Braskem SA ADR

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Bratkin's third quarter of 2020 earnings conference call. Today with us we have Alberto Simões, CEO of Bratkin, Pedro Freitas, Vice President of Finance, Procurement and Corporate Affairs, and Rosana Volho, Investor Relations Director. We would like to inform you that this event is being recorded and all participants will be in a listening-only mode during the company's presentation. After breath-taking remarks are completed, there will be a question-and-answer session. 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 a simultaneous webcast that may be accessed through the Brotkin IR website at www.brotkin-ri.com.br and the NEDIQ platform where the slides presentations are available for download. Please feel free to sleep 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 Securities Legation, Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Draft 2 Management and on information that is currently available for the company. They involve risks, uncertainties, and exceptions because they relate to the future events and, therefore, depend on the sequences that may or may not occur in the future. Investors should understand that general economic convictions, interest convictions, and other operating factors could also affect the future results of Breskin and could cause results that differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Rosana Valho, Investor Relations Director. Rosana Valho, you may begin your conference.

Good afternoon, all. We would like to thank you for joining this Brass Cane Earnings Conference Call. Today, we will present our quarter 2020 results. So, please, let's move to slide number three, in which we will talk about brass cane sustainability goals disclosed this week. Based on our Sustainable Development Strategy and in line with the Sustainable Development Goals of the United Nations for 2030 and the Paris Agreement on Climate Change, we recently informed the market our new goals related to mitigate climate change and eliminate plastic waste. Our goals for mitigating climate change are achieve carbon neutrality by 2050, and provide a 50% reduction in greenhouse gas emissions by 2030. Regarding eliminating plastic waste, our goals are expanding the IMGREEN portfolio, aiming to include 300,000 tons of thermoplastic resins and chemicals with recycled content by 2025, and by 2030, 1 million tons of such products. And also, by 2030, work to prevent 1.5 million tons of plastic waste from being sent for incineration to landfills or deposit in the environment. Moving to slide number four, we will present our strategy to achieve carbon neutrality and also to eliminate plastic waste. To achieve carbon neutrality, the company's strategy will concentrate its actions on three fronts. First, reduction of emissions focusing on energy efficiency and increasing the use of renewable energy in current operations. Establishing partnerships focused on innovation and technology. offsetting emissions with potential investments in the production of chemicals and polymers from renewable sources, and capturing carbon emissions through research and development for the use of carbon emissions as raw material. Additionally, in the forefront of circular economy, Braskem will continue to pursue its mechanical and chemical recycling projects. With that, the company reaffirms its commitment to sustainable development and its continuous purpose of improving people's lives by creating sustainable solutions for chemicals and plastics. Let's move to the slide number five, in which we'll talk about the company's consolidated highlights for the third quarter of 2020. In this quarter, the company recurring EBITDA was $699 million, 126% higher than the second quarter of 2020, mainly explained by the bad spreads in the international market of polyethylene in Brazil, polypropylene in the United States, and polyethylene in Mexico. Also, explained by an increasing sales volume in Brazil and in the United States due to the recovering demand for resins in the Brazilian market and polypropylene in North America. compared to the same period of the previous year, the company recurring EBITDA in U.S. dollars was 69% higher. Moving to the next slide, we will present the third quarter 20 highlights in Brazil. In Brazil, the average capacity utilization rate of our crackers increased 17 percentile points in relation to the second quarter. and 2% of points compared to the third quarter 2019, reflecting the normalization of operations in this quarter. Resin sales in the Brazilian market increased 24% in related to the second quarter 20 and 3% compared to the third quarter 2019 due to the strong recovering demand for resins in the Brazilian market. It is important to highlight that in this quarter, and in line with our strategy of prioritizing sales to the Brazilian market, the company exceeds 1,050,000 tons of resin sold in the domestic market, a historical quarterly record of resin sales in Brazil. Given that, Brazil's EBITDA was $529 million, 148% higher than second quarter 20, representing 70% of the company's consolidated segments EBITDA. The increase in EBITDA is mainly explained by the higher sales volumes of resins and chemicals in the Brazilian market and by better spreads in the polyethylene business. In the next slide, we will provide an update regarding the dialogical event in Alagoas. In January, we signed an agreement with the Alagoas State Public Defender's Office, the Federal Prosecution Office, the Alagoas State Prosecution Office, and the Federal Public Defender's Office. In this regard, and to the best of our knowledge, Brock estimated around 3.5 billion reais in provisions. of these amounts, around R$1.7 billion was related to support the relocation and deminification of residents of the areas at risk located in the affected region. Important to mention that this amount was transferred to a specific bank account managed by Braskem. Therefore, it's not being