Braskem SA ADR

Good afternoon, ladies and gentlemen, and thank you. At this time, we would like to welcome everyone to Braskem's first quarter of 2021 earnings conference call. Today with us, we have Roberto Simões, CEO of Braskem, Pedro Freitas, Vice President of Finance, Procurement and Corporate Affairs, and Rosana Avoglio, Investor Relations Director. We would like to inform you that this event has been recorded and all participants will be in list and only mode during the company's presentation. After Braskin's remarks are completed, there will be a question and answer section. At this 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 Braskin's IR website. at www.braskin-ri.com.br an MZ-IQ platform where the slide presentation is available for download. Please feel free to flip through the slide 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 Litigation Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Broskine Management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operation factors could also affect the future results of Braskin and could cause results to differ materially from those expressed in such forelooking statements. Now, I'll turn the conference over to Rosana Avoglio, Investor Relations Director. Ms. Avoglio, you may begin your conference.

Good morning, all. We would like to thank you for joining us on this conference call. Today, we will present first quarter 21 results. Please, let's move to slide number three, in which we'll talk about the petrochemical context in 2021. In the first quarter of 21, petrochemical supply was impacted by the severe winter storm in the U.S. Gulf Coast. which led to the unplanned production closures affecting resin suppliers. Additionally, demand continues strong for all resins. Because of this context, international market reference were impacted and PE and PP spreads reached the highest level since 2017, positively impacting the profitability of petrochemical companies in general. In the case of PE in EFTA base, for instance, its price in the first quarter of 21 were 103% higher than last year average. In the case of PE gas base, which is a spread that impacts brass cane business in Mexico and in the petrochemical cracker in Rio de Janeiro, depreciation was also significant and its price increased 93% compared to the average in 2020. regarding the PP propylene spreads in the United States, spreads grow 49% compared to 2020 average. Moving to slide number four, we'll comment about Braskem consolidated first quarter of 21 highlights. In the first quarter of 21, the company's recurring operating result was $1,266 million, 52% higher than fourth quarter of 20, explained mainly by the bad spreads for PE, PP, and main chemicals in Brazil, for PPE in the U.S. and Europe, and for PPE in Mexico, and also explaining by the higher PPE sales volumes in Europe. Compared to first quarter of 2020, recurring operating results in U.S. dollars advanced 341% due to the better spread for resins and main chemicals in Brazil, for PPE in the United States and Europe, and for PPE in Mexico, and also due to the higher sales volume of PPE in the United States and Europe and of main chemicals in Brazil. Moving to the next slide. On slide number five, we will present the main highlights of Brazil's operations. In the first quarter of 21, the utilization rate of our petrochemical crackers was 3% of points lower than fall quarter 20, mainly due to the impact of the pit stop in Rio Grande do Sul. In the Brazilian market, resin sales decreased in relation to the fourth quarter of 2020 due to the weaker but still healthy demand in the Brazilian market and also due to the lower product supply in the period. The reduction in exports is explained by the focus of the company on serving the Brazilian market. Given that, Brazil's recurring operating result was $943 million, 39% higher than fourth quarter 20, representing 70% of the company's consolidated segments recurring operating results. This increase in EBITDA is mainly explained by beta-PP, PE, and main chemicals expressed in the international market. Moving to the next slide. In this slide, we'll talk about the feedstock profile in Brazil. In line with the company's strategy to diversify its suppliers, the Brazil segment continued to purchase NAFTA via supplier agreements with international suppliers. In the first quarter of 2021, NAFTA imports accounted for around 70% of the total NAFTA consumption in the quarter. It's worth mentioning that BRAS can obtain the longest payment term on NAFTA purchase with foreign suppliers impacting positively its cash generation. In the next slide, we'll provide an update on a geological event in Alagoas. In this slide, we'll talk about the provisions regarding the geological event in Alagoas. In the chart on the left of this slide, we'll present the balance of provisions. In the first quarter of 21, the balance of provisions related to the geological event in Alagoas was around 8.5 billion reais And during the quarter, Bratkin reversed provisions in the amount of R$139 million. In the right chart of the slide, we present the disbursement schedule. Of the R$8.5 billion, around 50% was recorded under current liabilities and 50% under no current liabilities. important to mention that the company cannot predict with certainty future developments in respect of this matter or its related expenses. And the cost to be incurred by the company may be different than the currently estimated or provision. Moving to the next slide. In this slide, we'll talk about the financial compensation and support for location program. In the first quarter of 21, BRAS can continue to make progress on its relocation and financial compensation of families in the districts affected in Maceió. The numbers of families relocated increased 25%, reaching around 11,500 families. Additionally, the number of financial compensation proposals submitted by the company increased 58%. Regarding payments made in the scope of the financial compensation and support allocation program, around 700 million reais had already been disbursed as of first quarter 21. Moving to the next slide. In the United States, the average utilization rate of our PP plants decreased in relation to fourth quarter 20, explaining by the impacts from winter storm Yuri in the U.S. Gulf Coast. In Europe, utilization rate increase in relation to fourth quarter 20 explained by the scheduled maintenance shutdown in the last quarter of the prior year. In the United States, considering the sales offered the new PP plan delta only in the first quarter 21, sales increased in relation to fourth quarter 20 and also in relation to first quarter 20, mainly to the increase in production capacity after the commercial startup of the new PP plan in the region in September 2020. In Europe, sales increased in relation to fourth quarter 20 and also in relation to the first quarter 20 due to the higher supply of the product in the period. In the next slide, we'll talk about an important highlight in the United States. During the first quarter of 21, Braskem made the first international shipment from new global export hub facility. The new hub offers packaging, warehousing, and export shipment services to support Braskem's six PP plants in the United States. Additionally, The facility has the capacity to support export shipments of up to 204 KT annually to Bratkin clients worldwide. The new logistics and distribution facility in the Port Region of South Carolina significantly increased Bratkin export capacity in the United States. Due to the current moment in the PP market in North America, Bratkin is prioritizing sales in the U.S. market. However, over time, the new hub will enable Braskin to leverage the production of its assets on the U.S. Gulf Coast, Pennsylvania, and West Virginia to better serve the needs of its international clients. In the next slide, we'll talk about the main highlights of Mexicans' operations. In Mexico, The average capacity utilization rate of our PE plants increased in relation to the fourth quarter of 2020 due to the production based on an experimental business model implemented in January and February following the unilateral interruption of natural gas transport service by Senagaiz in early December 2020. In early March, after executing a natural gas transportation service agreement with Senagaiz, Transportation services were re-established. P.E. sales in Mexico decreased by 27% when compared to 4.20 due to the lower availability of products in inventory. Mexico's recurring operating result was $94 million, 49% lower than 4.20, representing 7% of the company's consolidated segment's EBITDA. In the next slide, we'll talk about fast-track solution in Mexico. In this slide, we'll talk about the expansion of e-taining ports from U.S. to BRAS-Canadeza. In December 20, BRAS-Canadeza concludes the expansion of its fast-track operation, which currently has expected e-taining port capacity of 20,000 barrels per day. in the first quarter of 21, to complement the supply of ethane by Pemex, Bratkin-Ideza imported a daily average of 13,100 barrels of ethane from the United States, which represented around 66% of FastTrack's current capacity. Additionally, the volume of import ethane accounted for around 30% of Bratkin's total ethane supply in the quarter. Moving to the next slide. In the first quarter of 21, we had a positive free cash flow generation of R$1,766 million, mainly explained by the recurring operating results in the quarter, the monetization of fiscal fees credits in the approximate amount of R$761 million, and also explained by the lower