Braskem S.A. (NYSE:BAK) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good morning. Thanks for waiting. Welcome to the Braskem Video Conference to present our Earnings Results for the First Quarter of 2023. Today, we have Mr. [Roberto Bishop] (Roberto Simoes), CEO of Braskem; Pedro Freitas, CFO of Braskem, and Rosana, Investor Relations Director. Please note that this event is being recorded. All participants will only hear the Braskem teleconference. Next, we will begin the Q&A session and we would like to take any questions you may have. If you have any issues or requests for assistance, please request assistance using the button here on this call. This event is also being broadcast live online through webcast and can be connected through www.braskem.com/ri. You will also find our presentation there.

The slide deck is under your control. The audio will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions to the Braskem website. They will be answered by the IR team after the conference is finished. We’d also like to mention that any comments that may be made during this teleconference with regard to financial results, projections, or any other opinions, are only considered as projections. These results always pertain to uncertainty and there is always risk that is possible. Please be aware that macroeconomic conditions, industry conditions and other factors can also cause results to differ materially from those expressed in such forward-looking statement. Now, I’d like to turn the conference over to missus Rosana Avolio, Investor Relations, Strategic Planning and Corporate Market Intelligence Director.

Mrs. Avolio, you may begin your presentation.

Rosana Avolio: Good morning. Ladies and gentlemen, and thank you for participating in Braskem’s results conference call. Today, we’ll present the results for the first quarter of 2023. Moving on to slide number three. I will comment on the company’s main highlights in the period. In the first quarter of 2023 Braskem reported recurring EBITDA of $205 million and net profit of $184 million and a cash consumption of $261 million. Regarding the financial highlights, Braskem continue to present solid credit metrics with a very long debt profile in a stronger liquidity position, which guarantees the coverage of debt maturities in the next six years. As for the operational highlights of the company registered the global accident frequency rate with and without leave of 1.08 events per 1 million man hours worked resulting in an 8% drop, compared to the same period in 2022, reinforcing that safety is and always will be a non-negotiable value for Braskem.

Furthermore, given the better global industrial activity, the company’s operating performance in the period was higher than the previous quarter. With an increase in utilization rate in all regions and increased sales volume in all segments. As far the strategic highlights, Braskem progress in the project to expand the current capacity of green ethylene by 30% with fiscal progress reaching 95% until March 2023. And another agreement for the purchase of wind energy was executed in the period. In addition, Braskem Idesa together with Advario made in advance in the construction of the ethane terminal in Mexico, reaching 34% of fiscal progress in the period. Let’s move on to the next slide. In the first quarter of 2023, the recurring EBITDA was a rounded $105 million, driven mainly by the better performance of global industrial activity, an inventory consumption in the transformation chain, impacting the petrochemical spreads in the international market.

Therefore, we had an increase in sales volume in all reportable segments of the company. Let’s move to the next slide. We’ll cover the highlights in Brazil segment. In the first quarter of 2023, the petrochemical crackers in Brazil operated at an average utilization rate of 77%, 5 percentage points higher than the previous quarter, mainly explained by the adequacy of production considering the better demanding period. In this scenario, the sales of volume are present in the Brazilian market increased by 3%, compared to the previous quarter, and the volume of exports from Brazil increased by 10% and compared to the fourth quarter of 2022 due to better opportunities in the international market. In this context, Brazil’s recurring EBITDA in the first quarter of 2023 was $122 million, representing 49% of the companies consolidated recurring EBITDA.

Moving on to the next slide. We’ll talk about the action fronts related to the geological event in Alagoas. The total amount of provisions booked to to-date for the Alagoas geological event is BRL13.2 billion, as we can see in the left chart. BRL7.5 billion have already being disbursed. The outstanding amount of the provision, which ended the first quarter of 2023 at approximately BRL6.1 billion with 67% of the total amount provision booked under the short-term and 33% under the long-term. It’s important to point out that Braskem cannot eliminate future developments related to the matter or its associated expenses. And the costs being incurred by Braskem may differ from its estimates or accrued amounts. Regarding relocation and compensation, on the right of the slide, Braskem continues to advance with the process of relocation and financial compensation of the families located in neighborhoods and risk areas in Marseille.

