Braskem SA ADR

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Braskem's second quarter of 2020 earnings conference call. Today with us we have Robert Simões, CEO of Braskem, Pedro Freitas, Vice President of Finance, Procurement and Corporate Affairs, and Rosana Avoglio, Head of Investors Relations. We would like to inform you that this event is being recorded and all participants will be in listening mode during the conference presentation. After the company 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 the Braskin's IRR website at www.braskin-ri.com.br and the MEZIQ platform, where the slide presentation is available for download. please feel free to slip 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, Lenny mentioned that further looking statements are being made under the Safe Harbor of Securities Allegation Reform Act of 1996. Further looking statements are based on the beliefs and assumptions of Braskin's management. and other information that currently available for the company. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on the circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Breskens and could cause results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Rosana Avoglio, Head of Investor Relations. Ms. Avoglio, you may begin your conference.

Good morning, all. We would like to thank you for joining the Braskem Earnings Results Conference. Today, we will present Second Quarter 2020 Results. Please, let's move to the slide number three, in which we will talk about the impact of COVID on the company's operation in the second quarter. During the second quarter, capacity utilization rates in Brazil and in the United States were temporarily reduced due to lower demand and inventory effects in the petrochemical and plastics production chain. In May, the operating capacity of the crackers in Brazil fell to 64%, and with the recovering demand in June, the capacity utilization of the crackers increased, resulting in a rate of 75% in June. In the United States, capacity utilization rates fell to 88% and then normalized in June. In Europe, capacity utilization rates fell in April, but normalized over the course of the quarter following the recovery demand as well. In regards to Mexico, utilization rates were positively influenced by the fast track project for retaining ports. Moving to the next slide. In terms of sales, the global economic slowdown caused by the pandemic affected resins and chemical sales in Brazil, mainly in April, which returned to near normal levels in June. In the United States and Europe, after some economies restarted their reopening process, sales increased. Moving to slide five, we will talk about consolidated results highlights. The consolidated EBITDA presented an increase of 5% compared to first quarter, 20, due to lower costs of feedstocks in Brazil because of lower inventory costs and also lower selling general and administrative expenses in Brazil and in Mexico. Compared to second quarter of 2019, recurring EBITDA was 25% lower, reflecting the narrower PE and PP spreads in the international market. Moving to slide number six, we will talk about the main highlights by region. In Brazil, the average capacity utilization rate of the crackers reduced 11 percent points in relation to first quarter of 20, and 19 percent points compared to second quarter 19, reflecting the weaker demand for resins and main chemicals. Resin sales in the Brazilian market decreased by 19 percent in relation to first quarter of 20, and 15% compared to the second quarter of 2019 due to the impact from COVID on the Brazilian economy. In this scenario, given the windows of opportunities and the maximization of existing commercial synergies, exports increased by 15% in relation to first quarter of 20, and compared to second quarter of 2019, export decreased by 7%. In the quarter, Brazil accounted for 61% of the company's consolidated segments EBITDA. Moving to slide number seven. In the context of the geologic event in Alagoas, we received a letter from the Alagoas State Public Defender's Office, the Federal Prosecution Office, the Alagoas State Prosecution Office, and the Federal Public Defender's Office informing of the updating of the map of sectors of damage and priority action lines by the Civil Defense of Maceió, which included around 2,000 properties to be vacant in the districts of Mutange, Bonparto, Pinheiro, and Bebedouro in Maceió, Alagoas. Given that, at the end of second quarter, The total amount of provisions recorded related to the geologic event in Alagoas was 4.5 billion Reais, of which 2.6 billion Reais was recorded in the short term and 1.97 billion Reais in the long term. Regarding our financial compensation and support for relocation program, the company has achieved the following results. Over 4,700 families relocated, over 2,600 families in the compensation flow, over 2,000 families from humanitarian aid immigrated to the program, over 900 compensation proposals made, and over 100 million temporary financial aid and compensation agreements were done. In the next slide, we will talk about U.S. and Europe's operation and financial highlights. In the United States and Europe, the average capacity utilization rate of our PPE plants decreased in relation to first quarter of 20 and second quarter of 2019, explained by weaker demand from the automotive industry in both regions. PPE sales volumes were 3% lower compared to first quarter of 20 due to COVID impact and 2% higher in relation to the second quarter last year mainly due to the higher inventory availability of product for sale. United States and Europe accounted for 12 percent of the company's consolidated segments EBITDA in this quarter. In the next slide, we will talk about Mexico's operations and financial highlights. In Mexico, the average capacity utilization rate of RPE plants decreased 6 percent points in related to first quarter of 20. due to the lower ithane supply by Pemex, which was partially offset by the higher volume of ithane imports from the United States. Compared to second quarter last year, the rate increased 8% points, reflecting the higher supply of ithane imports from the United States. In this quarter, Brass Caindesa imported 42,000 tons, or 8,000 berries per day on average, of retained from the United States to complement the supply of retained by Pemex, which corresponded to 13% of the capacity utilization rate of the Mexico petrochemical complex. In this quarter, Mexico accounted for 27% of the company's consolidated segments. In the next slide, we will talk about petrochemical scenario. According to the most recent projections by external consulting firms, The expectation is for healthy resin spreads in all regions regarding the resins and chemical spreads referenced for Brazil. For that, the polyethylene increased 69% over the figures projected in the beginning of the year. The chemical spreads decreased 17% in relation to the same comparative period as a consequence of lower oil price. About the spreads of United States and Europe, The polypropylene in Europe stands out as a result of the increase of 20% in relation to the projections of the beginning of the year. Regarding the spread reference of Mexico, it has