Braskem S.A.
Q3 2012 Earnings Call Transcript

Published: 9 Nov 2012

[Operator:]

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem’s Third Quarter 2012 Earnings Conference Call. Today with us, we have Carlos Fadigas, CEO; Marcela Drehmer, CFO; and Guilherme Mélega, IRO and Corporate Controlling. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company’s presentation. After Braskem remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given. (Operator Instructions) We have a simultaneous webcast that may be accessed through Braskem’s IR website, www.braskem.com.br/ir. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay facility for this call on the webcast. We remind you that questions will be answered during the Q&A session will not be posted in advance on the website. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Braskem 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 operating factors could also affect the future results of Braskem and cause actual results to differ materially from those expressed in such forward-looking statements. Now I’ll turn the conference over to Mr. Guilherme Mélega, IRO of Corporate Controlling Officer. Mr. Mélega, you may begin your conference.

[Guilherme A. Mélega:]

Good afternoon, ladies and gentlemen. Thank you for participating in another Braskem earnings conference call. Today, we’ll be commenting on our results for the third quarter of 2012. First, we would like to remind you that pursuant to Federal Law 11638 from 2007, the results presented in today’s presentation reflect the adoption of International Financial Reporting Standards, or IFRS. Note also that as of the second quarter, the company began to recognize investments in jointly controlled companies using the equity method and no longer base it on proportionate consolidation. In addition, unless stated otherwise, for the periods presented, Braskem’s consolidated results reflect

[Operator:]

(Operator Instructions) The first question is from Frank McGann from Bank of America/Merrill Lynch. Please go ahead.

[Frank J. McGann:]

Yes, I was just wondering if may be you could give a little bit more color on the expansion in Mexico and timing and how you see that fitting into the broader demand supply situation in the U.S. and Mexico. And then secondly there has been talk of some asset sales the only ones that we mentioned relatively small, but I was just wondering how you see asset sales as part of your plan to manage the balance sheet?

[Carlos José Fadigas De Souza Filho:]

Hi, Frank, it’s Carlos Fadigas. Two very interesting questions, let me start by talking about Mexico. First of all the project schedule to start up at least 2015, from June 2015 about 30 months from now, it’s right now on time, on schedule. Although we haven’t signed the project finance package and that is expected to happen over the next month. Both Braskem and Idesa, 65 ownership by Braskem and 35 ownership on the JV by Idesa, a local Mexico chemical company. So the two shareholders of the JV have advanced funds to the projects so it has happened on time and on schedule especially because we keep money forward ahead of the financial package that as I said, it’s scheduled to be signed over the next one month. Most of the equipments have been brought what we call the long lead items and mentioning that first of all, it reduce the uncertainty of the start-up once we had already brought these equipments and on top of that, we found very interesting price conditions in Europe to buy this equipment at the point of time in which Europe is the lacking industrial demand, the $3.2 billion project. and we are going to bring on line 1,050,000 tons of high density polyethylene and low density polyethylene. And when you compare that with the capacity additions in North America, but more specifically in the United States, the data we have from CNEI shows that only is more debate on that should happen between now and 2015. So that’s majority additional capacity you come on stream in the U.S. between 2016 and 2017. So we do have the first project to operate in North America. the first three projects should be brought in line in North America. specifically, CNEI has, they mentioned that only 1.3 million tons on top of our project would be adding to North American capacity. and as you know, that’s ethylene not polyethylene capacity is 1.3 million tons and as you know, which is less than 1% of global capacity production of ethylene. So naturally it has returned from 16 to 17 when we have new projects come on stream, and then we are going to have a different competitive scenario that we are glad, we’re going to be adding the first capacity in North America. and on top of that, more important emphasis that our project is 4% in the domestic market in Mexico and it’s actually mix brought into the U.S. but right now, the market has a back of more than 1 million tons. So even with this, on top of our credit, the Mexican market (inaudible) that’s important (inaudible) be able to the vast majority of this capacity in the domestic market, have an export in that U.S. Regarding the sale of assets, and we have to choose that perhaps as mentioned that currently the distribution business have to be sustained. So we want to brought the demand of (inaudible) discussion that right now, Frank, the potential fee of assets we are looking into, we will not be touching anything that is considered strategic progress. So if and we sell any assets two criteria should be considered. The first one is, naturally we have to be selling. We have a better return. We have to be selling project to be putting money on a better return projects. So it’s very basic logic of any M&As there will be assets someone who is willing to pay more for that putting more value on that, so we can fund projects like Mexico, projects like (inaudible), and the second criteria is that naturally, we won’t be touching anything that is considered strategic for Braskem more specifically anything that is related to polyethylene, polypropylene and PVC, ethylene, propylene capacity, it is the new core of Braskem.