considered in our cash position. Additionally, R$1 billion was related to actions to monitor and close the salt mining wells and R$700 million for other measures not covered by the agreement with the authorities. In July, Braskem executed an amendment to that agreement with the authorities and informed the market the second relevant provision in the amount of around R$1.6 billion. More recently, in September, we have informed the market an important development in the assessment of the plantation impacts of the geological event of Lagoas, with the conclusion, on September 14, the studies of expert independent technical engaged by the company from internationally recognized entities. In order to implement the potential new measures related to the illogical event in Alagoas, the company, in light of the information available to date, estimated the additional amount of around 3.6 billion reais. Finally, just to reinforce, Bracken cannot predict with certainty future development in respect of this matter or its related expenses. And the cost to be incurred by the company may be different than estimated. Moving to the next slide. Regarding the financial compensation and relocation program, in September, by September 2020, around 6.7 thousand properties were relocated. More than 7.5 thousand families were included on the compensation flows. Around 26 thousand residents were relocated and more than 2 thousand families from humanitarian aid were shifted to the program. Additionally, the residence center is set up to service residents of the financial compensation and support for location program. That is also a program focused on picking up and providing healthy care and welfare improvement for animals. Around 180 million reais was disbursed from the bank account of 1.7 billion reais mentioned before related to the expenses of the financial and compensation support for relocation program. Let's move to the next slide where we will present the third quarter 20 highlights in U.S. and Europe. In the United States and Europe, the average capacity utilization rate of RPP plants increased in relation to the second quarter of 2020 and also in relation to the third quarter of 2019, explained by the higher demand in the United States and the improved production capacity after operational issues in some plants in the U.S. and Europe in the previous quarters. PP sales volumes were 10% higher compared to the second quarter of 20 and 8% higher in relation to the third quarter of 2019, mainly to the demand recovery in the United States and supply restrictions in the region caused by the Laura hurricane. EBITDA in the United States and Europe was $133 million, 223% higher than the second quarter of 2020 and representing 18% of the company's consolidated segment EBITDA. The performance in the quarter is mainly explained by the higher sales volumes in the United States due to the increase in the country's industrial activity. In the next slide, we will talk about our new PPP plan in the U.S. The construction of Bratkin's new PP plant in the United States was concluded, and it has started commercial production in the third quarter of 2020. The new plant is located at the LaPorte site in the state of Texas and has production capacity of 150,000 tons per year. In October, the production of our new PP plant in the United States was 36,000 tons close to the monthly production capacity of the plant of around 38,000 tons. Moving to the next slide, we will talk about Mexico results. In Mexico, the average capacity utilization rate of our polyclean plants increased 4% of points in relation to the second quarter of 2020 due to the higher retained supply by Pemex combined with the retained import from the United States. Compared to the third quarter of 2019, the utilization rate increased 12% of points, reflecting the start-up of the ethane import project in February this year. In the quarter, BRAS Canada imported 42 million tons, or 8,000 barrels per day on average, of ethane from the United States to complement the supply of ethane by PEMEX. which corresponded to 13% of the capacity utilization rate of the Mexico petrochemical complex. Polyethylene sales in Mexico decreased by 2% when compared to second quarter 2020 due to inventory decomposition. When compared to the same period of last year, it increased by 12% given the high availability of products. Mexico's EBITDA was $97 million in line with second quarter 20, representing 13% of the company's consolidated segments EBITDA. In the next slide, we will talk about petrochemical scenario. According to the most recent projections by external consulting firms, the expectations for healthier rising spreads in all regions. Regarding the rising threat in Brazil, polyethylene spreads increased by 102%, polypropylene spreads increased by 26%, and PVC spreads increased by 41% over the figures projected in the beginning of the year. The spread improved mainly due to the strong drop in the NAFTA prices and the demand recovery after COVID impacts, and also by impacts of Hurricane Laura in case mainly of the polyethylene business. In the case of the main petrochemicals spreads, external consulting firms expect lower spreads over the figures projected in the beginning of the year, due to the COVID, the demand for basic chemics was strongly impacted, which resulted in challenging spreads each year. For the businesses outside Brazil, polypropylene in the United States increased by 9% and in Europe by 20% related to the projections of the beginning of the year. And 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. During the third quarter of 2020, we had a positive free cash flow generation of 747 million Reais, mainly explained by the increasing recurring BIDA and also by the monetization of Pisco Fin's credit for around 332 million Reais in this quarter. This effect was partially offset mainly by a bigger interest payment in the quarter due to the payment of the first installment of semi-annual interest of bonds issued in