Braskem SA ADR

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's first quarter of 2020 Earrings Conference Call. Today with us we have Pedro Freitas, Vice President of Finance, Procurement and Corporate Affairs, and Rosana Avoglio, Head of Investor Relations. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After Breskin remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. We have simultaneous webcasts that may be accessed through Breskin IR website at www.breskin-ri.com.br. 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 this Q&A session may be posted in advance on the website. Before proceeding, let me mention The forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on their beliefs and assumptions of brass screen management and on information currently available to the company. They involve risks, uncertainty, and assumptions because they are related to the 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 results of Bradscan and could result to differ materially from those exposed in such forward-looking statements. Now, I would like to turn the conference over to Rosanna Valle, Head of Investors Relations. Please, Mr. Ravoli, you may begin your conference.

Good afternoon, all. We would like to thank you for joining us for asking our new result conference call. Today, we will present first quarter 20 results. So, please, let's move to the slide number three, in which we will talk about the current global scenario in view of progression of COVID-19 outbreak. Since the end of 2019 and the beginning of 2020, all policymakers and private sector are putting efforts to fight COVID-19 pandemic. Sanitary, health, and economic strategies have been designed and implemented among all countries to preserve people's lives. And as a consequence, the current scenario demands global cooperation. Braskem, as one of the largest producers of thermoplastic resins and chemicals around the globe, plays an essential role in the global supply chain, responsible for supplying raw material of important items used in the combat against the pandemic. Our resins are used to produce hospital materials, such as surgical masks, doctor gowns, and plastic gloves, besides disposable and non-disposable items used in patient treatments. The resins are also used to produce packages for liquid and gel alcohol content, as well as for hygiene products and for food packaging. Also, our chemical products are used to produce hygiene materials, such as sanitary water. In this sense, given the important role played by plastic and chemicals, brass canes are an essential part in the global cooperation for the fight against the COVID-19. Committed with that, we are already putting efforts in initiatives that provide solutions to this tough moment. In the next slide, we will present the main initiatives that we have been taking regarding to that. Working together with our clients, we have donated thermoplastic, resins and chemicals for the production of more than 60 million surgical masks and for more than 1 million doctor gowns. For production of liquid and gel alcohol packages, representing more than 750,000 liters. Also, we have donated raw material for 3D printing of rods for protection masks. We also donated sanitary water for sanitation of hospitals and cities from the regions in Brazil where we operate. Regarding the community support, more than 1,200 families involved with recycling business will receive basic food baskets during three months. More than 50,000 families who live around our plants and facilities will receive donations of hygiene kits, and we're also supporting the implementation of a temporary hospital in Alagoas State. Our clients are also being supported with an additional credit line of one billion reais offered with special financial conditions. The purpose of this credit line is to support mainly small and medium business. In line with our core value of safety, the company started to operate its industrial assets with minimal teams. In some regions, we have adopted a locking regime in which some team members accepted the challenge to stay for 20 days working in the plants without external contact getting back to their families only after this period. Besides that, we are also providing medical assistance to team members confirmed and suspicious COVID-19 cases. In this next slide, we'll talk about the pandemic impacts in our business. Regarding our operations in Brazil, we have reduced ethylene production to around 65% of its total capacity, which is 3.6 million tons per year. In the United States, the polypropylene production was reduced to around 85% of its total capacity, which is 1.6 million tons per year. The utilization rates will be adjusted considering the market demand and the potential opportunities for exports to other regions that may arise, especially with the resumption of activities in Asia. We have been reducing by 50% the number of industrial team members and also contractors allowing us to keep teams safe while maintaining reliability of our operations. Our sales diversification by sectors contributed to mitigate the effects of the downturn given the COVID-19 scenario. Around 70% of our sales comes from segments that have shown resiliency even in this period. In the next slide, we will talk about the company's financial profile. Last year, we did our liability management exercise through bond issuance with longer tenure that ensures a more comfortable amortization schedule for the next years. In this sense, we ended the first quarter of 2020 with a liquid position sufficient to cover the next 55 months of debt payments without any cash generation. And as a precautionary measure to face COVID-19 challenge, we disbursed our revolving credit facility amount to $1 billion in April. In this context, we established a goal to reduce 10% of our fixed costs relative to last year. And we are also reducing capex for 2020 from $721 million to $600 million. In this sense, the company has strong equity to face this global economy downturn with no financial stress. Moving to the next slide, we'll talk about the highlights for the first quarter of 2020. In Brazil, the utilization rate was 81%, 3% of points above fourth quarter 2019, and explained by an increase in Bahia's cracker production, which was impacted by maintenance turnaround in the last quarter. In the United States, the utilization rate was 95%, 11% of points above last quarter, and explained by the normalization of operations, which were also impacted by maintenance turnaround in last quarter. In Europe, the utilization rate was 88%, one percentile point above the fourth quarter of 2019, and explained by the higher supply of propylene in the region. In Mexico, the utilization rate was 86%, four percentile points above