presented 13% increase compared to the figures projected in the beginning of the year. Moving to the next slide. In the end of June, the average bed term was around 14 years, with around 40% of that due after 2030. Also, the company has sufficient liquidity to cover the payment of all debts coming due in the next 43 months. In July, as a consequence of the uncertain scenario due to COVID, the rating agency's feeding ratings and standing poor's downgrading the company's risk rating on a global scale to BB+, with a stable outlook. Meanwhile, Moody's revised its outlook from stable to negative and reaffirms the company's rating of BA.1. Broskin reiterates that despite the diverse scenarios resulting from the down cycle and the COVID pandemic, it maintains a solid cash position and that maturity profile concentrated in the long term. The company reforms its commitment to maintain its liquidity position and cause discipline, while continue to take measures to reduce its corporate leverage to regain its investment rating. Moving to next slide. In July, the company concluded a 600 million subordinated debt issue through its wholly owned subsidiary, Braskem Netherlands Finance BV, with maturity in 2081, and coupon of 8.5% per year. This was the first hybrid data instrument issued by a Brazilian company with 50% equity treatment by standing poor and feature ratings and reinforced the company's commitment to continue implementing measures to the leverage in order to be reassigned as an investment-grade company again. Using the proceeds from this new issue, the company prepaid the standing by credit facility in the amount of $1 billion, as well as other bank debts in the short term. As a result, the performer average debt term was around 17 years, with around 50% of the total debt due after 2030. The new liquidity position is sufficient to cover the payment of all other debt obligations maturing over the next 55 months. Moving to the next slide, Bratkin is working on implementing measures to reduce its corporate leverage to return to be assigned as an investment-grade company. For that, the hybrid bond agency in July 2020 was one of the initiatives included in our deleverage plan. Additionally, there are other ongoing initiatives such as reduction of plan investment for 2020 from $721 million to $600 million, reduction of fixed costs by around 10% compared to 2019 number, working capital optimizations under discussion with relevant suppliers, and monetization of tax credits of around $300 million in the next two years. Moving to the next slide. In June, Braz can sign agreements for the supply of petrochemical naphtha for its industrial units in Bahia and Rio Grande do Sul. The agreements, which term is around five years after the expiration date of the current agreement, establish the supply of a minimum annual volume of 650 kT, and at the discretion of Petrobras, a maximum additional volume of up to 2.8 million tons per year. at the price of 100% of the ARA international reference. In addition, to guarantee access to the NAFTA logistics system in Rio Grande do Sul, Braskem also renewed the storage agreement with Petrobras and the transport and storage agreement with Petrobras Transport SA. In the next slide, we'll talk about the ESG highlights. In the ESG agenda, the company signed an agreement to purchase renewable energy from Canadian solar. The agreement will enable the construction of a solar power plant with capacity of 152 megawatt peak in Minas Gerais state that will guarantee energy supply to Breskin for 20 years. With that agreement, Breskin estimates the avoidance of 500,000 tons of CO2 emissions over two decades. The construction work is scheduled to begin in 2021, and the start of the contract execution is for 2023. The new contract with Canadian meets the company's sustainable energy strategy, which constantly seeks opportunities to add value by improving energy efficiency and using renewable sources. Moving to the next slide. Regarding our energy strategy, we have four strategic pillars, competitiveness, flexibility, reliability, and sustainability. With that, we seek to become a reference in energy consumption and renewable energy within chemical industry. By 2019, 60% of our energy demand was supplied by residual energy from our internal process since Braskem optimized its production by transforming the residual fuels from petrochemical process into electrical and steam energy. The other 40% we purchased from 30 parties. Of the total purchased energy, renewable energy represented 16% in 2019. Considering the startup of all power purchase agreements closed in the previous two years, The participation of renewable energy of the solar purchase energy will increase around by 4.9% points until 2023. These three sustainable energy contracts place us close of reaching our milestone of 1 million tons of CO2 avoid emissions. Moving to the next slide. Another important achievement for the company was that Broskin's bioplastic was recognized at a United Nations event as one of Brazil's most transformational cases in sustainable development. The company's production of biobased plastic, which completes one decade this year, is the result of years of dedication by the company in the research and development of sustainable products. Braskin is a global leader in the biopolymers market with an annual production capacity of 200,000 tons of green polyethylene. Currently, Braskin I'm Green bio-based polyethylene can be found in more than 150 brands worldwide, including packaging and products for a wide array of segments. Moving to the next slide. we will talk about the priorities for the third quarter of 2020. In relation to productivity and competitiveness, the priorities to ensure reliability of the industrial plants in all the regions and advance in the negotiations to renew the NAFTA supply to the São Paulo complex and the Italian propane agreement for the Rio de Janeiro complex. As for the diversification feedstock and suppliers, we will continue to ramp up the important solution for a complementary 10 EBRASKE-IDESA. With regard to geographical diversification, our priority is to complete the commission phase of DELTA project, our new plan in the United States, guaranteeing the beginning of the PP commercialization this quarter. About people, innovation, e-governance, and reputation, we'll work to advance the definition of sustainability macro objectives and targets for 2020, align with the company's sustainability strategy, and also increase global production and sales volume of recycling resins. In capital allocation and financial discipline, the priority is to continue with the implementation of the delivery planning initiatives and maintain discipline in capital allocation. That concludes today's presentation. Thank you for your attention. Let us move to the question and answer session. Thank you.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touch phone at this time or anytime. If at any point your question is answered, you may remove yourself from the queue pressing the pound 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 pull from some questions. Our first question is from Bruno Montanari for Morgan Stanley. Mr. Bruno, you may proceed.