volume of operating and strategic investments. These positive impacts are mainly opposed by the negative working capital change due to the impact from higher prices for resins and main chemicals in the international market affecting accounts receivable, and also from higher NAFTA prices on the finished product cost in inventory. Moving to the next slide. In the end of March, the average debt term was around 14 years, with most debt maturing the long term. Also, considering its cash balance, the company has sufficient liquidity to cover debt maturities in the next 79 months. During the quarter, because of the company's strong cash position and to reduce its gross debt, Broskin announced the total redemption of the 7.375 perpetual bonds at face value in the amount of $500 million. Let's move to the next slide, which will talk about corporate leverage. In line with its continuous commitment to financial health and with the objective to be reassigned as an investment-grade company, BRAS can continue to reduce its corporate leverage. The leverage ratio measures the ratio of net debt to recurring operating results in U.S. dollars and the first quarter 21 at 1.8 times, down 39% from fourth quarter 20, which was 2.94 times. Additionally, the company net debt decreased approximately $1 billion compared to first quarter 20. Moving to the next slide, we will start talking about our ESG highlights. The EDF Renewables started up its wind complex, which is going to supply renewable energy to Bratkin. The power supply is secured by a 20-year purchase agreement signed in 2018. This partnership is estimated to result in the avoidance of 280,000 tons of CO2 and is one of the four power purchase agreements signed by the company as of 2021. The wind complex is located in Bahia, and its construction complies with the key guiding principles of sustainable development. This project is part of our carbon neutrality strategy. It's one of the agreements which put brass canes near to the mark of 1.5 million tons of CO2 emissions avoided through long-term renewable power purchase agreements. Let's move to the next slide. Other important initiative related to climate change is the first collaboration between Trafigura and Braskem on the first NAFTA shipment in the world to offset carbon emissions. Trafigura supplies important NAFTA to Braskem Petrochemical Complex located in Brazil. In collaboration with the company, the first shipment was made with offsets and reductions of the carbon emissions associated with the feedstock, which includes extraction, refining, and transportation process. The calculation was made by Trafigura, and the results were obtained from offset projects based on the nature located in Indonesia, and reductions based on energy gains by cargo vessels. All of that data is assured by a verified carbon standard. This project is one step forward on the work to offset scope 3 CO2 emissions in which the company's contribution strategy is under development. Moving to the next slide. Other important achievement is related to our commitment to eliminate the plastic waste through recycling initiatives. Braskem is the first Brazilian company to receive the ISCC Plus an international certification for the production of resins and chemicals from circular feedstocks, such as pyrolysis oil. The pyrolysis oil is a product of chemical recycling that breaks down the post-consumption thermoplastic resins molecules using heat. The certification is based in the MASS concept, which ensures that the input amount of raw material is transformed into an equivalent amount of final product in the certified plants. The certified plants are the ABC Petrochemical Complex at São Paulo State and Triunfo Petrochemical Complex at Rio Grande do Sul State. This control enables the sustainability of Stilcola products to be duly credit and recognized. Moving to the next slide. The COVID pandemic has affected people's lives, especially with regard to the basic necessity. In this sense, The company allocated 15 million reais in 2021 to combat hunger, and it has started to distribute 48,000 food staple boxes, 25,000 hygiene kits, and three tons of vegetables to the surrounding communities in several states of Brazil. Also, through its employee volunteer program, Braskem will donate three food staples for each box donated by its employees. These actions are related to our social responsibility values, which aim to assimilate and support the local development of the surrounding communities of our operations. These important moments call for solidarity, joining forces and helping people's lives in need across Brazil to minimize pandemic's impact. COVID pandemic has affected people's lives, especially with regards to the basic necessities. In this sense, the company allocated 50 million reais to combat hunger, and it has started to distribute 48,000 food staple boxes, 25,000 hygiene kits, and three tons of vegetables to the surrounding communities in several states of Brazil. Also, through its employees' volunteer program, Braskem will donate three food staples for each box donated by its employees. These actions are related to our social responsibility values, which aim to assimilate and support the local development of the surrounding communities of our operations. This important moment calls for solidarity, joining forces, and helping people in need across Brazil to minimize pandemic impacts. Let's move to the next slide. Bresting was certified by the Brazilian Federal Revenue Service as an authorized economic operator in the compliance category. This is an international recognition for the adoption of practices and management process that minimize risks events existing in import operations and for the voluntarily comply with the compliancy, reliability and security criteria applicable to the global logistics chain. as well as tax and customers' obligations. This recognition strengthens relations with international partners and offers benefits such as reducing import time and costs. With this credential, Braskem expands its international footprint and reinforces image as an increasingly competitive, responsible, and compliant company. In the next slide, we'll talk about petrochemical scenario in 2021. According to the most recent projections by external consulting firms, the expectations for healthier PE and PVC spread in 2021. In the case of PE, in the second quarter of 21, it is expected more profitable PE-NEFTA and PE chain spreads since then seen in the last quarters. In the case of PVC, after the return of our chlorophyllite plant, the spread part better reflects the profitability of vinyls, which is also more possible than previous quarters. Let's move to the next slide, which will talk about the scenario for PP. Similar to P in PVC, external consulting firms are projecting healthy PP spreads in 2021 in the United States and also in Europe. In the case of PP, the main highlight is regarding spreads in the United States, where projections point for a 25% increase in PP propylene US spreads compared to recent years. Moving to the next slide. In this slide, we will present the short-term outlook, focusing on the dynamics in the second quarter of 21 compared to the first quarter of 21. In the case of Brazil, ATLANTE PRODUCTION SHOULD BE IN LINE WITH HIGHER PRODUCTION IN RIO GRANDE DO SUL AFTER THE PEAK STOP IN FIRST QUARTER 21 AND ALSO WITH THE SCHEDULE SHUTDOWN AT THE SÃO PAULO COMPLEX IN APRIL AND MAY. REGARDING SALES, TOTAL RISING SALES SHOULD BE IN LINE AND THE COMPANY EXPECTS TO CONTINUE STRATEGY TO PRIORITIZE SALES TO BRAZILIAN AND SOUTH AMERICAN MARKETS. ADDITIONALLY, it is expected healthy spreads for PE and PVC. In the United States, higher PP production and sales is expected, with expectations to normalize production at all plants following the impact from weather events in the first quarter of 21. Additionally, it is expected healthier PP propylene spreads in the U.S., due to the continued strong demand and gradual recovery in PEP supply. Finally, for Bratkin-Ideza, PEP production and sales should be higher, due to the return of gas transportation service and the expectation of higher E10 supply through fast-track solution, generation a higher product availability. Regarding spreads, in line with what we presented for the other regions, PE chain spread in the U.S. should be healthier. Moving to the next slide. To conclude the presentation, we will recap the main objectives of the company for 2021. For this year, the company developed six main objectives in its strategy. Continue with the advances related to the geological event in Alagoas. Find a constructive way to solve the E10 shortage in Mexico. Ensure that companies continue financial health, risk management, and discipline in capital allocation. Strengthen broad image and recognition with team members, clients, suppliers, investors, and society. Increase effectiveness, innovation, and speed up digital transformation. And finally, advancing the implementation of our ESG commitments. Lastly, but not least, Safety in our operations are perpetual and non-negotiable value in our strategy. That concludes today's presentation. Thank you for your attention. Let's move to the question and answer session.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone phone at this or any time. If, at any point, your question is answered, you may remove yourself from the queue by 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 handset to prove of optimum sound quality. Please hold while we poll for questions. Our first question comes from Ben Isaacson from Scotiabank. Mr. Isaacson, you may proceed.

