Braskem SA ADR

Good morning, and thank you for waiting. Welcome to this conference call to discuss Brascam's second quarter of 2023 results. We have with us today, Mr. Roberto Bischoff, CEO of Brascam, Pedro Freitas, CFO of Brascam, and Rosana Avoglio, Investor Relations, Strategic Planning, and Corporate Market Intelligence Director. This event is being recorded. and all participants will be in a listen-only mode during the company's presentation. After Brascam's remarks, 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. This event is also being broadcast live via webcast. and may be accessed through BrassCAM's website at www.brasscam-ri.com.br where the presentation will also be available. The selection of slides will be controlled by yourselves. The audio will be available shortly after the event is complete. We'd like to remind you that those following the presentation via the webcast may post their questions to the Brascam website. They will be answered by the IR team after the conference is finished. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Brascam management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that macroeconomic conditions, industry conditions, and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mrs. Rosanna Avoglio, Investor Relations, Strategic Planning, and Corporate Market Intelligence Director. Mrs. Avoglio, please go ahead and begin your presentation.

Good morning, ladies and gentlemen, and thank you for participating in Braskem's earnings conference call for the second quarter of 2023. Let's start the presentation on slide three with the highlights of the period. Braskem delivered a recurring EBITDA of $140 million in the second quarter of 2023, a non-cash loss of $156 million, and cash consumption of $5 million. Considering the payments regarding the geological event in Alagoas, the cash consumption accounts for $132 million. I would like to point out that Breskin maintained a robust liquidity position that is sufficient to cover all of its liabilities coming due over the next six years, as well as a very long debt maturity profile with an average term of 13 years. In terms of operational highlights, our global recordable and lost time injury frequency rate was stable in relation to the first quarter of this year. Another operational highlight was the capacity utilization rate of the Mexico segment, increasing by 14 percentage points compared to the last quarter, reaching 86%. With the second quarter also recording the highest polyethylene production volume of the last six years. Regarding sales volume, Mexico and the United States and Europe segments registered an increase in the sales in the quarter. On the strategic front, we are pleased to announce that we concluded our Green Ethylene Production Expansion Project by 30% at the Triunfo Petrochemical Complex in the state of Rio Grande do Sul. We will give more details on this project later on. Following here. We continue to advance on the construction of ethane import terminal in Mexico, which reached the completion of around 40% in end June 2023. And lastly, we exercised in the quarter the option to purchase shares of wind power farm from Casa dos Ventos and the SP Santuartur, which also will contribute with our strategy of utilizing competitive renewable energy in our portfolio. Now let's go to the next slide, please. The global petrochemical scenario in the second quarter of 2023 continued to be impacted mainly by the downturn in global consumption due to the high interest rates and persistent inflationary pressure by the stocking trend in the chain and by the below expectation recovery in China's industrial activity. Note also that the lower demand combined with the startup of new polyethylene and polypropylene capacities, continued to affect petrochemical spreads in the international market, which in consequence affected brass canes and the industry's results. In this scenario, brass canes posted recurring EBITDA of $100 million in the second quarter of 2023. This result is explained mainly by lower sales volume for resins and main chemicals in Brazil, for polypropylene in Europe due to lower demand in the period by the reduction in spreads in the international market for PVC in Brazil and for PPP in Europe and PE in Mexico. And lastly, by the appreciation of the Brazilian Rio against the US dollars of 5% in the period. Now let's go to the next slide. In the Brazil segment, in the second quarter of 2023, The petrochemical complexes operated at a capacity utilization rate of 72%, down 5 percentage points compared to the prior quarter, mainly explained by the adaptation of product to the lower demand in the period. The short production shutdowns during the quarter and the feedstock supply constraints at the petrochemical complexes in Rio de Janeiro and Rio Grande do Sul. The resin sales volume decreased by 11% from the first quarter of 2023, reflecting the lower demand for polyethylene, polypropylene, and PVC in the Brazilian market, mainly from the packaging, home appliance, and hospital material sectors. In this context, recurring EBITDA in Brazil in the second quarter of 2023 was $81 million, accounting for 56% of the company's consolidating recurring evidence. Following to the next slide, please. During the second quarter of 2023, Breskin concluded the project to expand green ethylene production capacity in Rio Grande do Sul. The capacity increased by 30%, the annual production capacity of our renewable bio-based ethylene plant. Also, I would like to highlight that we accounted a historical record for monthly production of green ethylene in June 2023. It's worth to highlight that besides enabling the plant to produce annually up to 260,000 tons of green ethylene a year and consequently of green polyethylene, the initiative will enable us to meet the growing demand for renewable products and help us reach our commitment becoming carbon neutral by 2050. Moving on to the next slide, we would like to show the progress on the actions front related to the geological event in Alagoas. Braskem continued to make progress in the relocation and financial compensation of families from the risk areas in Maceió as of end June 2023. 