November last year. Here today, free cash flow generation was negative 757 million reais, mainly explained by the cash consumption due to the change in the feedstock purchase strategy in Brazil due to COVID. Moving to the next slide. In the end of September, the average debt term was around 19 years, with around 50% of the total debt due after 2030. Also, the company has sufficient liquidity to cover debt maturities in the next 53 months. For that, we reiterate our commitment to maintain our strong liquidity position and cost discipline while continuing to implement the measures set forth in our deleverage plan. Let's move to the next slide, which will talk about the deleverage plan. Bracken remains focused on implementing the deleverage plan initiatives to reduce its corporate leverage. and as a consequence, to be reassigned as an investment grade company. Besides the conclusion of the hybrid bond issues in July 20, there are other initiatives underway for which Brodsky already presents results, such as reduce investments from $721 million to around $600 million in 2020, with the expectation of ending the year in line with that target, Reduction of around 9% of fixed costs in the year today compared to the same period last year. The goal is to close 2020 with a reduction of around 10%. Another initiative is related to working capital optimization under discussion with relevant suppliers of the company. And lastly, monetization of around 1 billion reais in fiscal fees credits in the year today. Moving to the next slide, we'll start talking about our ESG achievements during the quarter. The Alliance to End Plastic Waste is a nonprofit organization to help to solve a serious and complex issue, millions of plastic waste tons entering the ocean every year. As a member of the Alliance to End Plastic Waste, we have participated in the Progress Report, a report that celebrates the advance aimed at eliminating plastic waste in the environment. In this report, our CEO wrote a letter with Breskin 2019 main achievements. Our contributions were focused on three main fronts, business strategy focused in the sustainability development, Promotion of the circular economy is stimulating new approaches from production to disposal and strengthening of portfolio technologies and business models based on biopolymers and plastic reuse. Aligned with the organization initiatives, we recognize the complexity of this problem and understand that the solution depends on joint efforts from different vectors of society. In the next slide, we will present an important partnership for this quarter. We signed an agreement with TECIPA to remove plastic waste from landfills. This agreement will prevent more than 2,000 tons of plastic waste from being disposed annually in the landfill of Santana do Parnaíba, São Paulo. The volume is equivalent to 36 million plastic packets made of polyethylene and polypropylene. This partnership reinforced Bruskin's commitment to the circular economy and is in line with the company's business strategy, engaged in contributing to the development of the recycling chain. In the next slide, we will talk about chemical recycling. We also had advanced in the chemical recycling initiatives by signing a new cooperation agreement with Brazilian partners to invest on the development of catalysis. The agreement was obtained after Bratkin participation on a selection process opened by SENAI through a public notice. In the chemical recycling, the discarded plastic waste is processed and transformed into raw material cans that will be used to create new plastic resins. Moving to the next slide. At Bratkin, opportunities are for everyone. This means that we pursue, through our actions, to become a more inclusive and welcome company, guaranteeing equal opportunities for all team members through a diversity and inclusion program. In 2014-2015, we implemented some actions focused on women team members in industrial areas, such as diagnosis of work structure for women in the industrial area. In 2016, we launched the Diversity and Inclusion Program with five working fronts, gender equality, social and economy, race and ethnicity, people and disabilities, and sexuality and gender identity. Between 2017 and 2019, we train our teams, both individual and leadership, on diversity and inclusion. And in addition, the diversity and inclusion program become global with initiatives in the U.S. and also in Mexico. This year, we continue to work to create an even more inclusive work environment by creating an internship program with a greater focus on diversity. Lastly, in our 2020 internship program, some selection criteria were made more flexible, such as the English language, which is no longer mandatory in 40% of the vacancies. Moving to the next slide. To conclude the presentation, we will talk about the priorities for the fourth quarter of 2020. In relation to productivity and competitiveness, the priorities to start our chloro-chloride operations in Alagoas, and also to conclude negotiations to renew the supply of NAFTA for the industrial units in São Paulo and ethane and propane for the industrial units in Rio de Janeiro. As for the diversification of feedstock and suppliers, PILAR, we will continue the ramp-up of the complementary solution for importing tanks at Bras Canideza and continue evaluating the definitive infrastructure solution for expanding access to tanks in Mexico. With regard to geographical diversification, our priority is to continue the ramp-up of our new PPP plan in the United States and maximize synergies among the regions where BRASKIN has induced cooperation. about people, innovation, governance, and reputation, we will work to increase the volume of global production and commercialization of recycling resins and continue with the advance of the financial compensation and support for location programming in Alagoas. In capital allocation and financial discipline, the priority is to continue with the implementation of the delivery plan