Thank you very much and good afternoon. Everyone, congratulations on the great quarter and thank you for the comprehensive review. My first question is on spreads and how do you see spreads playing out over the next few quarters? And do you see any lingering impact from the Texas freeze in Q2 as it relates to Braskem?

Hi, Ben. This is Pedro Freitas. Good afternoon, everyone. Thank you for attending our call. We do see some lingering impacts from the freeze in Q2, Ben. If you look at spreads in the U.S. for polypropylene, for example, they are still high compared to the historical norm. If you look at the presentation on slide um 22 you can see exactly that i mean it's still an increase of about two to 230 to 240 dollars per ton in the polypropylene spread in the u.s and that is uh still i would say uh offshoot of the freeze um So we do see an improvement in terms of spread in the U.S. in the next quarter or in this quarter, right, in the second quarter. If you look more towards the end of the year, I'll pick an example here of the peach and afterspread. It falls from $1,100 per ton to $700 per ton, so about 50%. No, it's about 30% drop in the P&F spread. So we do see this drop, but to give you an example, $720 per ton in the P&F spread is similar to the 2017 spread, which was a historical record of the company in results. So we see spread coming down in the second half of the year, but coming down to a level that is still very good. And more specifically in the US, we do see a very strong second quarter in terms of spread. And then second half of the year, probably a little bit lower, but still on very good levels.

