Braskem S A : Transcription - 4Q23 Earnings Conference Call

International Conference Call

4Q23 Earnings Results Transcription

Braskem S/A (BRKM5 BZ)

March 19th, 2024

Operator: Good morning, everyone and thank you for waiting. Welcome to Braskem's 4th quarter and year 2023 results conference call. With us here today we have Mr. Roberto Bischoff - Braskem's CEO, Mr. Pedro Freitas - Braskem's CFO and Mrs. Rosana Avolio - Investor Relations, Strategic Planning and Corporate Market Intelligence Director.

We inform you that this event is being recorded. All participants can choose which language to listen to and see the presentation, using the "show captions" and "view options" buttons, respectively. After Braskem remarks, there will be a question-and-answer session. At that time further instructions will be given.

The audio of this event will be available on the Investor Relations website after it ends. We remind you that participants will be able to register, via the website, questions for Braskem, which will be answered after the end of the conference, by the IR department.

Before proceeding, we would like to clarify that any statements that may be made during this conference call, regarding Braskem's business prospects, projections, operational and financial goals, constitute beliefs and assumptions of the Company's Management, as well as information currently available to Braskem. Future considerations are not a guarantee of performance and involve risks, uncertainties and assumptions, as they refer to future events and, therefore, depend on circumstances that may or may not occur.

Investors and analysts should understand that general conditions, industry conditions and other operational factors may affect Braskem's future results and may lead to results that differ materially from those expressed in such future conditions.

Now, I'll turn the conference over to Rosana Avolio - Investor Relations, Strategic Planning and Corporate Market Intelligence Director. Mrs. Avolio, you may begin your presentation.

Rosana Avolio: Hello, ladies and gentlemen. Thank you for participating in Braskem's earnings call. Today, we will present the results for the fourth quarter and the year 2023. Following the agenda on slide 3, I will start by presenting the company's main financial highlights in the period on slide number 4.

In 2023, the imbalance between global supply and demand, caused by the addition of new polyethylene and polypropylene capacities in the United States and China, associated with the lower level of global consumption, resulted in

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international spreads reaching their historic lows throughout the year, pressuring the profitability of the global chemical and petrochemical industry.

In this context, Braskem's recurring EBITDA was US$211 million in the fourth quarter, totaling US$743 million in 2023. The company recorded a loss of approximately US$935 million in 2023, with a recurring cash consumption, excluding payments related to Alagoas, of US$375 million in the year.

The company continues to have a robust liquidity position, ending the year with US$ 3.6 billion in cash, an amount sufficient to cover debt maturities over the next 7 years. This calculation does not take into account the available international revolving credit line in the amount of US$ 1 billion until 2026.

In addition, Braskem's debt profile remains very long, with an average maturity of 12 years, with more than sixty percent due after 2030. The company ended the year with leverage of 8.12x, a reduction of approximately 4x compared to the previous quarter.

Finally, it is important to note that braskem is committed to the company's resilience and financial health. Therefore, in 2023, the implementation of resilience initiatives positively impacted EBITDA by about US$390 million and cash generation by about US$ 525 million. In the next slide, I will comment on the company's main operational and strategic highlights.

Regarding to operational highlights, the global accident frequency rate decreased by 2% compared to the previous quarter, ending the year with a rate of 1.08 events per million hours worked, a result below the industry average.

In Mexico, 4Q23 was marked by the recovery of production levels after the unscheduled shutdown in 3Q23. With an increase in the utilization rate by 18 p.p. when compared to the third quarter of 2023. In the year, Mexico's utilization rate increased by 5 p.p. to 77%. It is worth noting that this is the highest annual utilization rate in Mexico in the last five years.

In the United States, polypropylene plants located in Oyster creek, Neal and La Porte performed above the industry average in the period, reporting production records.

Finally, I would like to present some of the company's strategic highlights in 2023. Braskem maintained its efforts, balancing capital allocation, to continue advancing its growth agenda. In the year, the performance of the industrial decarbonization program was positive, totaling 80 initiatives predicted in the roadmap for 2030.

