And also, expand the global presence with gains in scale, especially PE, PP. And the new investments -- and the new investment of PE in U.S. is an example of that as well. And the fourth concentration is the foundation of all the other concentrations, and it's related to reputation and governance. This is a priority for the company, and it will have to strengthen up in image and reputation.

Thanks for hearing the conference -- the presentation. I'm going to move now to the Q&A session.

(Operator Instructions) Our first question comes from Sarah Leshner of Barclays.

I just have 2 quick questions. One is regarding the utilization rate in Mexico. Can you provide a little bit more detail on how it was with Pemex underserved the FAU contract and how that will be corrected going forward? And my second question is regarding the shareholder agreement. Between Petrobras and Odebrecht that entered into negotiations last month, if you're able to provide us with any more details on those discussions.

Thanks for your questions. Talking first -- this is Fernando Musa. Talking about the utilization rate in Mexico, the challenge we faced in the second quarter came from 2 sides. First, we had, on our side, some issues identified during the previous months wherein we were running really hard that we decided to invest some time to fix -- to improve. And at the same time, Pemex faced challenges on their operational efficiency and effectiveness and especially around their fractionation that led to a reduced supply for a few days. Those 2 topics have been addressed. As we move forward into the third quarter, July and August, we see the utilization rate going back up towards something that is closer to what would be expected given where we are in the ramp-up curve of the project. I would say that the first quarter was actually an outlier in the sense that it is extremely rare that you start up a project of this size and complexity, in which the very high utilization rates that we have in the first quarter, it was a coincidence, a very, very positive scenarios all over, where everything worked perfectly well. And unfortunately, this is not how those plans work. There's always some impact somewhere. And so if we take the average of the first half, which is somewhat in the 90% range in Mexico, compare it to the traditional rate that we have been delivering to Brazil, which is in the 92% to 93% range, I would say that this is a good proxy for what to expect going forward. As I mentioned before, the -- those small improvements and fix have been done on our ends, and Pemex performance has been improving as they fix their operational problems on their end. On their shareholder agreement, Petrobras and Odebrecht made a public announcement that they have decided to discuss changes in the shareholder agreement, between the 2 of them. The objective that they have stated for that is to identify ways to unlock and create value for all shareholders of Braskem through improvement of governance. This is a dialogue where Braskem's management team is not a direct participant. This is a discussion between the shareholders. We will, at some point in the future be involved given the fact that Braskem has the object of the shareholder agreement and the intervening party. He is a co-signer of the agreement, but this involvement will happen at a few times and my expectation is that this is going to be -- once they have reached the decision among the 2 of them about what changes, if any, we would like to implement. So as soon as we receive the information from the shareholders, we'll communicate the relevant information to the market as we get them.

(Operator Instructions) Our next question comes from [Jon Hale] from Morgan Stanley.

I just wanted to do one quick follow-up. So at the end, the Board of Directors approved the polypropylene plant in Texas. Can you maybe go over where you are at this stage, your additional tasks of the study and the feasibility stage? When do you plan to start the investment, and maybe what kind of financing options that you are potentially planning for? And are you going to look to take on a partner, et cetera? Maybe you can give some further information on that.

Jon, thank you for your question. So just a quick recap. This is our sixth production line in the U.S. in the polypropylene business. It will be built at our La Porte site, where we already have another polypropylene line. And this is also the site where we built our new tech line up, which are high molecular weight polyethylene line. It's a very large site, but we have enough lands and utilities and infrastructure available to support that new plant. This project has been evaluated for the last couple of years. We've got final approval from the board to go ahead in June. We have finished what is called feat from an engineering debate, which is the first phase of engineering. We have already signed an EPC contract, engineering, procurement and construction, with one large construction company or EPC company. This has been signed already. We are pretty advanced in the detailed engineering and in the procurement phase where most -- basically all of the long lead items have already been purchased. The purchase orders have been placed. And we have started, a couple of weeks ago, to purchase some of the bulk materials as well that tend to be brought after you buy the long lead items and the large equipment. We expect to have construction starting over the next 2 to 3 months on the site. We are finalizing on parts of the subcontracting that the EPC company is going to do some specialty work that is related to the beginning of the construction. So the project, I would say, is migrating for a -- from an analysis phase to an execution phase really fast, with, as I mentioned, detailed engineering already started, most of the relevant procurement activity is done and construction soon to start. As far as the structure of the project, we do not intend to have a partner. This is a $600 million -- up to $675 million investment, which is something that Braskem's balance sheet can finance. It is an addition to the current business. It is an additional line to a larger site. So not only we don't see the need for bringing a partner, but if we were to, besides bringing a partner, it would add significant complexities given that it's a part of a larger business, part of a larger site. All those issues could be dealt with, but it would add complexity. So there are different situation to the Mexico project where we have no business, a new country for us or where having a local partner would make a lot of difference. For this one, we don't need a local partner, we are the local operators. It is a significant investment, but it's an add into a business that has been running for many, many years with 5 other sites around the country.

Jon, this is Pedro Freitas. Just to complement on the finances. We have approved the project -- the board has approved the project considering corporate spending by Braskem. So any reduction on the cost of capital that we are able to achieve through, for example, special spending arrangement, will be accretive to the value of the project. We are looking at alternatives that are usual for this type of project, such as ETA funding. So that will most likely be the source of funds for the project. And we're also looking at other alternatives, but as a whole, all of these alternatives will add value on top of the -- our perception of the value of the project as approved by the board.

(Operator Instructions) I'll turn over to the company for closing remarks.

I would like to thank all of you for joining the call. This was a very positive quarter, with a combination of good results from an operational, financial point of view; important movement in the strategic side with the approval of the investment in U.S.; the end of our dialogue with the auditors and therefore, the publishing of our financial statements in regards to -- other key financial statements in regards to the 2016 balance sheet. And as a complement of that, I would like to mention that today is a special day in Braskem industry. It is our 15th year anniversary. And it's a moment where, after a very positive, productive, successful first 15 years, we are ready for a continuation of the deployment of our strategy, and we decided to mark out that the -- that date, that event, that transition with modernization of our brand, our visual entity. You might have noticed, in the presentation that the logo has been adapt, and this is part of a broader repositioning and restatement of the brand that will basically reinforce our core values, our core beliefs around our way of thinking, our way of challenging ourselves, always in the search of better solutions for society through chemistry and plastics, and doing that, working through people, the core of our strategy is our people on our end, whether interacting with people or the clients or the suppliers and providing services, products, solutions for people in the society towards having a better life.

So thank you very much for participating and looking forward to talking to you in the next quarter.

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