the fourth quarter of 2019, as a result of the beginning of detaining ports from United States. We also would like to highlight our good performance in the recordable and lost time injury frequency rate that stood at 0.81 events per 1 million hours. Regarding our results highlights, we had a 54% fixed cost reduction relative to the last quarter. Our EBITDA presented a 22% increase, and our sales volume increased by 4% when compared to the fourth quarter of 2019. Cash flow highlights are related to the P&Co fees monetization, in which we monetized R$344 million in this quarter. The company still has an outstanding balance of R$2 billion to be monetized, from which R$1 billion will be monetized in the short term. It is important to highlight that our new USPP facility reached 98.4 of completion by the end of first quarter. Moving to slide number eight, we will talk about the main highlight by region. In Brazil, in the first quarter of 2020, the recovery EBITDA was $233 million, which represented an increase of 214% relative to the fourth quarter of 2019. mainly due to sales volume increase and reduction in commercial expenses. EBITDA presented a reduction of 21% when compared to first quarter 2019 due to an increase in the cost of goods sold, which reflected higher feedstock prices from previous months. Sales presented an increase of 4% when compared to first quarter 20 to fourth quarter 2019 due to seasonality of the period. Regarding first quarter of 2019, sales dropped by 5% because of the lower availability of resins and Brazilian market supply prioritization. Ticket costs represented a drop of 76% related to fourth quarter of 2019, explained by the reduction of third-party service under the geologic EVN of Alagoas. In regard of the first quarter of 2019, the reduction of 55% is due to the drop in commercial expenses. Moving to next slide, we will talk about United States and Europe results. EBITDA for U.S. and Europe present an increase of 33% when compared to the last year due mainly to an increase in production and also in sales. Comparing to the first quarter of 2019, EBITDA felt 21% due to lower spread for European polypropylene business. Rising sales in the U.S. and Europe increased when compared to the last quarter and also to first quarter of 2019, given the higher availability of products. In the next slide, we will talk about Mexico's results. Mexico's EBITDA present an increase of 2% relative to prior quarter, explained by higher sales volume and utilization rate. Regarding first quarter of 2019, EBITDA presented a drop of 22% given lower volatility in prices in the international market. Sales volume increased by 3% and 5% compared to fourth quarter of 2019 and first quarter of 2019 due to higher availability of products. Moving to slide number 11, we will talk about consolidated results. The consolidated EBITDA present an increase of 22% when compared to last quarter due to an increase in sales and lower fixed costs. Comparing to the first quarter of 2019, EBITDA dropped by 34% due to global economy downturn. Sales present an increase of 4% when compared to fourth quarter of 2019. and dropped by 2% when compared to first quarter of 2019. Fixed costs presented a drop of 53% compared to fourth quarter of 2019 and explained by the reduction of 30-party services expenses. In the next slide, we'll talk about petrochemical scenario. The petrochemical scenario has been suffering important variation on the projections made by the external consultants in the beginning of the year. Regarding the resins and chemical spreads reference that we follow in Brazil, the polyethylene spread increased by 59% over the figures projected in the beginning of the year, mainly because of the drop of oil price. In this context, the chemical spreads decreased by 16% in relation to the same comparative period. About the spreads in the United States and Europe, the highlight is the polypropylene spread in Europe that increased by 23% in relation to the projections of the beginning of the year. Moving to next slide. In May of 2020, we received the certificate of monitorship conclusion by NPF, DOJ, and SEC. The monitorship began in 2016, and it was evaluated in phases. All of our governance, compliance, internal controls, and risk management structures and procedures. After that, the monitors recommended improvements to be implemented by the company. This work's conclusion means that the company implemented 100% of the recommendations proposed by the monitors, which resulted in an effective and robust compliance and governance structure. During this process, more than 11,000 broadcast documents were requested, more than 400 interviews were done, and more than 1,100 transactions were tested. By the end, more than 80 policies and normative documents of the company were revised beside the revision of the ethics code of brusking. And also, more than 40 procedures were revised, which includes the enhancement of our compliance program and financial controls. Moving to the next slide. Now we will talk about the priorities for the second quarter of 2020. In relation to productivity and competitiveness, the priority is to maintain the reliability of our industrial units in the context of COVID-19 and to focus on the negotiation of feedstock supply contracts with Petrobras. As for the diversification of raw materials and suppliers, we will continue to ramp up the complementary 10 import solution in Braskem-Ideza. With regard to geographical diversification, we will seek to maximize synergy among regions where Braskem has operations in order to mitigate the impacts of the global economy downturn. About people, governance, and reputation, our main priority is to ensure health and safety of our industrial team members. Furthermore, We will prioritize the expansion of our recycling resin sales also. And the last priority of the company is discipline in capital allocation in order to maintain liquidity of brass king. Finally, in the next slide, we would like to thank our team members who live in two of our industrial units to guarantee the essential materials production that we need to get through this critical moment. Thank you for your effort. That concludes today's presentation. Thank you for your attention. So let us move to the question and answer session. Thank you.

Thank you. The floor now is open for questions. If you have a question, please press star 1 on your touch-tone phone at this or any time. If at any time your question is answered, you may remove your question from the queue by pressing the hash key. Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your headset to provide optimum sound quality. Please hold while we pose for questions. Our first question is from Mr. Gabriel Barra from UBS. You may proceed.