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On the technology and innovation front, around US$122 million were invested in 2023, reinforcing our commitment to this important pillar of our strategy. As for the growth avenues, important advances have been made:

On the traditional avenue, the financing of the construction of the ethane import terminal in Mexico was completed by Terminal Química Puerto México ("TQPM"), this investment represented another important step towards greater availability and stability of raw material supply for Braskem Idesa.

Also on this avenue, in March, the company announced a new wind energy purchase agreement with Casa dos Ventos, which provides for supply for up to 22 years. And in November, the biomass-based renewable energy production plant, developed by Veolia in partnership with Braskem, was inaugurated. The steam generated via renewable sources is already being supplied to the company's plants in Alagoas and will contribute to the potential reduction of about 150 thousand tons of greenhouse gases annually.

In the bio-based avenue, the expansion of green ethylene production capacity to 260 kt/year was completed, an increase of 30% compared to the previous capacity. In addition, in august, Braskem and SCG Chemicals signed an agreement to form a joint venture to create Braskem Siam, with the objective of producing green ethylene from Braskem's proprietary ethanol dewatering technology in Thailand.

Finally, in the advances of the recycling avenue, we can highlight the conclusion of the acquisition of 61.1% of Wise Plásticos, a Brazilian company in the mechanical recycling sector, and the formation of the Upsyde, joint venture between Braskem and Terra Circular in the Netherlands, which holds patented and proprietary plastic waste recycling technology. Finally, we have also signed contracts with suppliers of raw materials, such as Nexus in the United States and Vitol in Europe, ensuring strategic partnerships in this value chain.

Moving on to slide number 7, where I will present the operational performance of the Brazil segment.

The utilization rate of Brazilian petrochemical plants in the fourth quarter was 66%, 2 p.p. lower than the third quarter, mainly due to the scheduled shutdown at the Bahia petrochemical plant.

In the Brazilian market, the sales volume of resins was 11% lower than in the previous quarter, mainly explained by the strategy of prioritizing higher value- added sales and the seasonality of the period. On the other hand, greater commercial opportunities for PE and PP in South America increased the volume of the company's exports.

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As a result, the segment's recurring EBITDA in 4Q23 was US$123 million, an increase of 7% from the prior quarter and representing 52% of the company's consolidated EBITDA for the quarter. Moving on to the next slide.

The production of green ethylene was impacted by restrictions in the supply of ethanol in December, due to weather conditions in the region of the petrochemical complex of Rio Grande do Sul. Thus, the utilization rate was 62%, a reduction of 46 p.p. compared to the previous quarter. It is important to note that utilization rates in the third and fourth quarters of 2023 already reflect the addition of green ethylene capacity.

Regarding sales, in the last quarter, volume increased by 17%, mainly due to higher seasonal demand supported by the availability of inventory built after the capacity expansion. As a highlight on this front, Braskem concluded the update of the green pe life cycle assessment, confirming the product's negative carbon footprint. The update of the study shows that each kilogram of green pe avoids the emission of approximately 2.12 kilograms of CO2 equivalent. Moving on to the next slide.

In the United States and Europe segment, the utilization rate in the last quarter was 82%, in line with the previous quarter and the average for the year, which ended at 81%. On the other hand, sales volume decreased by 6% compared to the third quarter. In the United States, the sales volume was impacted by the seasonality of the period and the destocking process in the transformation chain.

In the fourth quarter, recurring EBITDA was US$ 87 million, 45% higher than 3Q23 and representing 37% of the company's consolidated recurring EBITDA in dollar terms in the quarter. This increase is mainly explained by the optimization of the sales mix and the flexibility in the purchase of propylene in the United States. Moving on to the next slide, we'll talk about the Mexico segment.

In Mexico, the utilization rate for the quarter was 84%, an increase of 18 p.p. compared to the previous quarter after the resumption of operations. It is important to note that the average supply of ethane by Pemex was 35 thousand barrels per day in the quarter, above the minimum contractual volume, and the average import of ethane through the Fast Track solution was 18 thousand barrels per day.