Good morning and thanks for taking my questions. Can I take advantage of perhaps Roberto's presence and ask what has been your areas of focus outside dealing with the COVID situation since taking over as CEO? And what do you believe are the key obstacles and opportunities to Brastium in the coming years? A more short-term question. The first half of the year, free cash flow was under pressure, mostly due to the working capital dynamics. Can we expect a full reversal of that now in the second half of the year, with the company being free cash positive for the full year 2020? And a final one about Mexico. It's clear that Pemex is taking a different approach with the shipper pay fine. So I'm wondering what will be the company's course of action should define, accumulate, and perhaps set some triggers in the project finance terms. Thank you very much.

Please keep on waiting in the line.

Good morning, everyone. Thank you for your question. The main priority for the company is exactly the same that we found out at the beginning of the year. The focus is exactly to face the crisis in Mateo, the first one. The second is to provide the research for the company to face the petrochemical cycle. The third one is the image of the company. And the fourth is to recover the value of the company in terms of the stock market. These are the main causes that we have to this period. Nowadays, Mexico, for sure, is another issue that we are improving our priority because we have some concern about the composition from the Mexico government, but we are still in a negotiation with them in order to solve this issue. Thank you for your question.

Bruno, just to address the other two points that you asked about, good morning. On working capital, I mean, the dynamics that we saw in the first half of the year, they were related to the dynamics of purchasing feedstock. We purchased feedstock from Petrobras in Brazil, but we also import NAFTA from international suppliers. And last year, roughly two-thirds of our needs were imported. When we import, we are able to have extended payment terms from our suppliers. So we had in working capital, I would say, a good volume coming from this imported NAFTA purchase. and a lot of that NAFTA is being paid or was paid in the first half of this year. Now, this year, it's the reverse, right? We are buying roughly two-thirds of our NAFTA from Petrobras, and because of that, I mean, with Petrobras, we do not have the extended payment terms, so in the end, Looking at cash flow, we are paying NAFTA from last year, and we're also paying NAFTA for this year from the purchase from the progress. That's why you see this drop on cash from working capital. The plan moving forward and looking at the second half of the year, I mean, we'll keep prioritizing the purchases of NAFTA according to market dynamics. Because the NAFTA price is going up in the second half of the year, I think that the usual situation is that we would increase imports a little bit. And in this situation, I would say that the cash consumption into working capital could be diminished in the second half. I'm not sure we will be cash positive on a cash flow basis by the end of the year. This is still uncertain, but I would expect to see a lower draw in cash in the second half of the year, and potentially even a contribution to cash, but looking at the net of the year, considering the consumption in the first half and what we have now in the second half, I don't know if we're going to be able to reverse that into a cash positive situation for the year. And then on FEMIX, as Roberto said, we are discussing with them how to approach and address the needs there. But we don't have any significant adjustments so far. It's just that the conversations are going on. Up to date, we have roughly $56 million in liquidated damages that were not paid or not treated. We didn't get the credit notes from PENIX. So we are trying to address this with them. The positive aspect in Mexico as well is that the FastTrack project is ramping up nicely. we have been able to have roughly 15% of our needs for the second quarter, especially in June. The bracing rate was really good. And in July, we already see even better performance compared to June. So the alternative of imports, I think, will be working. And we are looking at how to expand that until the end of the year. There are some investments, small investments that need to be made in the harbor to improve the operational logistics. And we think that if we solve those issues and expanding also the operating schedule of the fast track, we could get up to 35% of the

That's great. Thank you very much.

Our next question is from Christian from .

Thank you, Roberto and Pedro. Roberto, it's great to have you on the call. I would like to ask three questions. First one, Roberto, on the topic of Alagoas, I know that you have, as a company, been working very hard on this ongoing issue. My question is, given that you take the right steps and then the government seems to come back with new things, how do you think about putting an end to this? Is there an end to it? Is it a question of provisioning a larger amount than you foresee just to try to make this subject go away? So if you could just share strategically how you see progress from this point forward, because it seems like you always are trying to do the right thing, but then yet something comes up. So we'd love to hear your thoughts there. Second question was more, focus, Pedro, maybe on the demand outlook. We clearly saw an improvement, as you detailed in your presentation, during the second quarter. As we go into the third quarter, what are you feeling, that we're seeing a continued improvement or that we might have plateaued in terms of demand at the levels in June, July, and August will be more flattish, so We'd love to hear your comments there if you continue to see an improvement in demand that would be linear into the fourth quarter or more a plateauing of demand where we are today. And then the third and final question is on the spread outlook. Obviously, we had a very volatile second quarter with oil prices having come back. You had a very helpful chart on the spreads today. But again, we would love to hear what you're seeing so far in August and the expectations for August and September and the end of the year, please. Thank you very much.