Just one more question on the spreads. before I get to the leverage. So how would you rank PE, PP, and PPC in terms of how tight those markets are, whether you look at inventories, I guess in terms of how long it'll take for inventory levels to get back to normal?

All of them are pretty tight, Ben. If I were to guess, I would guess that It's different per region. I would say that in Brazil, we already see some inventories getting back to normal or closer to normal, maybe not yet at normal. It usually takes about two, three months for inventories to normalize, but the lingering effect of the freeze in Texas means that it's taking longer for those inventories to be normalized. So we're still at lower inventory levels in the value chain compared to the, I'd say, the five-year average. I mean, still very low, very low inventory levels. If I were to guess, I would say that probably PBC is a bit tighter globally, especially because we have not seen a lot of new investments in PBC globally. And then TEPP. seems to be like they are in a similar position. But we think that PE is going to structurally, I mean, you have more of a capacity. So to the end of the year, we think that PE should become softer compared to PE. But again, as I said, on very good levels.

Great. And then just my last question. Your leverage has improved a lot. I don't have the number in front of me, but I believe it's sub two, if I'm not mistaken. And what does that mean? So what does that mean in terms of timing to and get to investment grade? And then what do you do once you're there? I mean, do you want to keep your balance sheet at that level or are you trying to build up some firepower to do some acquisitions? What are you thinking about your balance sheet as you move towards investment grade?

Ben, we like to have our leverage below 2.5, right? So that's what's in our dividend policy. We would like to go back to paying dividends to our shareholders. So we're looking at that possibility in the future as leverage comes down. but always following our dividend policy, which is, I mean, we have to look at current leverage plus the forecasted leverage for the next two years. And that number needs to be below 2.5 for us to be able to pay dividends, excessive, right? In Brazil, we have the minimum dividend, which is mandatory, but to pay any excessive dividends, that's what we would like to do. I mean, retain the capability of paying dividends So this year, we don't have that capability. I mean, we had a loss last year, so we cannot pay dividends. What we are really looking at today is, first, second half of last year was pretty bad, right? Middle of COVID, curtailing production. So we anticipate that the second quarter of this year is going to be better than the second quarter of last year. So we see leverage coming further down in the second quarter. So we keep getting this type of question, right? What we're going to do with all this money and how does that play out into the investment grade? We've been talking to the rating agencies and showing them that our situation is much better than it was one year ago when they lost the investment grade, right? So just to explore this a little bit further on the rating agency side, Last year, they told us, look, there are three factors that were more relevant in their decision. One was the moment in the cycle with overcapacity, potential overcapacity. And I mean, 2019 was very low results, right? And leverage was pretty high as well. Second point was our goals and uncertainties around that. And third point was COVID and the uncertainties around COVID. So right now, what we have is a much better financial situation, much lower leverage, below two, as you mentioned, at 1.8. Forecast for even lower leverage in the coming quarters. We see Alagoas in a different light today, much lower in certainties with the supplements that we had in December. And COVID, I mean, in the end, you saw the results of the past three quarters. Since the second half of last year, we've been doing pretty well, despite of COVID. So in all the arguments that the rating agencies brought us last July, they are no longer on the table. And actually, what they have on the table is a much more favorable situation. So our goal now is to recover the investment rate. We've been talking to them. And let's see how they decide, right? It's their decision. But we've been emphasizing those points with them. And then on what to do with the cash, right? And what we are doing is we are retiring gross debt. So we're paying back debt. We did that with the perpetual bond, $500 million on March. As the expected cash flow materializes over the coming months and quarters, we expect to keep retiring gross debt. As we cannot pay dividends, we don't have substantial growth projects or new investments in the company. So in the end, that's what we are looking at for this year. For next year, if we have a net profit and a basis, then We also anticipate paying some dividends, of course, within the metrics that I mentioned in our dividend policy.

That's very helpful. Thank you so much. I appreciate your time.

Our next question comes from Christian Alge from Santander. Mr. Christian, you may proceed.

Thank you. Hello, Roberto, Pedro, and Rosana. First of all, congratulations on these results. Record and really amazing across the board, so congratulations to the whole team. I wanted to focus on three questions. The operational is going so well, but I wanted to touch on the topics that are a little beyond operational to get your latest views. More specifically, number one, you've done a lot on the alagoas front and you've been very transparent with the markets but if you could comment on these recent developments in terms of is there really anything new there or not that would be helpful second again you've been working very hard as well on mexico could you give us an update on how the negotiations are going and if from a timing point of view you believe that by the fourth quarter these could be resolved, or do we just not have visibility to be able to talk about timing for these negotiations to be concluded? And then the third and final one is, if you have had any discussion, Roberto and Pedro, with Petrobras from the point of view of their potential sale, of their stake on brass can because it is something that can create noise, generate potential overhangs, which obviously is not helpful to your stock. Thank you.

