Braskem S A : Transcription - Delta Day

Conference Call Transcript

Delta Day

Braskem (BRKM3 BZ)

September 24, 2020

Operator:

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's Delta conference call. Today with us, we have Roberto Simões, CEO of Braskem; Pedro Freitas, CFO; Mark Nikolich, Vice-President of North America Olefins and Polyolefins; 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 http://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 Roberto Simões, CEO of Braskem. Mr. Simões, you may begin your conference.

Roberto Simões:

Thank you. First of all, I would like to thank you everyone for listening to this conference. Last week, we proudly communicated to the market the start of production of our newest PP plant, located in La Porte, Texas.

Our Delta project team worked diligently over the last three years on the construction, commissioning and the startup of the new PP plant, and this achievement was only possible because of their strong effort and dedication.

Before Mark gives you all more color on Delta and North America PP market, I would like to highlight some topics about our business in the United States. Ten years ago, we started our internationalization process with the acquisition of Sunoco Chemical's PP assets in the United States. Then, Braskem America continued to invest in growing its business.

The purchasing of Dow's PP assets, expanding our operation in Marcus Hook plant, built of a new UTEC production facility, and the staff of Delta, Braskem America latest achievement, will strength our PP leadership position in North America.

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Conference Call Transcript

Delta Day

Braskem (BRKM3 BZ)

September 24, 2020

In the next slide, we will talk about Braskem America business model. In the U.S., we purchased a plant for supply and produce PP, a second generation thermoplastic resin.. To purchase the required feedstock, several propylene sources such as PDHs, refineries and crackers are available for us.

Braskem America has a critical role in the value chain as PP is the feedstock of a variety of products in several different segments, such as automotive, packaging and medical application, and our product is being crucial in the fighting against covid, for example.

In this sense, we are committed to meet the needs of our customers, and to continue to be a PP supplier today and in the future.

Moving to the next slide, since 2011, when we acquired PP assets from Dow in the U.S., we are the largest producer of PP in the United States. Now, with Delta, we have six PP plants: four in Texas, one in Pennsylvania and one in West Virginia. With our new plants, our production capacity grows from 1.6 million tons per year to 2.1 million tons per year.

Besides our PP operation, we also have one UTEC plant in La Porte, Texas. The UTEC is an engineered polymer with excellent mechanical properties, such as high abrasion resistance, impact strength, and low coefficient of friction, with applications in various markets.

For us, innovation is the path to our growth, so we can have one modern innovation and technology center in Pittsburgh, which plays a critical role in our ability to deliver our clients' needs.

In the next slide, I would like to highlight how Delta is fully aligned with the Company's strategy. Moving to this slide, about the strategy, Braskem based its decision in five player-defined strategic objectives.

With the startup of Delta, we have made significant progress on the feedstock and geographic diversification pillars. Delta supports us to progress towards a more balance feedstock profile between gas and oil business sources, as our new PP plant in the U.S. is propylene based, surpassing the relevance of the naphtha. Additionally, we expand our global footprint outside Brazil, and we are now even a more global company.

Now, I would like to take the opportunity to invite Mark, our Vice-President for Olefins and Polyolefins in North America, who will talk about Delta and the North American PP market. Thank you. Mark?

Mark Nikolich:

Thanks, Roberto. If we move to slide ten, I will dig a little deeper into Delta. A couple of things to note. As Roberto said, the teams have been working very hard for the last three plus years on this project. The vision actually started over four years ago, looking at the markets and coming up with a strategy to continue to progress our leadership in North America, as well as the Americas and globally. And that idea manifested itself in this new plant, which we called Delta.

So what is Delta? Delta is a very large PP line, 450kta+. And what we mean by that is that it is designed to run a minimum of 450kta. It is a very large line. It is the largest polypropylene line in the Americas, and we are really proud of that.

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Conference Call Transcript

Delta Day

Braskem (BRKM3 BZ)

September 24, 2020

Total investment, US$750 million. The location site is La Porte, Texas. We chose La Porte, Texas, for a variety of reasons. One, it is our largest facility in the U.S., and we had land, so we had space to build this new plant. Secondarily, the feedstock of propylene, which we are the largest buyer of propylene in North America, and the feedstock of propylene predominantly comes from the Gulf Coast. And our connectivity from the La Porte site into the feedstock suppliers in the Gulf Coast is excellent. We have five going on fixed pipelines into the asset, and that gives us a lot of redundancy in supply and access to all the major propylene producers.

In addition to that, we took the opportunity with this project to upgrade our utilities and support systems at the site. The site also has another PP line on it, as well as the aforementioned UTEC line that Roberto talked about.