On the commercial front, sales volume was lower when compared to the previous quarter, mainly due to the recomposition of inventories. Recurring EBITDA in the period was US$26 million, almost three times higher than the result of the third quarter and represented 11% of the company's consolidated recurring EBITDA in dollars in the quarter.

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On slide 12 I will talk about the consolidated financial highlights.

In the fourth quarter of 2023, recurring EBITDA was US$211 million, an increase of 13% compared to the previous quarter. This increase is a reflection of the prioritization of sales with higher added value, the optimization of the sales mix, the higher spreads in the international market of resins and chemicals for Brazil, and pe in Mexico.

For the year, recurring EBITDA was US$743 million. The decrease compared to 2022 is mainly explained by the lower petrochemical spreads in the international market in practically all segments. On the other hand, these effects were partially offset by the impact of the resilience and financial health actions implemented in 2023, including the sales prioritization and optimization strategy, the reduction of approximately US$60 million in general and administrative expenses and US$30 million in other fixed costs and the gains from the monetization of credit rights and tax assets. Moving on to the next slide.

Regarding consolidated cash flow, braskem presented a recurring cash consumption of approximately R$ 1.9 billion mainly explained by the 64% reduction in recurring EBITDA compared to 2022, due to the global industry's downturn.

This effect was partially offset by the positive change in working capital of R$2.5 billion as a result of the implementation of initiatives to optimize operating working capital, and by the corporate investment in capex lower by R$245 million compared to the estimate at the beginning of the year, as a result of the prioritization of investments, and for the lowest income tax payments in the year.

If we add the payments related to Alagoas, cash consumption totaled about R$4.6 billion in 2023. Moving on to the next slide. Braskem ended 2023 maintaining a very long debt profile, with an average payment term of about 12 years, with 61% of the debts concentrated as of 2030.

The company's robust liquidity level is sufficient to cover its obligations for the next 7 years, not considering the international revolving credit facility in the amount of US$1.0 billion that is available until 2026. At the end of the quarter, corporate leverage was 8.12x, a decrease of approximately 4x compared to the third quarter.

Net debt remained in line with the last quarter and the average of the last 7 years, ending the year at approximately US$5.1 billion. In relation to the agencies, Fitch ratings e S&P rating downgraded Braskem's rating to 'BB+'.

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It is important noting that the company maintains its commitment to maintaining its liquidity position, cost discipline and continuing to implement measures to reduce its corporate leverage and recover its investment grade. Moving on to slide 16. Next, I will comment on the main updates of the work fronts in Maceió, starting with the relocation and compensation front, on the next slide.

The residents' relocation program continues to advance and, by February 2024, 99.6% of the program had already been executed, with 100% being the level of evacuation in the risk area and 98% in the monitoring area, according to map number 4 of the Civil Defense.

As for the proposals of the financial compensation and relocation support program (the PCF): more than 99% of the estimated proposals have already been submitted, of which about 97.9% have already been accepted and about 95.1% have already been paid, with an overall acceptance rate of 99.4%.

The total provision within this front so far was R$5.7 billion, of which R$4.5 billion disbursed and R$1.4 billion in balance at the end of the fourth quarter of 2023. Moving on to the next slide.

With respect to the closure and monitoring of the mines, I will present below the current status of the closure plan. The sand filling group has a total of 13 mines, of which 5 are completed and 2 are in progress. To achieve a definitive solution, 6 cavities, which were prior in the monitoring group, were recently added in the sand filling and are now in preparation phase.

The natural filling group has a total of 6 targeted cavities, of which 5 are completely filled. Cavity 18, which was recently moved to this group, it is in the evaluation phase, with an indication that no sand filling measures will be necessary. Finally, from the 16 mines directed to the plugging and pressurization group, 7 are already pressurized and are being monitored, and 9 are in the confirmation stage of completion.

On this front, R$3.8 billion have already been provisioned so far, of which R$2.4 billion have already been disbursed and R$1.6 billion in balance at the end of the fourth quarter of 2023. The planned actions mentioned are estimated to be completed by 2026. Moving on to the next slide.