Hi, Christian. Thank you for your questions. On Alagoas, I mean, Rosana showed the substantial improvement we did in relocating people. and submitting proposals to them, and also in getting acceptance on the proposals at 99.6% in the first quarter of proposals accepted, and also in actually making the disbursements, right? So we had, I would say, very substantial improvements or advances in Alagoas in that regard. And also, I mean, you're learning, right? You saw that we had a reversion of very, let's say, it's a large number, 139 million reais reversion in the provision, which comes out of learning and out of improving the operation so that we reduce the cost of, I would call it kind of cost of overhead in managing the situation there. So those were substantial advances. We didn't have yesterday a piece of news that came out in Brazil around some, I would say, moves by a community in Alagoas. And what they said was that they were more isolated because kind of the neighborhood is being relocated and a portion of that is not in the relocation program. So they're saying, look, I mean, we had clients in our businesses that were across the street. They are no longer there. That sort of thing, right? Kind of more on the social impacts of relocating people and looking at the people that are remaining in their original homes. The concept of the settlement that we had back in December was we will relocate people that are at risk. You can see Alagoas as a huge risk mitigation effort, right? I mean, it's really getting people out of a potentially risky situation. And that area that was the reason for this piece of news is not in a risky situation. I mean, when we look at the criticality and even local authorities agree that, and they've done this publicly, agreed that it's not a critical area for risk. It's more of a social impact. And then I'd like to remind everybody that the other settlement that we had was on the social and urban and environmental aspects of the case. and there is about 1.6 billion reais already in the provision to be invested or put into projects to mitigate the social impacts of the situation in Alagoas. So we believe that if the city wants to allocate a portion of that 1.6 billion reais to that part of the community, we would be fine with that. It's important that the city needs to uh still adhere to the settlement so that we can start implementing the the actions so that that's something that we're still working on with through the city but uh once that is done we will be able to allocate part of those resources to that community so that's that's our view on how this should be seen and addressed in the future So that's the Alagoas aspect. On Mexico, I'll be very brief. I mean, negotiations are still ongoing. I think everybody knows the underlying issue is the lack of ethane in the country. We've been putting a lot of effort in increasing the supply of imported ethane. So our capacity to import right now is at about 20,000 barrels per day of ethane, and we are expanding that capacity to 26,000 barrels per day in the coming, I would say, month or so. And then Tamex has been supplying at 30,000, 35,000 barrels per day. So if you look at those numbers, the potential maximum capacity right now would be, or in the near future, would be at about 55,000 to 60,000 barrels per day. And so that's about 85% of capacity utilization. Going back to the negotiation, again, it's ongoing. Terms still need to be aligned and get to a final agreement. The timing is really, as you said, end of the year. We have no control on time, right? The negotiation can be shorter, can be longer, but right now the outlook is for the end of the year to finalize this. And finally, on Petrobras, there was some rumor in the market last Friday, and what we got from all of that was that Petrobras made a public statement last Friday saying that First, one thing that they have been telling everybody, their equity in Braskem is not a core asset for them, so it's part of their divestment plan. But they also said last Friday that they don't have any definition or decision about the sale model. So we don't have any other information about this. I mean, it's their decision, but we don't have any news that they are really moving on selling their stake. We know it's part of their divestment program. We don't have any information about any short-term decisions right now.

Very clear, Pedro. And just a follow-up on Alagoas. The recent news implies in any way that you would need to do anything beyond all the work that you've already done in provisioning for these events? Or no, that would be a development that's part of the monies you've put aside that you've provisioned to deal with the situation?

The short answer to that is that we believe the provision is adequate and correct, given the settlement and all the knowledge that we have at this moment. Of course, it is a situation that may evolve. We may see changes. There is no way for us to control that. But right now, and even in light of the piece of news yesterday, we believe that the provision is adequate, and we don't intend to change that.

All right. Thank you very much.

Our next question comes from Guilherme Levy from Morgan Stanley. Mr. Guilherme, you may proceed.

Hi, good afternoon, and thanks for taking my questions. My first question is actually a follow up from the last one on Alagoas. I just wanted to put in other way the question. how easy it is for uh the the civil defense or the the municipality or any other public entity to to like go and reopen the the agreements that were already signed uh i just wanted to understand to what level uh the agreements already signed are written on stone or are they can still be modified And the next one, last quarter, we saw a material impact of working capital on cash generation. I just wanted to get your view on what should we expect into the next quarters and for the full year. Thank you.

Hi, Guilherme. On your different way of framing the question around Alagoas, we settled The two settlements back in December, they had first, the map that was a part of that settlement was the December map. And there is no provision for that to be changed automatically, okay? So that's the basis for the risky area. And those two civil actions were extinguished in December. So of course, A new action could be proposed against the company, but right now the civil actions were extinguished. They don't exist anymore. And the basis for the settlement and our obligation relates to the map that was published back in December. And even a new map would not change that basis. The second point I would bring is the concept and reinforce the concept that I just mentioned around what is behind those two settlements, right? One is behind risk, okay? So if there's risk to people, that in the settlements has led to relocation. So we would need to ascertain that there was risk in a different area for us Start, even potentially start the discussion around including that area in the relocation program. So that's the first point. And as I said, we don't have any indication, and we have substantially upgraded the monitoring, the geological monitoring of the area. We don't have any indication of risk there. And we even have local authorities, again, saying that it's not a matter of criticality or risk in that region. It's a social impact. so uh that's the first concept okay relocation is linked to risk in our mind and uh the settlement was done in a specific map back back in back in december around that on the relocation on the uh On the other part of the settlement, the concept is social remediation, which links to what we're seeing potentially in that zone because we only heard of all of this through the news. We don't have any official positioning by anybody. That's how we are addressing it. If it's a social impact, we have funds that are targeted for projects yet to be defined around social remediation. That's where this is coming, at least in our perspective, that's where it's coming from, and it would be taken care of in that way. So, again, to be more direct in your answer, how easy it is to reopen, there is no reopening. They were extinguished. Of course, a new one could be proposed, and then it would be a new discussion, but our concept is relocation is linked to risk, and we don't have an indication of risk in that zone. Okay? On the second point around working capital, we had an increase in prices in the first quarter. So that leads to higher inventory costs, of course, higher payables, which helps in working capital, but also higher accounts receivable. So the net effect in working capital with higher prices is the consumption of cash. In the next quarters, we should see Still, some increase in inventories. I mean, we've been running as well as I've said, the whole supply chain has been running at lower than average inventory. But also we anticipate a drop in some product prices or a decrease, right? Not a drop, drop maybe too strong, but a decrease in product prices. So that's the net effect of that. I think, I mean, it's... I think it could be a positive effect or neutral. I don't see a bigger cash consumption going forward because of that. We also have a lot of taxes to monetize yet. So we have 1.4 billion reais of the fiscal fees tax to monetize that are already booked in our balance sheet. and about 800 million reais in cases that were not final in the courts yet. So those are also positive facts that could come through the year.