So in addition to building this new Delta 450kta line, we also upgraded steam, we upgraded high voltage electricity, we upgraded the cooling water system, and we upgraded the entire feedstock pipeline and measurement system coming into the plant. So we spent over US$25 million on what I will call infrastructure utilities that both support Delta as well as the existing plants on that site.

This leads us to a very competitive operating base on that site, not just with Delta, but with the other plants. And the Delta plant itself has the ability to produce the full portfolio of polypropylene that we supply to the market.

Not to get too detailed, but there are three product families, homopolymer, random copolymer and impact copolymer that are supplied to the polypropylene industry, and we will be able to make all three product families on this new line.

The technology that we use is UNIPOL technology from Grace. This is a proven technology, with a lot of operating lines all over the world. In addition to that, and more importantly, Braskem itself has a lot of experience in UNIPOL PP technology. We have a plant in Germany. We have two lines in Marcus Hook, Pennsylvania. We have a plant in Seadrift, Texas that is UNIPOL technology. And now, obviously, Delta.

In addition to that, when we acquired the Dow polypropylene franchise back in 2011, many of the engineers and team members that came with that acquisition had been supporting the UNIPOL PP technology development over the years. So we acquired a lot of subject matter expertise when we bought the Dow business.

It gives us a lot of confidence with the technology. We know how to run it. We understand the cost of it, the maintenance of it, the complexity of it, and we have a lot of confidence in this technology.

And then, one thing that I want to make sure it does not go unnoticed because we are really proud of it, safety, as Roberto tells us and our stakeholders every day, is the foundation of our Company. It is our license to operate, and we are really pleased with the safety record of this project. Over three years of construction. You see the numbers of people in the site, and we really ended up with a first quartile safety record for the project, which we are really proud of.

So I am going to move on to the next slide to talk a little bit about the market, some of the context in which we developed the project and where we are today. If I talk about propylene predominant feedstock, when we look at propylene in North America, we really started to look at what was happening in the world, and the development of shale gas and tight oil in the U.S.

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Conference Call Transcript

Delta Day

Braskem (BRKM3 BZ)

September 24, 2020

And what that led us to believe is that there was going to be significant NGLs and significant propylene production in the U.S. that would support a globally competitive asset in the U.S.

What do I mean by that? There is continued to be investment in the propylene chain in the U.S. We have seen increases in the development of PDH projects, those are propane dehydrogenation units. They essentially take propane and turn it into propylene. And why is this relevant for shale? Because as we continue to grow the shale base in the U.S., we continue to produce NGLs, ethane and propane. Propane we supply to the world, but it creates a competitive base of feedstock for us where we can derive propylene from that.

So these PDH units that you see in the yellow part of the bar are really the growth of propylene production in the U.S., and you can see how it continues to grow. The most recent PDH startups were Enterprise and Dow, chemical PDHs.

So that brings to us a globally competitive feedstock. When you look at the trade balance, if you follow the yellow line, you will see the net trade going from the U.S. to other parts of the world, which essentially means the arbitrage is open and the cost basis of that propylene is competitive enough to price itself in the global markets all the time. That means that if we buy that feedstock, our derivative is going to be globally competitive.

That was the foundation for deciding not just to build in PP, but to build in PP in North America, and in the U.S. specifically. And you will see as we talk later, it is not just to supply North America, but it is to supply our global polypropylene franchise and our clients around the world.

One last note at the bottom that I mentioned previously, that we are the largest propylene buyer in North America. We do buy from a variety of sources and it creates a portfolio of side buy for us. We buy from PDHs, we buy from refineries, we buy from steam crackers and we buy from the metathesis units. So that broadens this base and supports the strategic initiative that we have had for the last ten years to diversify our base feedstock portfolio.

Next slide, let us start talking a little bit more about the polypropylene thesis as opposed to the feedstock. When we look at polypropylene, and we look at the context of the North American market, what we see here going back to 2005 is a lot of shutdowns. What does that indicate? It indicates the market was in a tough environment for a long period of time. There were aging assets that were too expensive to operate. They were not competitive anymore and many assets were shut down.

The last actual build in the U.S. for polypropylene was before 2005. This last startup in 2005 was actually a repurposing of an asset designed for another polymer that was repurposed to polypropylene. Indelpro started up a new asset in Mexico in 2008, but after that, you can see there has been a really long drought of capacity additions in North America.

As we saw the growth rate continue to increase, and I will talk about this, we saw an opportunity to do two things: one, new capacity to support the growth of Braskem, and then secondarily really enhance our cost position, with the newest state-of-the-art and world scale asset. That is what led to 2020.

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