Regarding the progress of socio-urban measures, 6 urban mobility projects are in the physical execution phase, out of a total of 11 planned. The estimated completion is by 2026.

On the Mutange slope, the overall progress of the project is 69%, with demolition activities already completed and the project expected to be fully completed in

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2024. The socio-urban action plan is underway with 23 actions validated by the authorities, of which 2 are in execution.

In Flexais, of the 23 socioeconomic measures provided for in the term of agreement, 12 were implemented in the social and services axes, one civil work has been completed and another is in progress.

In the financial support program, about 98.8% of the proposals were paid. On this front, R$1.7 billion have already been provisioned so far, with about R$500 million already disbursed and R$1.4 billion in balance at the end of the fourth quarter of 2023. Moving on to the next slide on the financial provisions and other updates.

The total of provisions related to Alagoas registered so far is R$15.5 billion, of which R$9.5 billion have already been paid, approximately R$1.1 billion are recorded in other obligations to be paid and about R$500 million referring to the adjustment to present value. Finally, at the end of 2023, the provisioned balance was R$5.2 billion. In addition, the actions of the environmental plan according to the provisions made are still in progress and are expected to be completed in 2028. Moving on to the next slide.

To conclude this session, I would like to emphasize that over the last four years, braskem has permanently reaffirmed its commitments to Maceió with actions and programs on the social, urban and environmental fronts. Recently, the reaffirmation of these commitments was disclosed, in order to bring more transparency in the monitoring of actions and programs.

It is important to highlight that, above all, Braskem's priority is and always has been people's safety. Moving on to the last topic on our agenda, on slide 23, where we will bring the company's perspectives for the future.

In the next quarter and in 2024, the outlook for the Brazil segment is positive, with an increase in utilization rates, due to the resumption of operating levels after scheduled shutdowns in 2023, and the expectation of an increase in sales volume, especially in the Brazilian market. As for spreads, the trend, according to external consultants, is for an increase in the next quarter, due to higher resin prices in the international market, with a stabilization trend throughout the year.

For green PE, the expectation is also positive both in the operation rate and in sales volume, due to the resumption of the supply of raw materials and the consolidation of the increase in production after the expansion project, reflecting in a higher sales volume.

In the United States and Europe, there is a stabilizing trend in plant utilization rates both in the next quarter and in the year. On the commercial front, sales

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volumes are expected to increase in the short term, compared to seasonality at the end of the year, but should remain stable year-on-year. Regarding spreads, according to external consultants, the outlook is for an increase in the short term, due to the increase in the price of resins, while, for the year, the expectation is to maintain the level of spreads.

Finally, in Mexico, the trend for the first quarter is to maintain production, given the recent increase in the utilization rate, with greater product availability for sales and higher spreads due to the downward trend in ethane prices and increase in pe prices. For the year of 2024, the outlook is positive in all indicators. Moving on to the next slide.

In 2024, Braskem will continue to focus on the value creation fronts, which seek to balance the optimization of the current asset portfolio and the execution of growth and transformation investments, to ensure profitability and financial health. Following, I will comment on these two axes of value creation for the company.

In 2023, on the resilience and financial health front, the implementation of the mapped corporate initiatives positively impacted EBITDA by US$390 million and cash generation by US$525 million.

For 2024, the company will continue to focus on implementing the mapped initiatives and identifying new opportunities. The combined initiatives have a potential positive impact of approximately US$280 million on EBITDA and US$400 million on cash generation. Throughout 2024, we will reinforce this performance with initiatives such as strengthening the commercial strategy, with the prioritization of higher value-added sales.

Measures to reduce costs and increase productivity will continue to be part of the company's day-to-day operations, with a potential positive contribution of approximately US$80 million through new initiatives.

For 2024, the expected reduction in investments is approximately US$300 million, 37% lower than the historical average of the last 7 years with no impact on the reliability and safety of industrial assets. This reduction will be made possible by optimizing the investment portfolio and prioritizing initiatives based on return and the selection of partnerships.