Perfect. Thank you.

Our next question comes from Annie Nielsen from Bank of America. Mr. Annie, you may proceed.

Thank you. Congratulations. Fantastic quarter. Happy to see that. Last year was tough at times. So I have several of my questions have been answered, but just two questions. One, just to understand the main drivers of your purchase from NAFTA, whether it's imported or from the local market, Petrobras. It sounds like prices are roughly equal, but you get better financing internationally. That obviously will help your working capital and cash flow and so forth. Or maybe there are pricing differentials that need to be discussed. And then the second is just on the comment that you made regarding what some of the ratings agencies were looking for. One was the place in the cycle and talking about potential new capacity and overcapacity in the industry coming online. Maybe you could talk about where we are now with China supply or from other locations, although I think China was then the big worry from a number of the agencies and what you see there right now. Thank you.

Hi, Anne. Nice talking to you. About this time, we would be in Miami, right, in the Bank of America? Yes. So the imported NAFTA, it does help our working capital. We can extend NAFTA payments with international suppliers by up to a year. So that's part of our cash management policy. And we've been increasing the imports of NAFTA. Last year, we had about 55% coming from Petrobras and 45% imported. The first quarter of this year, it was already 70% imported and 30% Brazilian NAFTA. And we think that the balance will remain that way for the remainder of the year. So 70% imported NAFTA, 30% Petrobras NAFTA with the new contract that we signed last year with Petrobras. the volume of the contracts with Petrobras was reduced and we've been keeping that ratio in the first quarter and I think going forward that's going to be the norm. So we keep I would say benefiting from that in working capital. Of course, in the first quarter we had the kind of increasing prices and low inventories, but over time that's going to normalize and we should see some benefits in cash flow and working capital coming from this strategy. In terms of China supply, we believe our assumption is that it's going to come to the market, the point or the question is when, right? We think that some of it will come this year and some of it will come next year. I believe IHS is probably a little bit more bullish than us. They are anticipating less capacity coming on this year and a bit more this next year. If you look at the balance of the new capacity, we tend to be more conservative. We are preparing for, I would say, a bit longer market still this year. They are saying it's more for next year. But we do see the capacity in China coming online. About 4.5 million tons of polyethylene. That's our assumption. I think the other aspect, a couple of other aspects for us, just to point that out. I mean, last year, we were short about 15% of the new capacity that were supposed to come online. 15% did not come online last year . So we are seeing some of that coming online this year. The other aspect that is interesting, I mean, the forecast that IHS has for global demand, again, in polyethylene is about 5%, about 6% for polypropylene. The historical average for polyethylene globally has been at around 3%. So 5% is 2% higher, right? The same applies to PP. Historical average at around 4%. This year, 6%. So even with more new capacity coming online, we also are going to see a bit more demand. So I would say the downturn in the cycle, the industry view and our view is that it's not going to be substantial. And that's why we've been saying, look, our view is that the second quarter is still going to be very strong. We're still having very high spread, some disruption in value chains. in supply chain, sorry. And then we see second half of the year softer, but still at good levels in terms of markets. We tend to be more conservative than the average of the industry. So we could be on our internal view, we could have a surprise to the upside.

Okay, thanks. And just a quick follow up on the the supply agreement that you have with Petrobras and the difference between imported and preserved. Are prices roughly equal between the two?

They are. A couple of relevant points there. If you look at just the raw price of NAFTA, what we buy outside Brazil is cheaper. If we include logistics, the landed cost in Brazil depends on where we are buying some places it's higher imported nasa in some places uh imported nasa could be still cheaper so depends on the supplier the the ship etc right so then then uh it's more matched more easily matched landed in brazil but the benefit that we have with imported nasa is that we can choose the quality of nasa so if we need an after that is more aromatic that will produce more benzene toluene etc we buy that. If we need an asset that is more for a phenic that goes more towards the olefins, ethylene, propylene, butadiene, then we buy that. So in the international market, you have more flexibility around the quality of the product. And then, I mean, that helps us, I would say, have a higher value composition of products in our sales. So it does not change the cost itself, but it could add, generate, I would say, of sales that is higher value added for us when we import.

Okay. Thanks, Ben. Good luck for the rest of the year. Talk soon.

Thank you, Ana.

Our next question comes from Matheus Reinfeldt from Banco BSBB. Mr. Matheus, you may proceed. Hi.

It's Matheus Reinfeldt from UPS. Thank you for taking my question. My first question is, there have been some news of specific players interested in some assets of Roskim, not in the company as a whole, but we were thinking here, what are the potential losses from thinking Roskim assets as separate units instead of a nationwide companies? I mean, are there any significant losses in synergy, either operationally or in terms of taxes that will make this make less sense in a way? And that's my first question. For my second question, just to follow up on Mexico, are there any advancements in thinking of a long-term solution for the theme supply? That's it. Thank you.