Hi, Christian. Nice talking to you. Just to start off here with the points that you mentioned, when we talk about Alagoas, I mean, I think that everybody knows that we made an additional provision of $1.6 billion high in the second quarter. The point that we still have open there, it's always an evolving situation, right? And we have so far relocated 6.5 thousand houses or we also have a technical team looking at claims by people that live there. It's a joint team with authorities and engineers that look at specific claims that are outside of the the relocation zone. So far, we have roughly 7,000 houses that have been or will be relocated and that are included in the provision. This is about 70% of the total. If you look at the civil defense map, they have criticity zero and criticity one. By now, we have roughly 70% of the houses are in the zero and will be relocated. And 30% are being monitored, and we are using the civil defense map as a reference. We have studies ongoing, and we want to have a final conclusion on them as soon as possible. We also have the environmental action by the prosecutors. In that action, it's not yet clear how the outcome will be. There are studies that are being conducted to gauge and assess the environmental impact. Those studies are going to take, I would say, many months to be concluded. They are very detailed. We don't anticipate that they will be ready by the end of this year, for example. We have already provisions. What we think is the right approach, which is, I mean, the studies themselves and also the shutting down of the mine, and what we believe is required to shut down the mine. But out of these studies, there could be something else coming up. It's very hard for us to say right now whether anything else will come up. So far, in the provision, we have what we think needs to be done based on current information. As I said, there are some studies still being conducted, so there could be changes, especially on the relocation and also on the environmental claims. But we believe that we have provisioned everything that we know of, right, that should be provisioned. On switching gears here to the demand outlook, looking at the third quarter, if you look at the market and inventories in the market so far, we think that inventories are still below the average or the normal level. So we still see some room for restocking of the value chain. And with that, we do anticipate still a strong demand growth in the third quarter. The third quarter is usually the strongest quarter in the year in terms of demand. You may have seen in the presentation earlier today that the demand for June in Brazil, for example, for polymers was around 400,000 tons in the month of June. That is roughly the same level of demand that we had on average for last year. But we could say that demand in June was already at the same level as the average of last year. And then because of this seasonality in the third quarter, which is usually stronger, plus the potential of some restocking, some additional restocking in the value chain, we are looking at potentially a growth in the market of up to 10% in the third quarter. Still, the outlook for the year, I mean, considering the weaker second quarter, there's still a drop in demand comparing 2020 to 2019 in Brazil, roughly a 6% drop in demand year on year. So that's the demand situation. And then looking at spreads, I mean, I would say short term, spreads are still doing well, and we do see, say, better than expected spreads for the year or overall for brass cans. In some businesses, especially in base chemicals, we do see a weaker spread, but pretty much all the polymers are seeing stronger spreads for the year compared to even the expectations of the market in the beginning of the year. The expectation in the beginning of the year and the expectation now, it's an improvement in expectations. But also, I mean, looking at our particular situation in the way that the cost of inventory flows into our results. So in the first half of the year, in the first quarter of the year, up to April, May, we were still carrying a higher cost inventory with the stock purchases that we had before the drop in oil price. Then April, May, we had low cost of feedstock, or the purchases were at a low price. So that low price will flow, has started to flow into cost of goods sold starting in June. And we think that in the third quarter, we will see, again, a more favorable cost of goods sold because of the purchase of feedstock that we made in the period of April-May. We even increased the inventories of feedstock above normal levels in that period, anticipating this increase in the oil price and then potential benefit that we now expect to capture based on that. So, again, shorter term, I would say better than expected. looking at kind of the midterm, let's say looking into 21, 22, then, I mean, structurally, the PE market is still oversupplied. So we do anticipate, let's say, challenging, still a continuation of the challenging spread with P&P into the next year or two years. This is more related to the structural supply-demand dynamics of industry So, things going back to normal, to historic trends, we should see some recovery in PE spreads compared to, let's say, the end of the year. Again, right now we are at a better spread, but we should see some drop, some fall in PE spreads and then a low recovery over the next couple of years. In PT, especially in the U.S., we do see good spreads being maintained. We don't see any new capacity coming online, except for our new plants there. The Delta project increases our capacity in the U.S. by roughly 30%, and it will capture this good level of stress that we see in North America. Just reminding you that the project should come online. I mean, the physical construction is done, and we are now going into the commissioning phase. I mean, it's pretty advanced. We expect to be able to announce the market, the startup of the plant, so to say, over the coming few weeks. Still, essentially, I mean, hopefully still within the month of August.

Great, very helpful, very detailed. Just a follow-up, on the leverage front, again, you provided very detailed information on your presentation. I was just wondering, how are the conversations with the rating agencies evolving? Obviously, we had this increase in leverage due to the weaker EBITDA, which was expected, but How are their conversations between you and the agencies going as it pertains to, you know, for how long you could stay at a net death rate above, you know, your targets?

