Braskem S A : Transcription - 3Q20 Earnings Conference Call

Conference Call Transcript

3Q20 Results

Braskem (BRKM3 BZ)

November 12, 2020

Operator:

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's 3Q20 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 Avolio, Investor Relations Director.

We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After Braskem remarks are completed, 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 *0 to reach the operator.

We have simultaneous webcast that may be accessed through Braskem's IR website at www.braskem-ri.com.br,and the MZIQ platform, where the slide presentation is available for download. Please feel free to flip through the slides during the conference call. There will be a replay facility for this call on the website.

We remind you that the 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 Litigations Reform Act of COVID-1996.Forward-looking statements are based on the beliefs and assumptions of the Braskem management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to the future events and therefore, depend on the 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 could cause results to differ materially from those expressed in such forward-looking statements.

Now I would like to turn the conference over to Ms. Rosana Avolio, Head of Investor Relations. Please, Ms. Avolio, you may begin your conference.

Rosana Avolio:

Good afternoon, all. We would like to thank you for joining Braskem earnings conference call. Today, we will present 3Q20 results. So, please, let us move to slide number three, in which we will talk about Braskem's sustainability goals disclosed this week.

Based on our sustainable development strategy and in line with the sustainable development goals of the United Nations for 2030 and the Paris Agreement on climate change, we recently informed the market our new goals related to mitigate climate change and eliminate plastic waste.

Our goal for mitigating climate change is achieved carbon neutrality by 2050; and provide a 50% reduction in greenhouse gas emissions by 2030. Regarding eliminating plastic waste, our goals are expanding the I'm green portfolio aiming to include 300,000 tons of thermoplastics resins and chemicals with recycled content by 2025 and by 2030, 1 million tons of such products; and also by 2030, work to prevent 1.5 million tons of plastic waste from being sent for incineration to landfills or deposit in environment.

Moving to slide number four, we will present our strategy to achieve carbon neutrality and also to eliminate plastic waste. Strategic carbon neutrality, the Company's strategy will

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Conference Call Transcript

3Q20 Results

Braskem (BRKM3 BZ)

November 12, 2020

concentrate its actions on three fronts; first, reduction of emissions focusing on energy, efficiency, and increasing the use of renewable energy in current operations, establishing partnerships focused on innovation and technology.

Two, offsetting emissions with potential investments in the production of chemicals and polymers from renewable sources; and capturing carbon emissions through research and development for the use of carbon emissions as raw material.

Additionally, in the forefront of circular economy, Braskem will continue to pursue its mechanical and chemical recycling projects. With that, the Company reaffirms its commitment to sustainable development and its continuous purpose of improving people's life by creating sustainable solutions for chemicals and plastics.

Let us move to the slide number 5, in which we will talk about the Company's consolidated highlights for the 3Q of 2020. In this quarter, the Company recurring EBITDA was US$699 million, 126% higher than the 2Q20, mainly explained by the better spreads in the international market of polyethylene in Brazil, polypropylene in the United States and polyethylene and Mexico.

Also, explained by an increasing sales volume in Brazil and in the United States due to the recovering demand for resins in the Brazilian market and polypropylene in North America. Compared to the same period of the previous year, the Company recurring EBITDA in U.S. dollars was 69% higher.

Moving to the next slide, we will present the 3Q20 highlights in Brazil. In Brazil, the average capacity utilization rate of our crackers increased 17 p.p. in relation to the 2Q and 2 p.p. compared to the 3Q 2019, reflecting the normalization of operations in the quarter.

Resin sales in the Brazilian market increased 24% in related to the 2Q 2020 and 3% compared to the 3Q19, due to the strong recovery in demand for resins in the Brazilian market. It is important to highlight that in this quarter, and in line with our strategy of prioritizing sales to the Brazilian market, the Company exceeded 1,050,000 tons of resins sold in the domestic market, a historical quarterly record of resin sales in Brazil.

Given that, Brazil's EBITDA was US$529 million, 148% higher than 2Q 2020, representing 70% of the Company's consolidated segment EBITDA. The increase in EBITDA is mainly explained by the higher sales volumes of resins and chemicals in the Brazilian market and by better spreads in the polyethylene business.

In the next slide, we will provide an update regarding the geological event in Alagoas. In January, we signed an agreement with the Alagoas State Public Defenders Office, the Federal Prosecution Office, the Alagoas State Prosecution Office and the Federal Public Defenders Office.

In this regard, and to the best of our knowledge, Braskem estimated around R$3.5 billion in provisions. Of this amount, around R$1.7 billion was related to support the relocation indemnification of resins of the areas at risk located in the affected region.

Important to mention that this amount was transferred to a specific bank account managed by Braskem. Therefore, it has not been considered in our cash position. Additionally, R$1billion was related to actions to monitor and close the south mining wells and R$700 million for other measures not covered by the agreement with the authorities.

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Conference Call Transcript

3Q20 Results

Braskem (BRKM3 BZ)

November 12, 2020

In July, Braskem executed an amendment to that agreement with the authorities and informed the market the second relevant provision in the amount of around R$1.6 billion.

More recently, in September, we have informed the market an important development, the assessment of the potential impacts of the geological event in Alagoas, with the conclusion, on September 14, of the studies of exploring the independent technical engaged by the Company from international recognized entities.