The number of proposals for financial compensation submitted reached 18,933 at the end of the quarter, representing approximately 99% of the estimated total with approximately 93% of the proposals accepted. Additionally, the pre-allocation program had 99% of its education completed in March 2023. Moving on to the next slide, but still on the geological event in Alagoas, we will present the progress of the well closures and monitoring front, as well as the social urban measures. On the closing and monitoring of wells action front, as of the end of March of 2023 of the 35 well cavities nine are in the Sand Backfilling Group with one already completed and three are in advanced stage of filling. Additionally, I would like to highlight the main advances of social, urbanistic, and environmental measures.

All 11 urban mobility actions are in progress, eight of which already have their executive project concluded, and three of them are already in the construction phase. Advances in the project of urban integration and development of Flexais and the environmental plan actions have already been started. Let’s move on to the next slide, please. This slide presents the highlights of operations in the United States and Europe. In the first quarter of 2023, the PPE plans in the United States and Europe operated at a capacity utilization rate of 81%, an increase of 6 percentage points in comparison to the fourth quarter of 2022. This improvement is explained mainly by the inventory management during the quarter, due to the scheduled maintenance stoppages in the United States and higher availability of feedstock in Europe.

Regarding sales, United States and Europe segment, registered a sales volume of 518 tons in the quarter similar to the previous quarter. Considering that the segments recurring EBITDA in the period was $98 million, that represents 40% of the consolidated recurring EBITDA. Let’s move on to the next slide, when we’ll talk about Mexico. In Mexico, the utilization rate was 72% in the first quarter of 2023. 3 percentage points higher than the fourth quarter of 2022. This increase reflects a higher ethane supply by Pemex in the period. Considering the higher feedstock availability and the demand increase in the region, sales volume was 11% higher when compared to the previous quarter. The better operational performance in Mexico combined with the increase in the international spreads resulted in a recurring EBITDA of $27 million in the first quarter of 2023, which represents 11% of Braskem’s consolidated recurring EBITDA.

Moving on to the next slide, please. Regarding consolidated cash flow, Braskem presented a recurring cash consumption of BRL677 million in the first quarter of 2023. The consumption explained mainly by the working capital, which was impacted by the increase in sales volume, higher international reference prices, and also by the typical concentration of semi-annual interest payments on bonds in the international market during the period. Let’s move on to the next slide, please. Braskem ended the quarter maintaining a very long debt maturity and strong liquidity position with around 6% of its debts coming due as of 2030. The current liquidity position covers all that is coming due in the next 76 months. Not considering the international revolving credit facility in the amount of $1 billion available until 2026.

Going to the next slide, we will talk about credit metrics, and corporate leverage. At the end of the quarter, the net debt level remained in line with the previous quarter, and corporate leverage was 3.86 times, due to the lower EBITDA in the quarter, when compared with the same quarter of the previous year. Additionally, Braskem continues with solid credit metrics a very comfortable liquidity level and an average debt term of approximately 13-years. Let’s move to the next slide, please. As previously released, Braskem has established several initiatives to maximize its cash generation considering the macroeconomic dynamics. Regarding initiatives with an impact on EBITDA, we continue advancing in our initiatives related to the optimization of revenues, seeking commercial opportunities with improvements of international spreads.

Additionally, regarding initiatives with an impact on fixed and variable costs, until this moment we are reaching our expected target for the year. As for the transform for value program, it ended the first quarter of 2023 with an accumulated gain of approximately an additional $28 million, compared to 2022. Regarding initiatives with an impact on cash generation, we have made advances on all fronts with a focus on the non-recurring monetization initiatives, which reached approximately 75% of its completion in the first quarter of 2023. It’s worth reinforcing that the company remains committed to the implementation of all initiatives mapped and the identification of potential new opportunities. Let’s move on to the next slide, please. As part of our sustainable development strategy through innovation, we carried out the expansion of — one of the company’s main technology and innovation centers.