Hi, Mateus. Thank you for the questions. So on the first one, I mean, it's The fail process is not a process that we are driving or participating in other than by supplying information, right? Why don't we look at, having said that, we saw the same news that I think everybody has had of this idea of breaking Rackham up. So we've been putting some thought around that to see if there are any opportunities or ideas that could increase the value for all of our current shareholders. And some other thoughts around your question. In terms of synergy, I think that the Brazilian operation, the integrated operation that we have today is highly synergistic. So breaking up Brazil, I think would bring very significant synergies to the business. So that's the first consideration that I would make. It's an integrated production planning, integrated inventory planning, integrated commercial planning, integrated feedstock procurement planning. So everything is integrated. It's a single overhead, so there are lots of economies of scale as well. So I would say that Brazil is highly synergistic within Brazil. The synergy across regions, and I tend to think of our regions as South America as one region, U.S., Mexico, and Europe, right? So that's how I tend to think of our regions. There is, I would say, more substantial synergy commercially between Brazil and Europe because, I would say, after South America, the largest exports hub for us is europe so there are commercial synergies uh in in there and also uh our feedstock trading that is in the netherlands so if you're thinking about the pp plants in europe i would say much fewer synergies but you're thinking if you're thinking about europe as a whole then you have commercial commercial synergy especially because of the the dutch operation um And then the other area where I see some synergy across the different businesses is in the industrial area. I mean, we do internal benchmarking. We do, I mean, we have every single improvement that one team in one plant identifies is then spread out to the other plants. So you have a lot of cross-fertilization in industrial areas. which, I mean, is another way of gathering synergies, right? I don't think that's very substantial, but anyways, it's another area of synergy. And then the third one is, you asked about taxes. I mean, there could be tax implications of a breakup like that, but it would depend a lot on the format, right? And we don't have... I would say a very in-depth analysis of this. I mean, it's more kind of a feeling and knowing the numbers and the cost of acquisition of the assets in the US and Europe, for example. So there could be a substantial tax burden or not, depending a lot on the structure of how such a deal could be done. But having said that, I mean, we are not at this moment doing that, right? So we're not working on that. There is no ask for us to do that. The shareholders have not decided to do that, as far as we know. So far, it's more curiosity. I mean, we hear the news. We look at it. We discuss a little bit to see what potential implications would be. But in the end, at the end of the day, I think that anything that maximizes the value for for the shareholders is what we should be looking at, right? So this is kind of where we are coming from. Is there anything in these rumors that could lead to some value unlocking for shareholders? If so, okay, let's entertain that. If not, then okay, we're not going there. But as far as we understand, the sale of Braskem is an integrated sale of the whole company, okay? That's how we understand it at this point.

Thank you. And on the update on Mexico, do you have any updates on the... I'm sorry.

Yeah. So we are working on a terminal, right? On the project of a terminal to import ethane into Mexico. So that's part of the development that we're having. And that also is part of the... of the discussions with Penex, right? So it's still a project in development. We don't have any final decision or even I would say the format of that is still being discussed, right? The conceptual approach to the terminal is still something that we are narrowing down to one solution, but we don't have that yet defined. The other aspect of supply of FA into Mexico is the fast track, right? We are, as I mentioned a bit earlier, we are increasing the fast track by about 30% to improve and bring more imports into Mexico in the short term. It's the second extension already. And just to bring out another aspect for you guys, given the expanded spread in the first quarter of the year, which we all know they were a very high EBITDA margin in the first quarter was around 40%, with the operation running at about 60%. So again, very, very positive results from Mexico in the first quarter. So that shows it's really a very good asset that we have there. Once it gets 100% supply, we will, of course, see even better.

Yeah, thank you and congratulations to the result.

Our next question comes from Regis Cardoso from Credit Suisse. Mr. Regis, you may proceed.

Hi, guys. Good afternoon. Thanks, Pedro, Rosana, for taking my questions. I have a few follow-ups. I mean, it's been a while I don't participate in the conference call, so if you could maybe expand a little bit, you know, some of the topics you've already discussed in this call, in particular, in relation to the cash flow dynamics. It appears that, I mean, you had a lower free cash flow than would otherwise expect from, you know, the very strong operating results. I know you already commented about inventories. If you could also comment on the tax credits you've already received, how much there is still to monetize going ahead. It seems it's a very high pay. And then it appears that the liabilities might as well be part of that working capital dynamics. So just to follow up on the cash flow dynamics to understand whether the operating results are translating to cash flow dynamics. The other follow-up is regarding Alagoas and what I will call sort of a new normal after the moment of crisis where you had the actual risk to people. But I understand there is a social impact to having such a big area in the city empty. And I imagine there will be plans around revitalizing that area and other social implications. So I wanted to get your sense, and I believe there is no certain answer at this point, but I wanted to get your views on what happens after this and what will be Braskem's role, let's say, in revitalizing that area. And then maybe the last one of the follow-ups is regarding the sale. If you could maybe just comment if the management team is involved in any way. in that process, you know, for a strategic partner, data rooms, et cetera. And then finally, I mean, maybe the only new topic is around ESG and the role of plastics. In particular, if you see any, you know, any angle for Braskem in the many discussions we see taking place right now, you know, around green refineries, hydrogen plants, and so on. So those follow-ups and then just that new one. Thanks.