[Frank J. McGann:]

Okay, thanks. If I can just follow-up maybe just in terms of the outlook that you’ve given for the fourth quarter in 2013, it seems relatively cautious and I was just wondering how you see relative to the say, EBITDA generation that you have in the third quarter, as you’re looking out on an annual basis say, for next year. Do you think that the capacity issues that could pressure margins and might make it difficult to see upside to EBITDA next year or do you, are you more optimistic on that?

[Carlos José Fadigas de Souza Filho:]

Yeah. If we talk about 2013 when you compare that with this year, I think that we have two or three local Brazilian projects that should help. The first one is end of the tax advantage to import in Brazil. And that something which has been part of the Brazilian Senate, but will become effective only on the turn of the year. So that should be go as a better competing field, very well important projects that most of the states in Brazil won’t to be able to keep providing and sometimes 9% tax advantage of the import. Also we are going to have a full year or almost a full year with the increase of the import tariff for full year. This year October 1 effective an increase in import tariff for polyethylene that is from 14% to 20%. So we had three months in this year benefitted by that and we should have at least nine months next year. The increase is carried to either finish at October ‘13 or (inaudible). So we’re going to have at least nine months next year compared to three months of the year of these benefits. And the third point would be the increase of Brazilian GDP, we are having a very tough year, as we know, Brazil is supposed to be on emerging country and we’re going to have a growth activity of 1.5% that is actually larger than the U.S. So you should get back to something around 3.5% that seems to be the general consensus in Brazil. So these financing Brazil should help for us increase profitability as you look to ‘13 compared to 2012. The point we don’t know about and it’s a huge point have to do with the global economy. and since 2008, I don’t know whether you’re really similar to ours, that the volatility has increased the net visibility has been very tough to predict but it is going to happen, we have tough turn from 2011 to 2012, with a lot of capacity shutdown and year it self, we started this year with only 55% transition rate in our ethylene lines, and we also saw a softening in demand in Europe this year. So one thing to be very closely monitored is what is going to happen with both China and Europe in 2013 and that may bring a huge impact in petrochemicals. My final comment would be about the exchange ratio, I don’t see the net change in exchange ratio from the Brazilian reais to U.S. dollar. So although it’s important statutory to one that at least now don’t see (inaudible).

[Frank J. McGann:]

Okay, really helpful. Thank you very much.

[Carlos Jose Fadigas de Souza Filho:]

You’re welcome.

[Operator:]

(Operator Instructions) And the next question is from Fernando Valle from Citi. Please go ahead.

[Fernando Valle:]

Hi, good afternoon guys. Just a quick question, you have previously talked about a project to lower taxation on asset purchases, so I just wanted to see what’s the status is on that project? Thanks.

[Carlos Jose Fadigas de Souza Filho:]

Fernando the project you’re mentioning is a proposal put forward by the Brazilian Chemical Association that worked together with the Brazilian Development Bank and also with Petrobras should produce a set of policies, proposal of policies should give to Brazilian chemical sector, a new dynamic, a stronger dynamic and help bring more competitiveness to this sector. That was the result of a world class roughly 10 months, second half of 2011, most of the first half of this year that has been presented to the boardroom back in May of this year and since then we’ve been actively logging for the approval of these proposals. It brings three sets of proposals, one talks about lower taxes on the raw materials that’s the most impactful in the short-term. A second one talks about lower taxation on investment. so CapEx in Brazil is reduced and the third one talks about innovation technology and incentives for innovation technology especially these innovations associated with green economy, green chemicals. As I mentioned we’re longing for an approval, we have been seen other sectors being aggressive. the need of other sectors being aggressive and actually Braskem has been benefitted by some of these broader incentives like the incentives on exports that is called [Integra] like the increase in import tariff that covered 100 products and included in this 100 products is the polyethylene. but we have to see our proposals, or our policy that targets really the Brazilian chemical Industry. It’s very hard for me to tell you when and if, when we have this approval. And actually I do believe, we’re going to have these approval at some point in time, it’s critical, our we’re longing for this approval and using the average of the Brazilian Chemical Association. The Brazilian chemical industry is a very relevant one for the Brazilian economy, which consider in due stability at some point it is the third and the fourth largest sector of the Brazilian industry and we do hope that some benefit at some point more likely in the beginning of the next year. We’ve been working very hard to, but it’s hard for me to tell you when the government we will make a decision on that.

