Braskem S A : Transcription - 3Q22 Earnings Conference Call

Conference Call Transcript

3Q22 Results

Braskem (BRKM5 BZ)

November 09, 2022

Operator:

Good morning, and thank you for standing by. Welcome, everyone, to Braskem's 3Q22 results conference call. With us today, we have Mr. Roberto Simões, Braskem's CEO; Mr. Pedro Freitas, the Company's CFO; and Ms. Rosana Avolio, IRO, Strategic Planning and Corporate Market Intelligence Director.

This event is being recorded and all participants are connected in listen-only mode during the Company's remarks. After Braskem's presentation, there will be a question-and-answer session when further instructions will be provided. Should any participant need assistance during the call, please press *0 to reach out the operator.

This event is also being broadcast live via webcast and may be found at Braskem's website at www.braskem.com/ri, where the respective slide deck can also be found. slide selection can be made by participants. The audio facility will be made available after the event is over. Webcast participants may post their questions via the website. They will be addressed after the closing of the presentation by our IR team.

Before moving on, it's important to say that forward-looking statements made during this call concerning the Company's business outlook, as well as financial and operating targets and prospects are based on the Company's assumptions and beliefs, and also on information currently available to the Company. Those forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not materialize. Investors and analysts should have in mind that macroeconomic conditions, industry conditions and other operating factors can also affect future results of the Company and, therefore, lead to results that you will differ considerably from those expressing these forward-looking statements.

I will now turn the floor over to Ms. Rosana Avolio, Investor Relations, Strategic Planning and Corporate Market Intelligence Director, who will start the presentation. Please, Ms. Avolio, you have the floor.

Rosana Avolio:

Good morning, ladies and gentlemen, thank you for participating in Braskem's conference call. We will present today the results for the 3Q22.

Let us go to slide 3. I will make some comments about the Company's main highlights for the quarter. The global scenario in the 3Q22 remained impacted by global macroeconomic uncertainties, geopolitical tensions, and perspectives on the performance of the world's major economies. These uncertainties directly influenced the global demand and, consequently, the dynamics of the petrochemical industry.

Moving on to financial highlights, the Company reported recurring EBITDA of US$371 million. Additionally, cash generation in the quarter was R$889 million. Concerning return to shareholders, the return on cash flow was 31%. Now, going to our credit metrics, the corporate leverage remained low in the period and we maintain strong liquidity position enough to cover the debt maturities for the next 5 years. It's worth noting that the Company's debt profile continues to be very elongated and the Company continues to maintain its rated investment- grade by S&P and Fitch Ratings.

In the quarter, we had experienced significant advances in the ethane import terminal in Mexico. Braskem Idesa obtained its approval for the constitution of the joint venture with Advario from the Federal Economic Competition Commission of Mexico. The construction started in July 2022 with physical progress of 22% by September 2022. We would like to

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Conference Call Transcript

3Q22 Results

Braskem (BRKM5 BZ)

November 09, 2022

remind you that this terminal will have the capacity to import on average 80,000 barrels of ethane per year, providing conditions for Braskem Idesa to import all its raw materials needs, besides allowing a study for expansion of about 20% of the polyethylene production capacity in Mexico.

Moving on to the highlights of ESG agenda, we launched Voqen, an energy and natural gas trading company that will help Braskem and its clients in the energy transition. In addition, we launched Oxygea, a business and innovation hub that will foster the emergence of new technologies in that sustainability and digital transformation. Finally, Braskem in the United States signed a contract to purchase renewable energy for the Neal Plant in West Virginia, starting its supply by the end of 2024.

Now, moving on to social area, we advanced in the program of financial compensation and support to the relocation in Alagoas, and ended the quarter with a proposal acceptance rate of 99.6%. In addition, the Company implemented actions to support the needy population, circular economy and environmental education in the communities surrounding its operations.

Let us now go to slide 4. In the 3Q22, the recurring EBITDA was US$371 million, 54% lower than the previous quarter, and explained primarily by lowering international resin spreads by the lower export volume of resins in Brazil, lower sales volumes of polypropylene in the United States, and polyethylene in Mexico. In addition, in the quarter, we had the accounting effect of inventory realization in the net amount of US$75 million. Excluding this inventory realization effect, recurring EBITDA was US$448 million for the quarter. Considering the 9 months of 2022, the Company's accumulated recurring EBITDA was US$2.92 million.

Now, moving on to the next slide, we are going to hear about the highlights of each of the segments. This slide, we present the main highlights of our operations in Brazil. In the 3Q22, the utilization rate of petrochemical plants in Brazil was 79%, 5 p.p. higher than the previous quarter, mainly due to the resumption of operations after a scheduled maintenance shutdown at the Rio Grande do Sul petrochemical plant.

In the Brazilian market, resin sales in the quarter increased 2% in relation to the previous quarter, due to higher availability of products and the higher demand in the period, because of seasonality. As for resin exports, they decreased by 18% due to fewer opportunities in the international market, given the high inventory levels in the global chain. Within this context, Brazil's recurring EBITDA in the 3Q22 was US$312 million.