initiatives and maintain capital location discipline that concludes today's presentation thank you for your attention and let's move to q a session thank you thank you we are now open for questions if you have a question please press star 1 on your phone or phone at this or any time if at any point the question is answered you may lose yourself in a few pressing star 2 key Questions will be taken in the order they are received. We do ask that when you pose your questions, that you fix up your handset to provide optimal sound quality. Our first question, it is from Bruno Montanari from Modern Soundlight. Bruno, you may proceed.

Good afternoon and thanks for taking my questions. I have two questions. First one, I understand it is difficult to estimate the full amount of the Alagoas provision. But how should we think about the timeline to say, now this is over and there will be no more provisions and this is how much we're going to spend? And what is also the latest about your insurance coverage for the incident? And the second question is about Mexico. Is there any updates on the discussions with Pemex about the take-off pay fines, a potential revision of the ETAIN purchase contract? and also when we could see the conclusion for the definitive import solution in Mexico as well. Thank you very much.

Hi, Bruno. This is Pedro. It's a pleasure to be with all of you this afternoon to discuss our results for the third quarter. On Alagoas, what we have we try to be pretty clear around what we have provisioned and what is still not, we're still not able to foresee whether there is any additional amount on or not is this. And always with the caveat and with the view that it's a geological event, so there are aspects of it which may be unforeseeable, right? So we are working with the known facts and known expert studies and that's what we're basing our decisions on uh so what i'm going to talk about a little bit uh is also i mean subject to this uh uh situation right so um on on on i mean you can think about alagoas as kind of there is uh broadly right the side of it which is relocation of people And another side of it, which is what we call the social environmental aspects of it, which include the closing of the mine and other aspects, which I'm going to talk about. So on the relocation of people, we have put together the maps that are published by the civil defense. the maps that our own experts have developed and which we received in September, and which led to the additional provision that we booked in the third quarter. And then when we look at all the maps, all the risk maps that we have, looking even forward up to three, five years ahead in a prospective way, those maps consider that none of the other actions that we are undertaking in terms of soil stabilization, that all of them fail. So the best knowledge that we have today includes a certain area in Alagoas. The provision that we have booked includes that area, that known area, and even what is foreseeable for the map is expert studies. So, on this side, we think that the provision covers everything that we know, again, subject to the fact that these are assumptions that can be updated in the future. But, I mean, everything that we know is there in regards to the area of relocation of people, even considering certain areas that may not be needed to be relocated. if the soil stabilization and the closing of the mine stop the subsidence and the situation there. So that's the first aspect of it. The second aspect of it covers the closing of the mine and the social environmental actions, okay? So on that second side, what we have is we have books a little bit more than a billion reais for the closing of the mine. And that is based again on expert inputs and also submitted to the Brazilian mining agency. So the plan to close the mine is a plan that is shared with authorities in Brazil. And the amount that we have estimated for that today is a little bit more than a billion reais. The second side of that is what we call the social environmental aspects of the case. So what do you do with all the land that is there? Do you have to make any kind of compensation to the city? What do you do with, I mean, are there any environmental impacts that should be accounted for? Are there any social impacts that are not covered yet by the relocation of people and the modifications there? So on that second side, have booked is in total about $2 billion high, maybe a little bit more than that, including the $1.2 billion for the closing of the mine and other social environmental aspects that we have already considered, which include, for example, as we have discussed in other calls, tearing down the buildings, demolishing the buildings that are there, and some other aspects in terms of safety, security, keeping the land, I mean, avoiding invasions into the land, people going back to live there. So that sort of thing is already covered. We are still in discussions with the authorities and with the prosecutors regarding the two main legal actions against the company, which are the state... Originally, it was a state prosecutor case around relocating people. And the second one is the federal prosecutors around social environmental aspects. So the first one, I mean, we have included all the known areas. So we believe that what is covered already by the provision is what will be needed. But again, there is still a discussion with authorities to close down that case. On the second piece, there are certain aspects of it which we believe that could move quicker because they touch on, for example, the closing of the mine and things that we already have a lot of information on. And that, I mean, we're trying to move fast on that, but again, it's a discussion with the authorities, so the timing is not controlled by us. And there is another aspect of which is more related to the environmental impact. There is an environmental study going on in the region to see if the mining operation has created any environmental impact in terms of impact on biodiversity, impact on water, et cetera, water quality. So that study is still going on. We think it's going to take a few months for that study to be concluded. So I would say that that piece of the environmental action, the environmental claim, is probably going to be resolved only next year. So my best estimate today is maybe a year from now or so. But I mean, those studies take time. And then the conclusion of that is still going to take time. So it's a long answer. But I'm trying to be very transparent in terms of the amount and the timeline, especially, I mean, we think a piece of it could be resolved this year. A piece of it, we think, probably will take us into the next year, especially because of these studies that are still going on. On insurance coverage, we are discussing with the insurers about, I mean, we have a civil liability coverage of $200 million, as we have discussed, and we have submitted and are still submitting documents to the insurers to substantiate the claim. we have not received any values yet, but this is something that is going on as well. Finally, on Mexico and updates on Pemex and the ethane contract discussion, we are in touch with Pemex. We have this discussion going on with them about any potential potential changes in the contract, but we don't have anything yet that is defying on that. Basically, it's still going on. We're still looking for a constructive solution, and I'm afraid I don't have any concrete steps that have occurred in the past few months about that. Finally, on the last point about the fast track and the definitive solution, I'm happy to say that in the third quarter, the fast track contributed 12 percentage points to the operations of Mexico. So we ran close to 85%, 84%. utilization rates, 12 points of that were because of the fast track solution. There are two next steps there. One is upgrading the fast track. We are working on a pier in the harbor. And with that, we will be able to discharge more ethane. So the fast track utilization could go up to 20% or maybe even more than that. of the site needs, so that would put us on a running rate of Braskemideza north of 90%, which is what we would expect from the beginning. And then the definitive solution, which is a pipeline, we're still in engineering work around that, so we don't have a decision on that, but the project is advancing. There are a couple of different solutions, different routes for the pipelines and different harbors that are being contemplated. And it's something that is still under evaluation in terms of which one is the best approach for this project.

Thank you, Pedro. That was super thorough. Thank you very much. Our next question is from Ben Isaacson from Scotiabank.