Hey, Chris. It's Rosana. Thanks for the question. So, about the agencies, we have been talking with agencies almost on a weekly basis. For us, it is a priority. to be reassigned as an investment rate company. That's why we created the leverage plan. We are already delivering some of the measures, such as the hybrid bond that we issued last month. We will deliver more actions until the end of this year, but we know that the talks are to be investment rate again. It takes more time, right? It's not from a day to the other. That's why But it is an agenda that we created day one, right, since the day after the downgrade. So, it is a priority. It's part of the plan. We want to be re-assigned as an investment-grade company. So, we think that it's feasible, for example, next year, once spreads get better, we will increase more volume sales with Delta. We have FastTrack in Mexico as well. So we do think that next year it's feasible for it to be investment grade again.

Okay. Thank you.

Our next question, it is from Luis Carvalho from UBS.

Hi, Roberto. Hi, Pedro. Hi, Rosanna. Thanks for taking the questions. I have basically a couple questions. The first one is about the Ruben Duran- The note that you, you pointed out in the report i'm talking about you to defend next relationship. Ruben Duran- Recently, and make some comments about you know potentially reviewing the contract and then afterwards. Ruben Duran- mentioned the opposite, that he would not have going to say change any any contract that was set so just trying to send a bit better. uh the reason that you you put out the um uh that um that comment on the report and uh what are the risks uh in terms of a potential contract review and how solid the uh the brass can case the skinny days the case is the second question uh it's more about the um i would say i will put two things here capital location uh slash leverage right um any plans in terms of i don't know selling some assets in order to reduce the leverage of the company. And that's pretty much what will be the magnitude that you think that will be needed. And the third question is more about the, how can I say, the exposure, despite that you don't have a short-term, how can I say, a high amount of that to expire in the chart that you presented, one in 2024. The company has been burning cash around $300 million per quarter. And you have a position of $2 billion with a potential loss of $1 billion in lagos. So there's kind of a, I don't know, at least a liquidity issue that we see for, I don't know, maybe the next two years. So, how can we see that tied into the first question about potential asset sales? Thank you.

Hi, Luis. On the disclosure that we made around and Mexico, I mean, There were news in Mexico that, I mean, there was no substation with documentation or anything, but there was a claim that there was some sort of reward in tracking the data. So we, as part of our normal cycle here in regards to any type of allegation of the company, we open an investigation. Because of the sensitivity of the issue, we wanted just to disclose it to the market. The company has an ethics line. It's an independent service, which is, I mean, I would say, best in class in the world, not only in Brazil. regarding our approach. And the monitors that finalized the monitorship in the second quarter, they recognized the quality of what we do. And we just wanted to be transparent. Since there was an allegation, we will investigate. Bracken will investigate any allegation that comes up. And we just wanted to be transparent because it was in the news in Mexico. and we know it's a sensitive issue. We don't have any other indication that there's anything that could happen there. I want to emphasize that in the car wash investigations, we did look at Mexico. We do have an investigation report that was finalized in 2017 around the contract, nothing was found. We are going to do some complementary procedures because in the news now there are some details that were mentioned that were not, I mean, around in 2017. So we have asked the outside investigators to take a look at that. and see if there is anything that comes up looking at these additional details. But, I mean, so far we don't have any indication that there is any credibility around those allegations, okay? It was just, I would say, our effort to be more transparent that led us to make this disclosure. On capital allocation and... Of course, we are evaluating asset sales, and we don't have yet any process that is in any advanced stage. We are evaluating the sale of non-core assets. We don't have today any asset that I would say is outside of the scope of RAC and activities, but some of our assets, they are important, let's say, for industrial operations, but they are not business assets. So we are looking at that as part of a larger plan to the leverage. The hybrid bonds, I would say, that we issued now in July was also a piece of that. This is a comprehensive plan we are working on fixed cost reduction, and our target is to reduce costs by 10% compared to the last year. It's on track to get there. It is a challenge. I mean, Bratham has been leaning for a while now, so it's not that we have a lot of, say, unnecessary costs hanging out, but we are being, let's say, disciplined in approaching fixed costs and making an effort to get to this 10% reduction. We also have a goal of reducing capex by comparing to... I mean, we had announced a capex of $720 million for the year, and we are now reducing that goal to $600 million, which will include any cost overrun that we may have in Delta. So, I mean, it's $600 million absorbing everything that we already... or potentially will have in Delta. So, again, it's a significant effort to reduce capex. We're also optimizing working capital, working with suppliers and payment terms, with clients also to manage payment terms there. Looking at inventory, we are selling and monetizing, either selling or monetizing, depending on the case, tax assets or credits that we have. I mean, Brazil is very complex. uh in terms of our tax regulation and brad can have inherited a lot of also credit complaints from from our predecessor company so we are we have a tax force on stage to also to address those and monetize those so together we don't do again the hybrid bond capex reduction fixed cost working capital monetization of other other The tax assets, the sale of assets is a part of the code to deliver the company. I'm not sure it caught your last piece well, so I understood the question was around that profile, so I'll try to address it. If I don't, please come back. We have a very lengthened debt maturity profile today, and if you need to look at the situation post the bond, we have more than 50% of our debt now is due after 2030. So we have 10 years, at least 10 years for 50% of our debt. Our average debt term is at 17 years. I would say, I would dare to say it's the best debt profile in the industry. As we already have discussed with you in the past, I mean, the refinancing that we did last year was already geared to reducing our exposure, financial exposure to the years of 2020 to 23. And right now, I mean, we have roughly a billion dollars maturing in that time period, which is very substantial. So we also have prepaid the reporting private facility that we crew in April. It has been prepaid now. So it's still available to the company. We can still draw on it. It is valid until 2023. But we are keeping very healthy position of roughly $2 billion by the end of the second quarter, stable in relation to the first quarter. So, again, we are focusing on what needs to be done and keeping our liquidity in a good position even in the downturn in the cycle. That's the main aspect of it. I think it's important to mention that relating to Alambo is 1.7 billion reais is already set aside and it's in a separate bank account. And it's not included in the figures that we show here. It is in our balance sheet, but not when we look at leverage, we don't include that. And we also have insurance claims that are running with the insurers. The total civil liability insurance of the company is for $200 million. And we are now discussing with the insurers these claims.

