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.