The next slide, I am going to talk about the geological event of Alagoas. The chart on the left shows the total amount of provisions for the geological event of Alagoas, which is R$13 billion, of which, R$6.1 billion had already been disbursed. Moving on to the chart in the middle, we can see the balance of provisions, the balance registered in the end of the 3Q22 was approximately R$7.2 billion.

In the chart on the right, we can see the disbursement schedule of the resources. Of the current balance about 67% was registered in short-term and 33% in the long-term. It's important to mention that the Company cannot rule out future developments related to the issue or its associated expenses, and the cost to be incurred by Braskem may differ considerably from its estimates or accrued and provisioned amounts.

Now, moving on to the next slide. We keep on speaking about the geological event in Alagoas, and I will make some comments on our progresses. Since in relation to relocation and compensation, Braskem maintain its process of relocation and financial compensation of families located in the neighborhood areas of risk areas in Maceió. All the proposals for financial compensation reached 18,259 in the end of 2022, just focusing on the high maintenance of acceptance of proposals, which amounted to 99.6%.

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Conference Call Transcript

3Q22 Results

Braskem (BRKM5 BZ)

November 09, 2022

In terms of closure and monitoring of wells, by the end of October 2022, out of 35 mining fronts, 9 belong to the Sand Backfilling Group, out of which, 4 have ongoing filling, 3 at advanced stages of filling.

Now in relation to the other 26 fronts, the actions of closing and monitoring of wells are following the schedule approved by ANM, the National Mining Agency.

Finally, I will also make some comments about socio and urban, as well as environmental measures. The activities of these fronts are concentrated on urban mobility, social compensation, and actions in unoccupied areas.

For this specific area, I would like to highlight the following points. The hiring of a specialized consulting firm to evaluate and monitor the execution of the environmental plan, and the integrated action plan, in accordance with what was established in our socio-environmental agreement.

We started 2 projects related to urban mobility out of a total of 11 actions. There was 64% progress in the demolition process at the Mutange hillside area. And finally, we have signed and confirmed the term of agreement for the adoption of requalification and indemnification for the Flexais region.

Now, let us move on to the next slide. On this slide, I will present the main highlights of operations in the United States and Europe. In the 3Q22, the utilization rate of the polypropylene plants in the USA was 74%, 7 p.p. lower than in the 2Q22. This reduction is explained by lower demand in the region and shorter unscheduled shuts.

In Europe, the utilization rate decreased by 1 p.p. compared to the previous quarter, due to lower availability of raw material, which was caused by operational problems of local suppliers and also to the lower demand in the period.

Speaking of commercial performance in the United States, the sales volume for the quarter was 381,000 tons, which represents reduction of 19% over the previous quarter. In Europe, sales volumes in the 3Q22 were 128,000 tons with an increase of 8%, when compared to the previous quarter. On this segment, recurring EBITDA in the 3Q was US$62 million.

Now going to the next slide, I will address the highlights of the operations in Mexico. In Mexico, the utilization rate in the 3Q22 was 76%, 9 p.p. higher than in the 2Q22. Due to higher ethane supply by PEMEX, and also ethane imported through Fast Track.

Concerning sales, there was a reduction of 5% over the 2Q22 due to rebuilding of inventory levels at Braskem Idesa. Recurring EBITDA for the segment in the 3Q22 was US$14 million.

Now, let us go to the next slide. We will address the ethane terminal in Mexico. The beginning of the construction of the ethane import terminal in Mexico was one of the major highlights of the quarter for the Mexico operation. Terminal Química Puerto México is the joint venture between Braskem and Advario. With each partner holding 50% of the Company's shares, its raw material supply capacity for the terminal will be approximately 80,000 barrels of ethane per day, which represents 120% of Braskem Idesa current raw material needs.

The CAPEX of the project is estimated about US$400 million, and the expectation is that the beginning of the terminal operations will be the 2H24. The physical progress of the project at the end of September 2022 was 22%.

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Conference Call Transcript

3Q22 Results

Braskem (BRKM5 BZ)

November 09, 2022

Finally, it's worth pointing out that in the addendum signed with PEMEX in 2021, Braskem Idesa has the right of preference to purchase all the ethane that PEMEX has available and not use its own production process until 2045.

Going to the next slide, we are going to address Company's cash generation in the quarter. In the quarter, the Company had cash generation amounting to R$889 million. Excluding the payments related to Alagoas geological event in the quarter, the Company had a recurring cash generation of R$1.557 billion.

The main things were the recurring EBITDA for the quarter, and the positive variation in working capital, due to reduction in accounts receivables, caused by lower sales volume and lower price references in the international market, and also by the reduction in inventory levels due to lower price references in the international market.