Ben, you may proceed.

Thank you very much and good to be on these calls and thank you for the very comprehensive overview. I have three questions. The first one is given the provisions that you took in September, do you still expect your leverage to be at or below 3.5 times by the end of 2021? Number two, on Pemex, if you don't reach a constructive conclusion, what is the legal threshold or how close are they to falling below the 70% threshold and what happens once they fall below that point? And then my final question is, I've noticed over the last few years, you've been decreasing your NAFTA exposure from Petrobras but it's actually increased this year. What are the reasons why it's increased, and is that temporary, and how should we think about that going forward? Thank you very much. Hi, Ben, and thank you for the questions. On the leverage, I think everybody saw that our leverage, which was north of seven turns and net back to EBITDA, in the second quarter, fell below five in the third quarter. So it was a pretty steep deleveraging, basically because of the recovery in results, right, in the EBITDA. Our debt has been pretty much stable for the past, I would say, many years. We've been banned, but pretty much stable. Looking at the year end, we have been talking to you and telling that we thought it could go down to somewhere around 4.5. Because of this extraordinary performance in the third quarter, we now believe that it could be below 4.5 by the end of this year. And we still have the goal of getting to 3.5 by the end of next year. um of course uh any any settlement in alagoas could change that that perspective but right now this is this is what we are we have as a goal we have not closed yet our budget for next year uh because of the high volatility in the markets we decided to uh close the budget uh actually in the beginning of january so that we know how the the year end was for 2020 and also we have a closer look and a closer feeling of how the market will perform in the turn of the year, beginning of the year, so that then we can have our budget approved by the board. So that's going to happen the beginning of next year. Next year, we are going to have some benefits or some, let's say, tailwinds helping us to improve our results. I'd like to mention, I mean, the new plant that started up in the US, the Delta project, it's already running at close to capacity utilization. So the ramp up was pretty steep, pretty good. And we expected to contribute a sizable chunk of EBITDA starting next year. I mean, it's already contributing, but looking at a full year results, Delta for sure will be a good contributor to results. We are also going to have the chloral chloride plant back in operation in Alagoas. And with that, we do expect to have a recovery also in EBITDA, which, I mean, our estimate is that we lost about $60 to $80 million in EBITDA because of that plant being stopped. So that going back, I think that's... also good. The ramp up in the fast track that I already mentioned. We also have a perspective of better markets next year, some market growth, which could also impact both our volumes and spreads, right? So overall, we do expect a better year next year. At least looking at the drivers that we have today, we do expect that. But as I said, we haven't closed our budget yet. The goal is still to get to 3.5. On Pemex, Pemex has been supplying us at 70 or a little bit more than 70% every quarter, so that legal threshold you mentioned has not been reached. There is, as far as I recall, no legal obligation for us to do anything, but there are certain rights that we get if if certain conditions are not met, one of them being the supply threshold. So we are, I mean, we keep looking for a constructive solution with Pemex, as I said, but of course, we are also looking at all other alternatives that are available to BRAS-MEDESA, including legal alternatives if need be. So that's, I mean, we are looking at plan A, plan B, plan C in this situation. And in terms of NAFTA, what happened was, I mean, as you saw for the past couple of years, our strategy has been to import more NAFTA than consumed from the local supplier, from Petrobras. There are a few changes that occurred in the beginning of this year that led us to increase our purchases from Petrobras. But I would say that that was kind of an exception to what we expect to be the norm going forward. So looking at Petrobras, the supply in the beginning of this year, I would highlight two main points. One was with oil prices falling, it makes more sense for us to, given the structure of the contract, make more sense for us to get supply from Petrobras. But also, and I think more importantly, the market was long gasoline in the beginning of the year, especially with COVID. I mean, a lot of refineries stopping, et cetera. And then Petrobras came to us with, I would say, a good proposal that would be beneficial to Braskem in terms of consuming more NAFTA from them and reducing imports so that Petrobras then could run their refineries at a higher rate. That would be mutually beneficial. We got a discount there around April of $15 to $35 per ton, which is very, very substantial. So that was a good deal, a good approach for us there. Going forward, we expect to have more imported NAFTA. Looking at the contracts that were already closed for the South and for Bahia, the volumes there are smaller than the historical or the volumes that we have in the current contract. We expect the volumes for the São Paulo Cracker to remain the same as we have today. So we expect to have more imported NAFTA going forward. If I could just ask a very quick follow-up. When you think about the PEMEX, there's two issues. One is you are forced to run at a lower operating rate. The other is that you're making less margin per ton. Can you provide some color of the magnitude of the impact on a margin per ton basis? How much are you losing by importing ethane from the U.S. Gulf versus from PEMEX? Yeah. The import cost is around $200 per ton, I mean, full cost, fully landed. So that's about the margin that we're losing. That's great. Thank you very much. Just an additional comment, Ben, that I think is relevant. With the additional solutions, the step two and step three that I mentioned, I mean, the step two of FastTrack and then the pipeline, those costs should be lower going forward. Because, I mean, we would be able to bring larger ships, so reducing shipping costs in the first step. In the second step, I mean, it's a pipeline, so it's much lower cost than running trucks, which is what we're doing today.