On the working capital front, the company will continue to work on various efficiency initiatives for the integrated planning cycle, seeking to generate results through the optimization of its operating cycle.

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Finally, the company continues to map and evaluate opportunities to monetize adjacent assets, such as credit rights, taxes to recover and other assets, as well as evaluate structures to enable these monetizations. Moving on to the next slide.

The company's growth strategy will continue to advance in the three avenues, namely, traditional and decarbonization, bioproducts and recycling. By 2030, the initiatives being implemented, mapped and under study add up to a potential for value creation of approximately US$1 billion.

The implementation of Braskem's corporate strategy for 2030, finally, based on our pillars, avenues and foundations, will continue to balance capital allocation with the creation of shareholder value and the generation of positive impact for all stakeholders. Going to the last slide.

Finally, I would like to highlight Braskem's priorities for 2024. Firstly, the company remains focused on fulfilling the commitments established in the agreements signed in Maceió.

As for assets, Braskem reinforces its strategy of optimizing asset management, maintaining cost discipline, and increasing productivity and competitiveness.

We will also continue to promote discussions about the competitiveness of Brazilian industry, seeking measures that guarantee the competitive equality of Brazilian industry.

Initiatives to preserve finances, deleverage and reduce cash requirements continue to be priorities for the company's financial resilience and health.

In addition, the prioritization of the company's long-term investments will continue to be a central part of our strategy, as well as the implementation of innovation and digital transformation initiatives that support such growth.

In Mexico, we will continue our efforts to pursue value-creation initiatives and to complete the construction of the ethane terminal.

Finally, I'd like to reinforce that safety is and always will be on focus at Braskem's operations, as a non-negotiable value.

Thus, we conclude the presentation of Braskem's fourth quarter and full year of 2023 results. Thank you very much for your attention. We will now begin the Q&A session.

Operator: Ladies and gentlemen, we are now going to start the Q&A session. To ask a question, please click on "raise hand" function or send your question using the Q&A window. To remove your question from the queue, click on the Q&A

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window. If you're using your phone, press star 9 on your touchtone phone. When your name or number is announced, press star 6.

Our first question comes from Luiz Carvalho with UBS. You may proceed, sir.

Luiz Carvalho: Hello, Mr. Bischoff. Hi, Pedro. Hi, Rosana. Thanks for taking my question and also thanks for sharing these value generation data in the mid and long-term. Now, if I may, I have three quick questions. The first, I think, I'm not sure if Pedro was giving an interview or what, but he mentioned that there are two ongoing due diligence processes right now. Could you please give some details about these processes, who they are? One I think is Adnoc, the other is probably Petrobras, I imagine. Could you please give us a bit more visibility with regard to the timing and when you think these due diligence processes will conclude?

The second is about Alagoas. You made an additional forecast of R$1 billion in the fourth quarter. Now, of course we would really appreciate any kind of an update about what is yet to come and everything that's being discussed in the CPI process in the Brazilian Senate, and also, of course, if there are any better ideas as to what's going on. Of course, we're now in March, but if there's anything we can anticipate that would be helpful.

And lastly, we've been looking at the spreads with CNA and, in fact, there was an improvement in the first quarter now, but they do still have a forecast of a drop in the second quarter and later more of a flat period before moving up again. So I'd like to pick your brains a little bit about what you think about the spreads and forecasts. Thank you.

Pedro de Freitas: Hi, Luiz. This is Pedro. I hope you're doing well. It's good to talk to you. So let me answer the first two questions, and then I'll ask Rosana to address the question about spreads.

With regard to the due diligence processes, we've got Petrobras who did their due diligence last year. It is basically complete. Of course, there's always a question or two remaining leftover, but as far as we're concerned, it's pretty much complete. And then we have two other players, one is Adnoc, as you mentioned, and there's another one that's also doing their due diligence.

Now, we don't control their timing. So I can't tell you "Oh, it's going to complete on X date", it really depends on their dynamic and on what they're going to need as far as information, what kind of detail they're going to want to look at. So we don't control that timing.

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