[Fernando Valle:]

Yeah, understood, thank you.

[Operator:]

Thank you, and the next question is from [Fernando Ramos] from GBM. Please go ahead.

[Unidentified Analyst:]

Good afternoon. Thank you for the call. Just a follow-up question regarded to Ethylene XXI project, in Mexico there have been, after you look all newspaper say and you have both you’re having some problems with the workers union and that actually you’ve a violent incident in your facility, so right now you can give a good information about these, it is difficult to affect in some ways, somewhat to start the portfolio? Thank you.

[Carlos Jose Fadigas de Souza Filho:]

Fernando, first of all unions in Mexico is very strong in sometimes it become violent as a nation. We first of all we have been investing a lot of time and effort in creating a working environment in a set of salary plus benefit that really differentiate this project from other job opportunities in the region. The State of Veracruz is very committed to this project. The Governor of this state is very committed to this project, it’s a huge investment of capital in this state, and we have got the support of the Federal government and of the state of Veracruz in handling our relationship and helping our relationship with the employees and also with the unions. Having said that, we haven’t had anything relevant, by relevant I mean something that could really change the schedule of the project that would stop work inside the project, and Braskem actually has a good track record in dealing with unions, with in review be it in the United States although we had a strike in the U.S. but we never stopped the production of the plant it was on strike. So we want to keep working with the local unions as I mentioned we already have a differentiated set of salary plus benefit to these workers. We have the full support not only of the current President Calderón, but also we have already had contact with the elected president, Enrique Peña Nieto he knows the project. We have discussed this project with him and he is also 100% supporting the Ethylene 20,000 project in Mexico. (inaudible) who knows the project quite well, he’s been at the project site several times and he has been also supporting us. So all in all, it will remain a point of attention because of the way some of unions behave, but at the end of the day, I think we are doing all the possible and right thing to do with towards that and I do not expect that to be a major problem or to cause any major problem to the scheduled project Ethylene XXI.

[Unidentified Analyst:]

Okay, thank you very much.

[Operator:]

(Operator Instructions) We have no further questions at this time. I’ll turn the call over to Mr. Carlos Fadigas for closing remarks.

[Carlos José Fadigas De Souza Filho:]

Well, I'd like to thank you all again for joining us for this call. I would like to apologize for the delay in the beginning of the call and we’re going to be working hard for that to make sure that it will not happen again, and my final comments has to do with our strategy and the management commitment to and this strategy remain confident in the long term, we will be doing all the possible thing to increase profitability of the business. We will be working hard to reduce the costs. We’d be working hard to add value to the product that stem out of our [massive] progress. We’ve been working with the Brazilian authorities to bring back competitiveness to Brazilian industry and more specifically to the chemical industry and to Braskem and we’ve been successful in some of these fronts. We’ve been completing our Ethylene XX1 project on sched, on budget and we actually have a good track record of greenfield projects to deliver them on schedule and on budget. So that’s our commitment. If we are going to have most likely going to have core profit at (inaudible) different than what we been seeing so far, and by that I mean we will follow a profitability. On the other hand as we move to the longer term for ’13, ‘14 and then finally ’15, we do expect Braskem to increase its profitability as there is more economic growth as we bring Ethylene XXI projects on stream and on top of that as the overall profitability of the chemical industry improves. So it’s been – I see a challenging couple of years, but we’ve been keeping our strategy, our keeping our focus and increase profitability back again. Thanks again for your time. And I wish you all a good weekend.

[Operator:]

Thank you. This concludes today’s Braskem’s earnings conference call you may disconnect your lines at this time.