In order to implement the potential new measures related to the large geological event in Alagoas, the Company, in light of the information available to-date, estimate the additional amount of around R$3.6billion.

Finally, just to reinforce, Braskem 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 estimate.

Moving to the next slide. Regarding the financial compensation and relocation program, by September 2020, around 6,700 properties were reallocated, more than 7,500 families were included on the compensation flows, around 26,000 residents were reallocated, and more than 2,000 families from Humanitarian Aid were shifted to the program.

Additionally, the residents center is set up to service residents of the Financial Compensation and Support for Relocation Program. There is also a program focused on picking up and providing health care and welfare improvement for animals.

Around R$180 million was disbursed from the bank account of R$1.7 billion mentioned before related to the expenses of the Financial and Compensation Support for Relocation Program.

Let us move to the next slide where we will present the 3Q20 highlights in U.S. and Europe. In the United States and Europe, the average capacity utilization rate of PP plants increase in relation to the 2Q20 and also in relation to the 3Q19 explained by the higher demand in the United States and improve production capacity as the operational issues and supplies in U.S. and Europe in the previous quarters.

1. sales volumes were 10% higher compared to the 2Q20 and 8% higher in relation to the 3Q19, mainly due to the demand recovery in the United States and supply restrictions in the region caused by the Laura Hurricane.

EBITDA in the United States and Europe was US$133 million, 223% higher than the 2Q20 and representing 18% of the Company's consolidated segment EBITDA. The performance in the quarter is mainly explained by the higher sales volumes in the United States due to the increase in the country's industrial activity.

In the next slide, we will talk about our new PP plant in U.S. The construction of Braskem new PP plant in the United States was concluded and it has started commercial production in the 3Q of 2020. The new plant is located at the La Porte side in the state of Texas and has production capacity of 150,000 tons per year. In October, the production of our new PP plant in the United States was 36,000 tons, close to the monthly production capacity of the plant of around 38,000 tons.

Moving to the next slide, we will talk about Mexico results. In Mexico, the average capacity utilization rate of our polyethylene size increased 4 p.p. related to the 2Q20 due to the higher ethane supply by PEMEX, combined with ethane imported from United States.

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Conference Call Transcript

3Q20 Results

Braskem (BRKM3 BZ)

November 12, 2020

Compared to the 3Q19, the utilization rate increased 12 p.p., reflecting the start-up of the ethane imports project in February this year.

In the quarter, Braskem Idesa imported 42 million tons or 8,000 barrels per day on average of ethane from the United States to complement the supply of ethane by PEMEX, which corresponded to 13% of the capacity utilization rate of the Mexico Petrochemical Complex. Polyethylene sales in Mexico decreased by 2% when compared to 2Q20 due to inventory recomposition when compared to the same period of last year, it increased by 12% given the high availability of products. Mexico's EBITDA was US$97 million in line with 2Q20, representing 13% of the Company's consolidated segment EBITDA.

In the next slide, we will talk about petrochemical scenario. According to the most recent projections by external consulting firms, the expectations for healthier resin spreads in all regions. Regarding the resins referred in Brazil, polyethylene spreads increased by 102%, polypropylene spreads increased by 26% and PVC spreads increased by 41% over the figures projected in the beginning of the year.

The spread improved mainly due to the strong drop in the naphtha prices and the demand recovered as the COVID impact and also by impacts of Hurricane Laura in case mainly of the polyethylene business. In the case of the main petrochemicals spreads, external consulting firms expect lower spreads over the figures projected in the beginning of the year. Due to the COVID, the demand for basic chemicals was strongly impacted, which resulted in challenging spreads this year.

For the businesses outside Brazil, polypropylene in the United States increased by 9% and in Europe by 20%, related to the projections of the beginning of the year. And regarding the spread reference of Mexico, it has presented 13% increase compared to the figures projected in the beginning of the year.

Moving to the next slide, during the 3Q20, we had a positive free cash flow generation of R$747 million, mainly explained by the increase in recurring EBITDA and also by the monetization of fiscal fees credit for around R$332 million in this quarter. This effect was partially offset mainly by a bigger interest payment in the quarter due to the payment of the first installment of semiannual interest, a bond issued in November last year.

Year-to-date, free cash flow generation was R$-757 million, mainly explained by the cash consumption due to the change in the feedstock purchase strategy in Brazil due to

COVID.

Moving to the next slide, in the end of September, the average debt term was around 19 years with around 50% of the total debt due after 2030. Also, the Company has sufficient liquidity to cover debt maturities in the next 53 months. For that, we reiterate our commitment to maintain our strong liquidity position and cost discipline while continuing to implement the measures set for in our deleverage plan.

Let us move to the next slide, which will talk about the deleverage plan. Braskem remains focused on implementing the deleverage plan initiatives to reduce its copper leverage, and as a consequence to be reassigned as an investment-grade company.

Beside the conclusion of the hybrid bond issues in July 2020, there are order initiatives underway for which Braskem already present results, such as: Reduced investments from US$721 million to around US$600 million in 2020 with the expectation of ending the year inline with the target; reduction of around 9% of fixed costs in the year today compared to the same period last year.

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