Great. Our next question, it is from Ricardo Rezange from BT Morgan.

Ricardo, you may proceed.

Hi, Pedro. Hi, Rosana. Thanks for taking my question. So the first one is on free cash flow. I remember that earlier this year we talked about the free cash flow for the year and we even discussed if it was going to be possible to have great giving for the year. How do you see cash flow on the fourth quarter? And also how do you see the fourth quarter giving? that there's seasonality, but at the same time, we're seeing this improvement on the demand side. And then the second question is on your ESG initiatives. Congrats on that announcement. My question is, is there any relevant capex involved on the implementation of these ESG initiatives?

Thank you. Ricardo. Thank you for the question.

On free cash flow for the fourth quarter, we are seeing a scale in October. We have seen good market performance. Results were better than we were anticipating for October. And looking at the end of the year, I mean, we see some of our clients still in high demand mode. We see also some sectors that have given people kind of their holidays uh they're in brazil it's usual to have the iran collective holidays right some some factories shut down and people over christmas and new years they go home and i mean a lot of plants are closed even for maybe 15 days sometimes so even braskin does that with um with i would say the administrative people and even some of the industrial people so um We think that some of those companies, they have already given, because of COVID, they have already given their employees the holidays. So we think that December this year will be atypical in the sense that we could have a positive surprise in volumes in December, higher than what would be usual. Looking at cash flow again for the fourth quarter and then for the year end, I mean, positive cash flow in the fourth quarter. for the year end and looking at the full year, we think that cash flow could be neutral, potentially still positive by the end of the year. We have a much lower amount of interest to pay in the fourth quarter compared to the third quarter. In the third quarter, the interest payments for the bond were really material. Fourth quarter, it should be a much lower amount. and also, I mean, a more stable operating cash flow. We also have resumed imports of NAFTA. And as you know, for imported NAFTA, we are able to negotiate many times extended payment terms. So that would also help with working capital. So in all, I would say that good perspective in terms of maybe even achieving positive cash flow by the end of the year. In terms of ESG, So I will split that into two pieces, right? There is a piece of that which is what we are already doing and many initiatives that we're already promoting in terms of circular economy, innovation around recycling, chemical recycling, mechanical recycling, as Rosana mentioned in the call. and also reducing our carbon footprint. We're doing a lot on the energy front, working with sustainable and renewable sources of energy, wind, solar. So I mean, right now, and I would say for the next five years, the capex numbers for all of that, they are not expected to be very material. Because it's still, I'd say, in some cases, like energy, it's a third-party investment. We're actually enabling investment by third parties in solar farms or wind farms. And in the other businesses, I mean, we expect, for example, in recycling, it's an investment in technology development, but that should yield results in the future, right? So it should come back to us So, looking at all of that, we don't anticipate, again, a very material investment beyond what we're already doing. What we're doing is tweaking the investment portfolio towards the sustainability investments, which are synergistic in many ways with what we already do. And on the other hand, I mean, if you're looking at the long-term goals, right, the 2050 zero-carbon ambition, for that, we don't know yet all of the solutions that we'll need to implement to get there, right? So I would say that the 2025-2030 targets, we have, I would say, a more known roadmap. And there are many partners working with us on that. But the long-term solutions, we don't know yet. And that's the fact. I would like to close this with just highlighting again that sustainability is a strategic pillar of our business. We're not talking about sustainability starting now. Now is the announcement about our ambitions around carbon neutrality. a reinforcement of the commitment that we already had around circular economy. But I'd like to remind everyone that in the charter of the creation of Braskem back in 2002, one of the first items there, it's in our website, everybody can look at it. I believe item number four, there was a commitment to sustainable development practices. It's a long-term, long-standing commitment of the company and we're just moving on that going forward.

That's very clear. Thank you so much, Pedro. Our next question, it is from Rodrigo Almeida from Santander.

Please, you may proceed.

Hi, Pedro. Thank you for the call. I have two questions here from my side. The first one is related to the PP plant in the US. Given the solid start and the good demand over there, do you foresee any faster ramp up for the plant, or is it more of an operating site? Any quality it could give us on the more, say, medium term ramp up of the plant would be nice to understand. And the second question is related to the working capital initiative that you mentioned. I understand that, you know, increasing the NASDAQ imports would help working capital dynamics, but what else could you do on the working capital front to benefit from that a little bit more? Thank you very much.

