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.