Okay. Thank you.

Our next question is from Ricardo Rezende from JP Morgan. Ricardo, you may proceed.

Hi, Roberto, Pedro, and Rosana. Thank you so much for taking my question. Hope all is well with you. So I just want to follow up on something that Rosana commented just prior to the call. And please correct me if I'm wrong, Rosana. It's on getting the ID rating back. And I'm trying to reconcile this comment with what Pedro just said about the spreads on PE remaining somewhat depressed for the next couple of years. And also, two questions that I had was, you just mentioned about the CapEx reduction for this year, but something that I'd like to know is, how should we think about CapEx for 2021? Are we going back to something around $720, $750 million per year? Is that something reasonable? And then the second thing would be on working capital optimization. That's something that you your decision as part of your delivery plan as well. How significant could that be? If you could provide us some numbers, that would be great. Thank you.

Ricardo, thank you for the question. I mean, when we look at the cash flow of the company, I think this year was a particular year because of this working capital gap. Ricardo, I just was notified that the webcast link has been disconnected, so I'll wait a couple of minutes for them to reconnect, okay? Okay, sure, no problem.

Our webcast lines are reconnected. Please, you may proceed with your conference.

Okay, sorry for that, but Ricardo, so just to recollect, right, the question is about, in the context of a downturn in the fee cycle, and looking forward, how do we see cash flow thinking about capex and working capital? So, I would say, first of all, This point around the PE cycle is, I mean, it is expected when you look at third-party projections, it is expected that the spreads for PE will be better than they were in the second half of last year or the beginning of this year. So it's not like it's a tougher situation than what we have already been through. It's just, I would say, tighter spreads than we saw that's in the second quarter of the year, right? In terms of the other aspects leading to cash flow, our CAPEX for 2021 has not been decided yet. Of course, we are being very mindful of cash flow, so it is an aspect that will be considered in the decisions now in the second half of the year for the budget for 2021. I would just highlight that delta will be done, so this important amount will not be spent next year. We did postpone some of the capex from 2020 into 2021, so we'll need to see how that balances out, but the company will be mindful of cash flow in deciding the budget for 2021. As regards to working capital, in the first half of the year, as I already mentioned, we had a lot of consumption of cash into working capital because of these dynamics of NAFTA purchases. I'll just remind you that the Petrobras contract that we signed in the second half, the volume of NAFTA embedded into those contracts is smaller than the volume of NAFTA that we have today with Petrobras. So structurally, the amount of imports will increase. And that, I mean, as I said, we have faster payment terms in the imports. So that should lead to a recovery of that working capital structurally going forward. Hard to say the amount involved, but if you look at the first half of the year, the cash consumption we had was mostly, and I would say that the main aspect of that was exactly this dynamic. So we should see a reversal going forward to 2021 with the new NAFTA contracts. And I will just finalize by saying that we keep our target of reducing leverage. Our goal is to be with a leverage, net leverage below 3.5 by the end of 2021, which is in line with the expectation of the RACI agencies. So the plan that I mentioned earlier is geared to achieving that goal by the end of next year.

Great. Thank you.

Our next question is from Barbara from J.P. Morgan. Barbara, you may proceed.

Hi. Thank you. So I have actually one follow-up question on the leverage. I think the last time we spoke, the company was talking about a leverage range between four and four and a half times by the end of this year. So I wanted to confirm if that's still the case. And then on a second point regarding the downgrade and breastcan Indesa contract, there was some discussion about a potential letter of credit that breastcan would have to place in response to the downgrade. So just wanted to have an update on that and on how that stands right now.

Okay, Barbara, thank you. On the goal for the end of this year, it is to be between this range that you mentioned, 4.5 to 5. That's also the discussion we have with the rating agencies. It depends a lot on how the second half of the year goes in terms of results, right? So it is a challenge. I think the plan we have in place, if we don't have any adverse surprises in the second half of the year, should take us there. So that's the goal. In terms of the downgrade and the impact we have on BRAFCAM obligations in regards to BRAFCAM-EDESA, we do have a contingent activity obligation with BRAFCAM-EDESA. It relates to the fact that BRAFCAM-EDESA is still considered as being under construction. And the main reason for that is a performance test that still needs to be performed that would show that BASA is able to operate north of 90% utilization rate for two or three consecutive months. And because of the lack of that, we have not been able to perform that test. Uh, so, uh, because of that, the project is still considered to be under construction. Uh, in this stage of under construction, we have this, uh, continued equity obligation of $200 million that Preston, uh, has, uh, and, uh, we have put in place a letter of credit, uh, to, uh, to, I mean, to, to fulfill this obligation. So right now we are current with the obligation. it doesn't have any draw on our cash position. And I would like to remind you that Brasco Medias has today $250 million in cash at hand. So, I mean, even though there is this obligation and a lot of credit is in place, there is this cash cushion still that has been capped at Brasco Medias. We are working with, Because of Fast-Track, we think that we will be able to achieve this utilization rate in the coming months. And then we need to see how to get the project moving from the construction phase, go through the milestones of physical completion and then financial completion. And then the contingent equity obligation, it falls from the $200 million to $100 million, and then over time it falls to zero. So, it's more of a contractual milestone discussion, and we have fulfilled this obligation with the letter of strategy.