Hi, Rodrigo. On the TP plant, I mean, it reached a 95% utilization rate already. So, I mean, I would say it has ramped up with, I would say, a center... a more unsophisticated portfolio of products. So now the effort is to specify in the plant additional grades that have not been produced yet. And we are moving forward with that. One thing that is helping is that the recovery of the market in the U.S. has led some clients to fuel some restriction in supply from some of our competitors. Also given the hurricanes that occurred in the Gulf Coast. So some clients have been reaching out to us looking to specify and homologate the product from the new plant faster than we expected. So that could also help us on the market side. But again, it's already running pretty well. In terms of working capital, just a few comments, right? If we break down our working capital, you can look at accounts receivable. With the recovery in the market and also the moving exchange rates, the accounts receivable in reais are higher now. And that's natural. That actually reflects a good moment in the business. And we have a very, I would say, thorough credit management of our client exposures. It is expected that there would be an increase in accounts receivable because of the recovery in the market and also exchange rates. Inventories have also gone up a little bit because of exchange rates. But we are working on several digital tools to manage inventories better. So there are several initiatives in our digital center that are geared towards reducing working capital, especially inventories. We are looking at the way that we are doing our forecasting process, We are implementing warehouse management systems, a new warehouse management system that probably will reduce the amount of parts that we have in our inventories, in our MRO inventories. Also, in terms of feedstock, we're working on that. So, we're working a lot on investment, on inventories. And on the supplier side, I already mentioned the increasing import in NAFTA, which also helps with working capital. And finally, we have a lot of taxes to recover, right? Tax credits to recover in our balance sheet. The largest amount of that is related to a specific tax recovery in Brazil called, it was a claim that we won in the courts. We call it the Pisco Fins uh tax um we have still in our balance sheet somewhere around 300 million dollars of fiscal fees to monetize but we have already calculated uh in this claim there are certain um uh specific claims that have not yet been awarded by the courts but those those could amount to an additional two billion reais um that that could add to or say uh more future cash flow, non-operating cash flow that we could be seeing in the future. It's exactly the same type of claim that we have already won. It's just a matter of the courts getting to that case and awarding the same decision that was already awarded in multiple other places in Brazil.

Perfect. Thank you very much for the complete answer, Pedro. Proceeding with our next question, please stay in the line. We are taking our next question. Please stay in the line. Our next question is from Luis Carvalho from UBS. Please, Luis, you may proceed.

Thanks for taking the questions. I have basically two quick questions here. You say, Pedro, I know that you don't give guidance for the following year, but of your best knowledge, looking to the spreads and the utilization capacity, what do you think that, due to the next couple quarters, would look like in terms of really compared to the results that you just presented in the third quarter? And, of course, comparing these to taking into consideration the seasonality of the past quarter, right? And the second question, it's mostly a follow-up on any update on the controlling shareholder, potential divestments, anything that you have been consulted with that you can share with us?

Thank you. Hi, Luis. Thank you.

I mean, looking at the basics of the business, I would say that internalization should be higher than this year. I mean, because of COVID and the hit that we had in the second quarter. So, and we do expect, I mean, higher demand next year compared to this year, just by market growth everywhere. So in terms of volumes, we think it could be a better year next year. The second main aspect of our business is the spreads, right? And there, I think there... the signals are still a little bit mixed. On the one hand, we have demand growth. So that helps with higher spreads. But on the other hand, we have several players and suppliers that this year they have stopped. Some have not come back yet. So the balance of, and there are new plants that were delayed from this year to next year, right? So the balance of supply demand for next year is still a little bit unclear. So, given the situation, I mean, I don't think spreads next year will be much higher than this year. They could be lower, especially in polyethylene. In polyethylene this year, we had spreads that were much higher than we expected. So, I think there may be some reversal in the PBE spreads for next year. But when we look at PP and PVC, they're doing pretty well, and I think there it's more solid. I mean, there is not a lot of new PVC capacity coming online. We're seeing delays of the new PP capacities coming out every quarter. So, I mean, to give you an idea of what I said, right, the spreading PE was close to double what we were expecting. it's really uncertain. But I would not expect much really higher spreads. They could be, I think, the same or maybe even a little bit lower. A lot will also depend, of course, on the oil price and how that occurs, right, and how long any changes in the oil price go through the final products. And the last aspect of this, still on kind of the on a running rate is effects. There was a strong devaluation of the hail this year, which is very good for us. And I mean, then I think it's anyone's call, right? What's going to happen with effects? All the analysts that we follow and everything that we look at leads us to expect an effect that is at around five or north of five, which is pretty good for us. So, again, I would say we have good perspectives in volume and effects, and mixed perspectives around spreads. They could be the same, a little bit better, or a little bit worse than we had this year. And finally, we have all the aspects that are already mentioned, right? The new plant in the U.S., the coming back of the chloral chloride plant in Alagoas, the increase in the fast track solution in mexico so there are certain aspects of uh of our business that will i would say uh comparing on a year-to-year basis there will be some positive discontinuity uh in terms of of those um of those uh uh i would say plants right in terms of of uh other brush the controlling shareholder and their So they advised us that they would start a process, a sale process. We have established with them a protocol for exchange of information, and we have started to provide them with pieces of information around Blaskin so that they can prepare the sale process. But we are not a part of that process. So, we will not, we are not expecting to have to engage with multiple counterparties. And, I mean, we are trying to keep that disruption away from the company and to provide for the branch. As a controlling shareholder, they have a right to the information. And then they will talk to the potential counterparties and decide what to do with their stake. So, the only new thing that I have to say is, I mean, this process of exchange of information has started, but I'm not aware of any, let's say, next step in this process or any external steps that may have happened at this point.