99% of the financial compensation proposals to the families had already been presented and 90% of the estimated total had already been paid. The acceptance rate remained in high levels. In addition, the program to relocate residents was 99% concluded as of end June 2023. On the closing and monitoring of the salt mining wells, As of the end of June 2023, out of the 35 wells, we had 9 wells in the sand filling group, of which 3 have been concluded and 5 are in progress. In the natural filling group, there are 5 wells which were fully closed and from the tamponade group, 14 of the 15 wells were fully tamponaded. Let's move on to the next slide, still addressing the geological event in Alagoas, showing the advances on the social and urban development measures, in addition to providing details on the provision related to the topic. I would like to highlight the key advances in the social, urban, and environmental measures. All the 11 mobility actions are ongoing, seven of which with executive project concluded, three already in the construction phase, and one planned for the start of the fourth quarter of 2023. We're still making progress on the urban integration project and the development of the flex hall with 10 urban requalification actions implemented. We also started to execute the actions of the environmental plan. We highlight the celebration and approval of the term of global agreement with the municipality of Maceió held in July 2023. Therefore, the total amount of provisions made by the end of the second quarter of 2023 related to the geological event in Alagoas was R$ 14.3 billion, of which R$ 8.2 billion already being disbursed as of the end of June 2023. As such, The balance of provisions at the end of the second quarter of 2023 was approximately R6.5 billion. Note that Braskem cannot eliminate the possibility of any future developments related to the matter or the associated expenses, and any costs to be actually incurred could differ from our estimate for cumulative amounts. Let's move on to the next slide. In the United States and Europe segment, the utilization rate ended the second quarter of 2023 was 80%, in line with the prior quarter and with the same quarter of last year. Sales volume in the segment grew by 3% in comparison to the first quarter of 2023, reflecting the higher demand after the destocking trend in the chain in the prior quarter. Compared to the second quarter of last year, sales volume grew by 2% due to the higher availability of product for sale in Europe, given the region's higher utilization rate. The reduction in recurring EBITDA compared to the first quarter was due to the effect from the profit-playing stocks acquired in prior periods in the United States, as well as the 3% reduction in the polypropylene spread in Europe. The United States and Europe segment recurring EBITDA accounted for 16% of the company's consolidated recurring EBITDA. Let's go to the next slide, which covers the Mexico segment. In Mexico, the utilization rate in the second quarter of 2023 was 86%, increasing 14 percentage points from the first quarter and up 19 percentage points on the same quarter of last year, representing the highest polyethylene production volume of the last six years. This increase is related to the higher ethane supply from Pemex to around 36,000 barrels of ethane per day and the higher supply of imported ethanes, complementing the feedstock supply with around 21,000 barrels per day via the fast-track solution. The higher production volume also had a positive impact on the polyethylene sales volume in the period, growing by 8% in relation to the first quarter of 2023 and by 13% in comparison to the second quarter of 2022. In this scenario, the segment recurring EBITDA grew by 50% when compared to the first quarter of 2023. Given the increase in sales volume, the reduction in production cost as a result of the higher utilization rate and the lower prices of ethane and natural gas in the international market. The segment's recurring EBITDA accounted for 28% of the company's consolidated recurring EBITDA. Let's move on to the next slide, please. Braskem's consolidated cash flow recorded a positive variation in working capital of 962 million reals due to the improvement in the period. This positive effect was offset by operational and strategic investments carried out in the period, interest payments and the payment of income tax and social contribution due in the quarter, which led to cash consumption of R27 million. Lastly, adding the payment related to the geological event in Alagoas, cash consumption in the second quarter came to R655 million, in the second quarter of 2023. Let's move on to the next slide. Breskin maintained a healthy debt profile with an average payment term of 13 years and an average weighted cost of exchange variation of plus 6%. I also highlight that more than half of the company's debt is concentrated in 2030 onwards. Breskin's cash position is sufficient to cover its obligation for the next six years. without considering the international standby credit facility of $1 billion, which is available for the company until 2026. Moving on, the next slide shows the corporate credit and leverage metrics. The corporate leverage ratio ended the second quarter of 2023 at 7.9 times due to the lower EBITDA since net debt remained stable in relation to the first quarter of the year. I would like to reinforce that Brascan continues to present solid credit metrics with a healthy and comfortable level of liquidity. Let's move on to the next slide, please. The company concluded its analysis of climate risks for 2030 and for 2050, which identified the physical and transitional risks that could impact Brascan's operations over the coming years. considering the different climate scenarios and aligned with the TCFD. In addition, the company exercised the purchase option for another wind power plant from Casa dos Vinhos, the SPI Santo Artur. In relation to the sales volume of recycled products in the second quarter of 2023, the sales volume for resins with recycled content from the Winnew brand increased by 22% in relation to the first quarter of 2023. Regarding the second quarter of 2022, resin sales increased 83%, reflecting the company's commercial strategy in the consolidation of sales volumes coming from Wise. In addition, the