Now, let us go to the next slide. The end of the 3Q22, the Company maintained a very long debt profile with strong liquidity position, and most of its debt maturing after 2030. The average debt term was around 13 years, and the Company's current liquidity level guarantees the coverage of debt maturities in the next 63 months without considering the available international revolving credit line in the amount of US$1 billion, maturing until 2026.

Let us move on to the next slide, where we will talk about company's credit metrics. Aligned with the dynamics observed in the previous quarter, Braskem maintained its solid credit metrics and corporate leverage remained low in the 3Q and close at 1.55 times. It's worth pointing out that the aim is to maintain a robust cash position with a very long debt profile, and that we are committed to efficient capital allocation and the maintenance of our investment- grade rating.

Moving on to the next slide, let us talk about our ESG agenda. Braskem held the second edition of ESG Day, a meeting with the financial market to share the advances of our commitments to sustainable development. During the event, we reinforced our commitment to strengthening Braskem's role in the carbon neutral and circular economy, and shared Braskem advances in the pillars of actions, which include eliminating plastic waste, and fighting climate change. Both initiatives are part of the Company's growth avenues for the future. The presentation and the video of the complete event can be accessed on Braskem Investor Relations website.

Moving on to the next slide. Now, during the quarter, Braskem launched Voqen, an electric energy and natural gas trading company. Voqen was born with a portfolio of R$3 billion, and theory and whose aim is to leverage business opportunities through the collaborative creation of competitive solutions that can accelerate the sustainable energy transition of the Company and the industry at large.

The Company has also launched Sustainea joint venture formed between Braskem and Sojitz for the development of biogas technology, based through plants with a reduction of carbon footprint in its production process. As the reference in 2021 based on external consultancies, the global market of bioMEG represented R$26.3 billion. We have also launched Oxygea, which is the business innovation hub that will foster the emergence and development of new technologies focused on sustainability, and digital transformation.

Moving on to the next slide, here I would like to highlight some initiatives carried out by Braskem in order to contribute to the pillar of human rights and social responsibility. To support low income population, Braskem in partnership with NGO Ação da Cidadania, has contributed with donations of basic food baskets. In addition, Braskem will donate another R$5 million to the same campaign.

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Conference Call Transcript

3Q22 Results

Braskem (BRKM5 BZ)

November 09, 2022

Regarding private social investments, during the quarter there was Plastianguis held in Mexico, encouraging recycling and promoting environmental education. 143 tons of plastic waste were collected, benefiting 7,000 people.

In Brazil, another edition of Plastitroque took place, promoting environmental education in the communities surrounding Braskem operations. More than 18.5 tons of plastic waste were correctly disposed, benefiting about 4,400 people.

In the project Corais da Maré, Braskem is part of a joint initiative that developed an innovative technique to speed up the restoration of corals using plastic, in addition, training environmental agents in the region. This project also included a cleaning task force to raise awareness of the population about the correct disposal of plastics.

Let us go into the next slide. On this slide, we will talk about the petrochemical scenario of polyethylene and polypropylene in 2022, lower global demand for resins coupled with higher inflation globally, and high inventory levels in the global chain resulted in lower spreads during the 3Q22. According to the latest external consultants' projections, the expectations are that polyethylene and polypropylene spreads are to remain pressure throughout the 4Q22 due to lower global demand associated with the entry of new capacity of this products.

Moving on to the next slide, I will present the Company's short-term outlook. For Brazil, there is a reduction in ethylene production. In the commercial side, we expect to reduce sales volumes of resins and the main chemicals due to lower demand in the estimated period. Now concerning spreads, external consulting companies expect a drop in the spreads for resins and basic chemicals due to lower global demand.

In the United States, well, the utilization rate and sales volumes are expected to remain at similar levels to those of the 3Q22. The spreads of PP-propane in the U.S. are expected to decrease, however, at levels above the recent historical average. Finally, in relation to Mexico, there is an expectation of include in production volumes because, there is an expected increase in total supply of raw material. In this situation, the expectations have an increase in sales volumes of PE due to bring your product availability.

Now, going to the next slide, I would like to remind you our main goals for 2022, apart and broken into our strategic pillars. Starting with productivity and competitiveness, our focus will be on capturing value with transformation initiatives, a recurring earnings of R$302 million per year for 2022.

Moving on to sustainability, our focus is on intensifying actions in recycling, expansion of renewables and reduction of carbon emissions. As to diversification, there are few relevant projects in terms of diversification and also growth. The construction of the Ethane Import Terminal in Mexico, in addition to the definition of a partner, both of them already concluded, and also the progress with the feasibility studies to invest jointly with SCG Chemicals in the construction of a new green ethane plant in Thailand.

As to people, governance and reputation, we will continue to focus on evolving on all fronts related to the geological event in Alagoas.

Finally, in our capital allocation pillar, we will be focused on returning value to shareholders, in addition to maintaining our investment-grade rating, according to the rating agencies.

With that, we conclude the presentation of Braskem's 3Q22 earnings. Thank you very much for your attention. We are now going to move on for the Q&A session.

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