Okay, thank you.

Our next question, it is from Pedro Sorais from Litigi Pacto. Mr. Pedro, you may proceed.

Yes. Hi, Roberto. Hi, Pedro. Hi, Rosana. Good morning, everyone. So I just have one question regarding the ramp-up of the USPP plant, the Delta project. You mentioned in the release and also during this call that you expect to start operating on a commercial scale now in Q3. But it would be nice if you could provide some color on the pace of that ramp-up looking forward, right? if we should expect it to be very gradual so that you don't pressure BP spreads even more. So if that's the case, then how are your expectations on the timing of that plan and when will it be able to operate at high optimization rates? That's it. Thank you.

Hi, Pedro. In regards to the commercial strategy around delta and the new plants and also the ramp up, usually polymer plants like this ramp up well. So, I mean, we have the examples, more recent examples we have are in Mexico. The polymer plants there ramped up in a few months, I would say two, three months. So, I think we can expect something like that in terms of production volume. In terms of the commercial approach and how we anticipate the development there, we have, I mean, Braskem today imports into the U.S. roughly one-third of the production of the plants, roughly between 100,000 and 150,000 tons per year of PCE that Braskem sends to the U.S. today. So one of the obvious markets is to replace those imports. Of course, I mean, we don't think that the entire plant will be geared or pointed to the U.S. market in the beginning, so we do see that there will be a force coming out of the U.S. with this new plant, and we will leverage Brafcan's commercial network in Latin America and Europe and Asia to sell those volumes. We have already, I mean, even before startup, given our knowledge of this technology, of the new plant, and, I mean, we have other plants with the same technology. We know pretty well how this works. We have already pre-qualified, I would say, more than 50% of the volume of the plant with clients, especially outside the U.S. And, I mean, we've been doing strong pre-marketing approach to clients. to place this additional volume in the market. So, I mean, it's hard to say today how these sales are going to progress, but I would anticipate still a sizable volume of exports in the beginning, let's say the first 12 months or so, and then relocation of that into the US. So in the beginning, of course, because of the exports, the spread that the new plant will capture will be lower than the average spread of the U.S. But then over time, the U.S. market imports today roughly two times the production of this new plant. So in theory, we should be able to dislocate imports into the U.S. with the product coming out of our operations. And that's kind of the rough outline, right? So start with mix of exports and local markets, and then increase the local market exposure as we dislocate other imports into the U.S.

Okay, thank you. That's pretty clear. Thank you.

Our next question, it is from Lily Young from HSBC. Lily, you may proceed.

Hi, thank you. Thanks for having the opportunity to make questions. Here is a privilege. I have two questions. One is on Mexico. Should you have to import all gas to run the petrochemical complex there in Mexico? Have you done any analysis of what will be your profitability there? In other words, if you would in any degree be able to compete versus the imported PE? That's the first question. The second question, if I may now, is more directed to Roberto, and thank you for being here. So the way I see Bratkin, the assets are unique. Management team is excellent. The company has actually executed projects on time, on budget. On the debt liability management side, it's actually good with possible. Your funding costs seem to be on the low-cost side. And you mentioned earlier that one of your priorities would be to provide have all this good stuff kind of fairly reflected into the stock price. So the feedback we tend to get from investors is that they are not happy to be in a stock with the two kinds of parents that it would have. And one parent, how can I say, leaves you with many off-balance sheet risks, while the other one is an SOE and is also a major feedstock supplier. So it's kind of bringing on non-quantifiable risks to the story. So would you mind please sharing your views if you tend to agree or not? So would you see any positives or any negatives for Braskem should it become a true corporation? Kind of what would you see could change in terms of growth strategy, ability to negotiate a final dispute settlement in Alagoas? or capital cost in case these two major controlling shareholders dilute their stake in the market. It's a lot of questions all in one. If you could share your views, that would be super great. Thank you.