Okay, very clear. Thank you very much. Our next question, it is for Fernanda Cunha from Hippie Bank.

Fernanda, you may proceed.

Hi, good afternoon, everyone. I have a couple of questions in the Mexico project. Can you explain how can we think of margins going forward with your fast track input strategy? It's just, it seems to me, finally, that this quarter versus second quarter, your margins actually, they went down when, you know, spreads were significantly higher. And I'm talking against second quarter for this year. So I'm trying to do this reconciliation and how we can think about the margins going forward. And then the second question I have is, on the imminence of a second wave of COVID-19, What lessons can, you know, have you learned from the first wave and, you know, and you think that margins could be better protected from this learning that you had?

Thanks for the question. About the margins in Mexico, I mean, we have been running with FastTrack since first quarter, since February. And in terms of margin, there is a decrease, actually, because we do have additional costs that we import. as Pedro mentioned, but we do sell more, right? And we are talking about a gas tracker in a network of putting Pemex plus the FastTrack solution is still a great project to generate good margins to generate cash flow. So even considering that, considering the cashback solution that we are ramping up is still a very positive project with great margins, even in the down cycle.

Yes, no, I agree with you. But I just wanted to understand why did margins drop, like, from 54% EBITDA margins in the second quarter to... somewhere like 40, 45%. I know there's an impact from, you know, the receivables from Pemex, but at the same time, e-paying did not come down so strongly. So I know revenues should, from my math, it should have come down like 9%. It came like 27% down. And so I'm just trying to understand what would be the normalized EBITDA margin.

Yeah, the margin... The margin dropped because we are breaking our size track that I just mentioned. But we are talking about 48% of the margin, right? We do not see that in any other company or project in the globe. If we compare, for example, to Brazil, where we have a much more diversified market, feedstock profile, a lot of products, EBITDA margin is 24% this quarter. So even with a drop in EXO, EBITDA margin that you mentioned, and it's true because we are ramping up FreshTrack, we're still getting a 48% EBITDA margin, which is great, actually.

Yeah, Rodana, just let me add another point here that I think is relevant, right? If you look at our... net revenue or or the the revenue it went up uh by about uh 10 percent uh third quarter versus uh second quarter um and and uh what happened is that um a part of that is that i mean if you have let's say a margin per ton of 500 per ton okay and the price that you're selling at is $1,000, that margin is 50%. But if you have the same $500 per ton of margin, and you're selling at $1,500 per ton, the margin goes down to 33%. It's still the same $500 per ton. So there is also a dynamic there of increasing PE prices but the spread has not increased by so much, right? So the evolution of the denominator of the math to get to the FDM margin leads you to that. So a part of the explanation also comes from that, besides the fast track, as Cosana mentioned.

Sure. No, I can take this discussion offline. It's just I understand that, you know, graph margins did not change. But when you look at EBITDA margins, it did change a lot, you know, quarter over quarter. So, I was just trying to understand what is the, you know, what's the difference here. But we can discuss this afterwards.

Okay. On COVID, just briefly, I mean, what we have learned, I would say, a lot in the first wave. And we don't know how, I mean, we see the second wave in certain regions. We don't see a second wave at least so far in other regions like in Brazil. So it's still unknown how the second wave or a potential second wave could hit our markets. But we have learned to turn around our operations pretty quickly. So, I mean, changing production schedules to adjust to changes in demand also logistics. So I think we learned a lot around how to adjust and adapt our operations quickly. And if anything happens in terms of a second wave, I think that would be helpful to us going forward. But again, it's really how you react once things start to hit the market. And we have seen that... The way that it happens is different in each region. It's different in each market. So it's really having the agility of answering quickly is more important than having a very well-established plan because, I mean, it's really an uncertain, unknown situation that may occur.

Okay, great. Thank you. Now I'll turn over to the company for closing remarks. We have Roberto Simões here with us, so I'll ask Roberto to close. Thank you all again for joining us for this call.

As we discussed it, the presentation, we had a quarter of very good results. As you saw, the money in all divisions increasing, and as we keep seeing, very healthy spread in the international market every month. Given that, we present a positive cash flow generation, and in this quarter, we saw leverage of 4.98%. an important reduction from field views for the leverage of 7.11. This reduction reinforces our commitment to be reassigned as an investment-based company. It's also important to highlight that from liquidity point of view, we are in a good situation with a longer data profile, without any relevant maturities in the short and medium term, and a very robust cash position. And finally, I want to reaffirm our commitment to sustainable development with the announcement that we did regarding our new goals related to mitigate climate change and eliminate gas waste. We will continue with our strategy around efficiency and competitiveness, diversification of feedstock, and the geographic diversification that has been leading to significant results for us. So, thank you very much for your participation, and looking forward to talking to you in a three-month time when we release the 2020 annual results.

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