company created the Upside, a joint venture with Terra Circular in the Netherlands, a company focused on solid residues in order to enhance circular economy. During the second quarter of 2023, Braskins delivered the first lot of donation of polypropylene to the Children's with a Disability Assistance Association, AACD. Out of the 14.3 tons, 6.9 have already been delivered and will be used to make around 17,000 prostheses and orthoses for the organizational patients. Let's go to the next slide, which will commend the prospects for the second half of 2023 in relation to the first half of the year. Regarding Brazil's segment, we expect a reduction in the ethylene production levels in the second half due to the maintenance shutdown of the petrochemical complex in Bahia scheduled to the second half of 2023. In the sales front, we expect a growth in the sales volume for resins due to higher demand and a reduction for the main chemicals in function of the lower utilization rate. Spreads will present a reduction explained by the global imbalance in supply and demand. For the United States and Europe, the utilization rate shall remain stable. However, sales volume shall increase due to inventory contraction in the chain. Spreads shall also remain stable. Lastly, in Mexico, we expect a raise in production due to the higher ethane availability, which affects positively the sales volume in the semester. According to the main external consultants, spread shall decrease due to the global imbalance between supply and demand of polyethylene. Moving on to the next slide, please. We will comment on the updates of the initiatives to maximize the company's EBITDA and cash generation. Regarding initiatives with an impact on EBITDA, we made progress in our initiatives related to optimizing revenue, reaching about 20% of the estimated result for the year. In relation to initiatives with an impact on fixed and variable costs, $64 million were delivered until the end of the first half of the year. I also highlighted that additional opportunities were identified, which would imply an additional $100 million to the estimated previously announced. Regarding the Transform for Value program, the program ended the first half of 2023 with an accumulated gain of approximately $78 million additional compared to this 2022. Moving on to the initiatives with an impact on cash generation, we had made progress in all fronts, especially the optimization of working capital, which had an important contribution to the company's cash flow in the semester, and non-recurring monetization initiatives, which reached approximately 75% of its completion in the first half of 2023. It's worth reinforcing that the company remains committed to the implementation of all the initiatives mapped out and engaged in identifying potential new opportunities. The next slide, please. On the slide, I would like to reinforce our main priorities for the year considering our strategic pillars. The first priority is related to optimizing the operations of assets with a focus on cost discipline to capture synergies in all regions. The second priority is to continue implementing financial preservation actions, creating value for our shareholders. Next, regarding the growth strategy, the focus is on executing the investments related to the commitments to eliminating plastic waste and combating climate change, as well as continuing to implement initiatives related to social responsibility and human rights. On the innovation front, the company continues to focus on expanding strategic innovation and its digital transformation. Finally, we will continue to make progress on all action fronts related to the geological events in Alagoas, meeting all the commitments established in the agreement. And lastly, I would like to reinforce that safe operations are and will always be the focus of Brecken's operation as a permanent and non-negotiable value. That concludes today's presentation on breast scans results for the second quarter of 2023. Thanks everyone for your attention and let's move on to the Q&A session.

Thank you, Rosana. Now I would like to pass the floor on to Mr. Pedro Freitas, who will be guiding us through this question and answer session. Thank you. Good morning, everyone. I just have a comment I'd like to make about the sale process. I think it would be best to get ahead of this topic because it's likely to come up. We don't have any major news. The information exchange process is still underway with interested parties and all under NDAs and confidentiality agreements. however, without any major news to report on. So I wanted to mention that right off. The offers that BrassCam has become aware of have already been shared, but we are not active parts of the negotiation procedure, nor do we have a schedule with the different stages involved in the sale process. So we continue to provide all sorts of information that we have access to, This is the extent of Raskin's involvement right now. Thank you. I think we can now open for other questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key. followed by the one key on your phone. If at any time you'd like to remove yourself from the queue, please press star two. Our first question comes from Gabriel Barra from Citibank. Go ahead, Gabriel. Hi, Roberto, Pedro, Rosanna. Thanks for taking my question. I have two questions, actually. Near the end of the presentation, when you mentioned the initiatives to dilute the impact of a potentially more challenging petrochemical scenario in the company's numbers, in the last meeting, we were already looking at a more difficult scenario coming up ahead. Could you say a few words about that? Do we have the hope of improving for the second semester? And so my question is, I'd like to understand your forecast with regard to operating cash. So do you believe that those forecasts of a neutral scenario and cash generation during this year is still viable? And can we do better than the six different points you mentioned, three for cash generation, specifically with regard to CapEx? Is there room for for us to get more out of our investment this year. And the second point about Alagoas, there was recently a 5.7 million BRL agreement, but there are still some open discussions there. Could