Hi, Liliana. Thank you for joining us today. On Mexico, I mean, the entire market project was built based on the feedstock contract, right? That was the entire point of building something in Mexico. You see many other countries in the past, they had exactly the same approach. In Canada, you have what is called the Alberta Advantage. I mean, there was a strong incentive to investment in petrochemicals in Canada. both based on feedstock terms and also based on just incentives and grants from the government for companies to develop the country, to develop that region of the country in Alberta. You have the same in several countries in the Middle East. To give you an idea, the price of feed of ethane in Saudi Arabia, at the time roughly of when the The Mexico contract was awarded in the bid in 2008, 2009. The price for ethane in Saudi Arabia, if you wanted to build a facility there, was around $30 per ton of ethane, $30 to $35 per ton of ethane at that time. So if you compare that to a discount on the Mondeo view ethane price, That was a discount of, I don't know, I don't have the exact numbers here, but for sure it was more than 50% discount. And I would say closer to 80% discount, 90% discount. I was going to have the number here. So it's around 90% discount on the moment of the price. So it is a strategy of countries to attract petrochemical investments by granting contracts to companies to attract investments. And then the country benefits from jobs, from improvement in trade balance. improvement in just the industrial fabric of the country because the chemical industry tends to be a structuring industry for an industrial sector. It provides seed stocks and raw materials for pretty much everything that you touch. So it is really one of the industries that countries tend to prioritize when they're looking for development. I could also mention Korea that back in the 70s and 80s focus on this industry as a source of development. Same thing for Brazil, again, back in the 70s. So it is really an industry that is the vector of country development. And that was the whole point of this project in Mexico. So talking about 100% imports doesn't really make sense based on the historical reason for the project to exist. So I would say that, I mean, It doesn't make sense, right? And also to make any significant or to make any change, not only any significant change, to make any change on any contract in Mexico, we need also the approval from the lenders in the project. We have today 14 international banks involved, development banks, and also commercial banks involved, and we need a unanimous approval from all of these 14 banks to have any change done. So even though, as we mentioned earlier, we are discussing this with the government around what to do and how to address the structural lack of ethane in the country, because that's the fact. I mean, Mexico has more capacity to consume ethane than is being produced today. So how to address this is the main focus of the conversation that we have. For sure, I mean, we do see that we will have to operate with some level of imports, but it's far from being 100% of imports. That does not make sense. In terms of the second piece of our question around tool preparation and how we see that in terms of growth potential and the capital cost and the situation of the company, I mean, today... And I'm trying to break it down into the same topics that you brought up. In terms of growth, I would say that the company has its own growth strategy that is independent of the current shareholders. It really is something that we looked at independently. And you can see the last big investments of the company have been in Mexico and then the new plant in the US. We do see pre-salt as a significant opportunity going forward, and we also see some other areas where there is feedstock available in abundance as potential growth areas. Of course, this will depend a lot on whether Braskem becomes a true corporation or if it's a sale by the shareholders to a strategic buyer. But today, we do have that opportunity. our own growth strategy or our own strategy. Linking that to capital cost and the capital structure of the company today, I mean, I don't think that our capital cost is in any way affected by the shareholding structure today. We don't see that coming from investors. But going forward, I mean, we do have a high leverage, right? So I don't anticipate Brascom engaging on any uh let's say major greenfield project or something like that that would have a cash requirement over the next couple of years until we get the leverage coming down and on our goals again our shareholders today do not have an involvement in alagoas it's a connector that is being conducted directly by the company so again going to a food corporation or even a sale, I don't see that that could change anything.

Thank you very much. Very comprehensive, great answers. Can I follow up, please? On the pre-salt as a key growth area that you mentioned, when you think about potential growth and down the road for brass can in Brazil, so would you think that the right

task to think of with the info you have is maybe some expansion into maybe rio de janeiro and if it will be more than gas based right or how you see that so uh it's uh i would say the basic structure of the company behind uh and the principle behind growth strategy is diversification so we look at diversification in three different aspects product diversification We look at feedstock diversification, and we look at geographic diversification. So if you look at the balance today, I would say there is a push for kind of we would like to increase our exposure to outside Brazil. So I would say just structurally investing outside Brazil does make sense for us in terms of diversification. Investing on gas-based makes sense. And also, I mean, some product diversification could also, I mean, that depends a lot on the opportunities that come up, right? We don't have any specific point in mind today about product diversification. But looking at free stocks, it is an opportunity in a market that we are a major player, right? So we do see this as part of the free stock diversification aspect. It needs to be competitive because it needs to gear towards exports. So it needs to be competitive on the international market. And that's the main focus. And I mean, talking about pre-salt, it is really on the coast of Sao Paulo, Rio de Janeiro, and it's in the coast of Brazil and Southeast. And as you mentioned, we do have this facility in Rio. Expanding that facility would be kind of one of lower cost approach that we could have. It will depend a lot on how much gas and at what cost becomes available. And that is not yet clear. I would say that pre-salt is something that will come to district chemicals potentially in the next five years, but it's not within the next one or two years.

Perfect. Thank you so much.

Thank you very much for the presence of all of you and I would like to thank you again for joining us for this call. As we discussed in this presentation, it was a challenging quarter from an operational point considering COVID impacts on the global demand and we have been working hard to keeping our operation running to better supply our clients and also working hard to reduce fixed costs. Second quarter results show that we posted better data from the previous quarter. We are confident for coming quarters results as we already see improvements from the demand side on July and August. As we expect to start the new PP fatality increase in our presence in North America, As we run past fast track, we're increasing our utilization rate in Mexico and we expand our global commercial footprint in Asia and Europe. It's also important to highlight that from liquidity point of view, we are in a good situation with a longer debt profile without any relevant maturities in short and medium term, a very robust cash position that gives us comfort. Lastly, I want to reinforce our commitment to be reassigned as an investment-grade company. We have created a delivery plan with several measures that we are already delivering some of them, such as the hybrid bond issue, and we have a few more being analyzed at this point. Thank you very much for the participation and looking forward to talking to you in the three-month time when we will receive the third quarter results.

Thank you. That concludes today's Breskin Earnings Conference Call. You may disconnect your lines at this time.