In this expansion, approximately BRL108 million were invested in physical infrastructure and state-of-the-art laboratory equipment to accelerate the company’s innovation process. The new building represents an increase of 25% in the research and development area of the technology and innovation center of Rio Grande do Sul. It’s worth remember that Braskem has innovation as a strategic pillar. And in this sense, in 2022, BRL514 million were invested in innovation and technology, including in innovation and technology centers, technical and research centers, and in pilot plants in several regions where we operate. The project pipeline currently has a 198 projects with 360 dedicated members and 450 customers served globally. Moving on to the next slide.

Regarding the advances in the ESG agenda, we recently published our integrated report, which meets internationally recognized reporting standards and shows the company’s advances in the strategy for sustainable development. Additionally, in early February 2023, the company concluded the acquisition of Wise’s equity stake. And we started to consolidate sales volume from Wise. This acquisition reflects the strategy of expanding product sales with the recycled content and is aligned with the Braskem’s commitment to eliminate plastic waste. Finally, during the quarter, the company closed with Casa dos Ventos, it’s six wind power purchase agreement. This contract foresees a supply of up to 22-years for Braskem, and added to the other agreements, the company estimates a reduction of 3.2 million tons of CO2 equivalent during the contract period.

This agreement is aligned with our commitment to reduce 15% of Scopes 1 and 2 emissions by 2030. On the next slide. In the first quarter of 2023, we observed an improvement in spread and international markets influenced mainly by the improvement in global industrial activity in addition to lower inventories in the transformation chain at the end of the zero COVID policy in China. On the other hand, they enter into operation of new PE and PP capacity in the United States and China during the year may put pressure on spreads according to the projections of external consultants. Considering a longer view, the consensus is for a positive trajectory for the petrochemical cycle as a result of the expectation that the growth in demand over the next few years may be greater than expected, increase in supply.

As we can see in the chart. Going to the next slide where we’ll present to the prospects for 2023. For Brazil segment expectation is for the second quarter of 2023 are for maintenance of ethylene production level observed in the previous quarter even with the scheduled maintenance stoppages at the Rio de Janeiro plant during the period. On the commercial front, the resin volume is expected to remain stable. In the United States and Europe, the utilization rate should remain stable due to the scheduled maintenance stoppages in the United States for the period. However, the expectation is that sales volume will increase in the period, reflecting the reduction of inventory levels in the chain. Finally, in Mexico production is expected to increase, due to the greater availability of ethane.

Consequently, the sales volume is also expected to increase. According to the main external consultants, the expectation is for the maintenance of the petrochemical spreads in the period. Now moving on to the next slide. We reinforce the main priorities for the year, take into consideration our strategic pillars. Our first priority is related to the optimization of asset operations with a focus on cost discipline to capture signatures in all regions. The second priority is to continue implementing financial preservation initiatives, creating value for our shareholders. Following here, in relation to the growth strategy, the focus is on the execution of investments to eliminate plastic waste and combat climate change in addition to following the implementation of the initiatives related to social responsibility and human rights.

Regarding innovation, the company is focused on expanding strategic innovation and digital transformation. And finally, to continue advancing in all action fronts related to the geological event in Alagoas for fulfilling the commitments established in the agreements. Finally, I would like to reinforce that safe operations are and always will be the focus on Braskem’s operations as a permanent and non-negotiable value of our strategy. That concludes today’s presentation of Braskem’s results for the first quarter of 2023. Thank you all for your attention. Let’s move on to the Q&A session now.

Q&A Session

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Order first question comes from Pedro Soares with BTG Pactual.

Operator: Our next question comes from Vicente Falanga with Bradesco BBI.

Operator: Our next question comes from Bruno from Morgan Stanley.

Operator: Our next question comes from Gabriel Barra with Citibank.

Operator: Our next question comes from Luiz Carvalho with UBS.

Operator: Our question comes from Leonardo Marcondes with Bank of America.

Operator: [Operator Instructions] That concludes the Q&A session for the day. I would like to turn the call over to the company for their final remarks. You may proceed.

Operator: That concludes Braskem’s video conference for today. Thank you very much for your participation, and thank you very much for using Chorus Call.