you speak a little bit about that? How are things looking with regard to the state? Could you give us a bit more information about the other processes, the other cases that are still ongoing? Can we foresee the end of this process? And do we have information about the numbers, the financial numbers? And there's another relevant point that if there's any other relevant points that I didn't mention, please. Hi, Gabriel. Good morning. Thanks for your questions. With regard to generating cash, I'd say that it's true. The scenario is a little bit more challenging than we envisioned a quarter ago. In April, we saw better results than we expected, but starting in May, there was a lack of recovery within the market that we hadn't foreseen. When we look at how this is going to move forward, and then going back to your question about generating cash, I have a comment I'd like to make. If we look at the first semester as a whole, cash flow generation was essentially due to Alagoas and the rest of the operation was neutral. It is not generating cash but neither is it consuming cash. So what is consuming cash has been the payments and disbursements that we've made in Alagoas. What we do have looking ahead is a recovery, a slow recovery that's probably only going to be realized in the fourth quarter. And we've signed agreements with the City Hall for additional funds. We are adopting additional measures to contain the situation, as Rosanna mentioned. And again, as Rosanna also mentioned, the financial situation and the cash status is quite comfortable for the company's management. So the fact is that our operations are, broadly speaking, giving us a neutral cash situation. Alagoas is consuming cash. Okay, so if you ask what can we do to save more cash, in fact, well, we are working on every line we can. For CapEx, which was your question specifically, I would say that we have very firm, very strong actions, measures to restrict new investments. Our major focus is on secure investments and everything else is, we're being very selective about everything else, about what we approve. CAPEX forecast for next year should be lower than this year. But there are some things we can do around the edges that we can work on to hold back the tide. But the major values, the major sums have already been, they're already, they've already been done. They've already been invested in. We have a scheduled maintenance in Bahia for the third quarter that needs to occur and it will occur. So this reduction should show its results later on next year. And perhaps 20% compared to last year. This is still being discussed. And as I mentioned, we are being very selective about what we do, what we invest in. With regard to other points in Alagoas, CBTU, and the state government, those discussions are ongoing. The CBTU is a very technical discussion about what should be done, what shouldn't be done, what are the alternatives. And this is something that we have, we've had long discussions about. We've been having, because it's a very complex topic, And this is something we've been discussing at length about how to work on this technically with specialists, geologists, and railway specialists as well. Because a secure operation is our ultimate value. This is the line we're heading toward. And in fact, the operation was delayed. It was actually frozen. There is a legal case that has been frozen up until january so that we have time to move forward technically so that's cbtu that's where we're at right now there in in operating that line with regard to the state government we have a portion of the state that's linked to state public entities And we agree that this should be the target of an agreement. This is, it's a given that Brethkamp will assume. But the state decided to bring to the courts another claim, and it's a claim that we do not agree about. We are not in agreement with the state government in that sense. And this new initiative so this this other case is we'll see what the courts say but that's what we have in the scope of the state of alagoas pedro could you give me a follow-up with a timeline as for paying this agreement with the municipal government what's your timeline look like for that Well, there's a portion that's going to be paid. 40% is going to be paid still in 2023 and the other 60% next year. Excellent. Thank you. That was very clear. Our next question is from Pedro Suarez from BTG Pactual. good morning everyone roberto pedro rosanna i'd like to follow up on the capex discussion just to be clear pedro i think you mentioned the expectation the forecast of additional capex and that next year should be less than this year could you comment a little bit about your your forecasts for operating capex or is this going to be purely strategic there's projects focused more on on growth i'm trying to understand if there really is more space for growth for next year's capex because the numbers we saw are rather low and for my next question as for your leverage Could you explain what is your forecast for those higher levels? And with regard to the ratings agencies, what impact does that have? Last time there was an analysis that doesn't cover fully the company's present scenario. Could you comment a little bit about that, please? Well, Pedro, thanks for your questions. With regard to CapEx, the review is likely to be balanced strategically. Things are probably a little bit higher than operational, but for next year, we don't foresee any petrochemical influence in our operating CapEx. And just as a reminder, For strategic, we do have an investment that we're thinking about for next year. There's a whole set of concerns there that we are working on to install all the different stops, especially in the major centers, wherever they are needed. And so there are new technologies, new forms of operation, that we've delayed some of those stops or adjust the scheduled stops for a more positive scenario. And on the other hand, we are also keeping our focus on growth. We're still being very selective. And we have projects that we're balancing for next year. With regard to the covenants rating, Brascamp does not have financial covenants. So that's a fact. And with regard to the ratings, I will let Rosana comment because she's more involved.