Okay, Jesus, thank you for all the questions. On cash flow, besides working capital that we already covered, as you mentioned, in January we also had a substantial interest payment, which are half-yearly, right, for the bond. and with the FX depreciation, when you look at the numbers in reais, those numbers are a bit higher, right? In dollars they are not, but in reais they are. The other aspects still of cash flow, we spent about 500 million reais, a little bit more than that, in Alagoas, which also takes away some of the free cash flow of the company. And finally, Even though we have a separate bank account for that, so some of that is coming from this bank account, but we're putting the full amount in our free cash flow calculation here. And the other aspect is around the tax credit that you asked. We have monetized 660 million reais in the first quarter. We still have about 1.4 billion reais to monetize and plus 800 million reais yet to be provisioned because they are not yet final decisions by the courts. So it's still, I would say, we still have some runway in terms of monetizing credits. As I said, working capital impact should be lower in the coming quarters if prices don't give us any surprise. And the interest payments are half years, so that should give you a view on the rest of the year. Then, because of the increased results, our tax payments have been a bit above what we would expect. with lower results, right? With higher results, we're paying a little bit more income back, but that, again, is not that material. As you saw in the chart there, it's about 300 million reais in the forecast. Switching over to Alagoas and the question around the space there, I mean, it's still categorized as a risky area, right? So nobody should be there. We do have people in the area to work on the back ceiling, of the wells, so feeding some of the wells with sand. So we do have operators in the area. We do monitor the risk, and as I said, we have substantially increased the monitoring and the instruments, the sensors in the area to make sure that nobody is in an unsafe situation. But we don't have any plans today around fucking with that in the future. It's the area, so far, still a risky area and nobody should be doing anything in there until there is stability and there is, I mean, kind of the stability of their mind is really a certain, and that's going to take a few years. On the sale, we have, put together a data room for Novonar for them to work on the sale. Of course, taking care about confidentiality, antitrust, or any competition, competitive issues. But that has been the extent of our involvement so far. We do believe that in the future we will be a bit more involved especially as it goes into a stage where management presentations are required or even when a contract is being discussed. So we do believe that in the future we should be more involved, but right now the extent has been to kind of prepare data to put in the data room. And finally, around ESG, thank you very much for this question. I think this is an area where Bradcomb is really improving on an already very good basis that we had. I mean, we've been working on ESG and sustainable development for more than a decade now. And we do have some numbers to show around our historical reduction in emissions around some of the work we've been doing around recycling and other aspects of the business that are very favorable. Just to give an example of the recognition we get from there, Blaskin is a AAA company in the carbon disclosure project for water efficiency, for energy efficiency, and also for the work we do with our suppliers. So it is an area we have been investing for a few years now. And looking at the future, and as you asked about the role of plastics, I mean, plastics are a very good solution for mankind, right? And so we see that there is an issue with plastics around the post-consumption disposal of plastics and how we work on that. We see that as a business opportunity. uh and we are we have set up for now for for two three years recycling uh business teams to develop opportunities around recycling it is a different business model compared to what we have at braston so far i mean if you look at the chemical world it is a few very high scale very large factories that are producing a lot of volume So it's very few, very large scale investments, right? And with recycling, it's going to be many low scale projects. And developing that is a challenge. Last year, we sold 10,000 tons of recycled polymer. Our goal, public goal for 2025 is to sell 300,000 tons. So it's multiplying by 30, three zero, the quantity or the amount of recycled plastics we sold last year. It is a substantial challenge and we are organizing ourselves to address that. And we see that as a business opportunity. The other area that we are also evolving a lot is around renewable chemicals. We have announced in January the expansion of our green polyethylene business. We are going to increase the size of that plant by 30%. It's a $60 million investment that will come online the second half of next year. So it's going to increase our footprint in that the renewables business substantially It's a very, again, very, very exciting development. And we do see a lot of market potential for this. So we are looking even for ways to accelerate the expansion of that business, looking at how we can fund that in different ways so that it doesn't hurt or doesn't change our credit metrics. But in the same time, we are able to access new sources of funds to be able to accelerate the capture of that value. So that's another area that we've been looking at very closely. We have also R&D developments around renewables. One that is public is green energy. We are not in the energy business today, but with this development, green energy could be a breakthrough that could even be, depending on how the technology grows, it's still in demonstration scale in terms of the technology, but if it progressed as well and then goes into industrial scale, could be a very sizable market for us to get into in the future. Again, also investing in developing our footprint in renewable chemicals, which is another way of mitigating the carbon footprint of the company.

Remember, if you have a question, please press star 1. Now I'll turn over for the company's closing remarks.

So I'd like to thank everyone for joining us in this call. And I just wanted to end with a couple of remarks. First, as you all noticed, it was a very strong first quarter, driven not only by the international scenario, but also by the ability of Rathkem's team members and the teams around the world to really operate very efficiently and to capture all the opportunities that the market put out there for us. So in this scenario, we closed the quarter with a very positive cash flow generation and the leverage of 1.8 turns, which is a very important reduction from what we had in the last quarter. I mean, in three months, we reduced our leverage by more than one turn of EBITDA. Also important to comment that we reduced our gross debt by about $700 million in this three-month period, which shows our commitment to keep reducing our gross debt going forward. We keep very committed to our financial liquidity and also to get that investment grade from the rating agency. The second point I'd like to emphasize is that we are very confident that in the second quarter, we will also have a very good industry dynamic and that our operations will run well. We will continue to, we expect to continue to have a good financial performance given the scenario and also the way that we've been running the business. We will keep the leveraging Rathcam, which is one of the main priorities for us this year. So I'd like to thank all of you for your participation and look to talking with you both when we release our second quarter results, but also just to remind everyone, we are holding an ESG day in May 17th. So about a couple of 10 days from now, 11 days from now, we are having an ESG day where we're going to disclose some of our achievements and also some new commitments around sustainable development for the company. So thank you all very much.

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