Nov 8, 2013
Executives
Roberta Varella Mario Augusto Da Silva - Chief Financial and Investor Relations Officer Carlos José Fadigas De Souza Filho - Chief Executive Officer
Analysts
Denis Parisien - Deutsche Bank AG, Research Division Christopher Buck - Barclays Capital, Research Division
Operator
Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to Braskem Third Quarter 2013 Earnings Conference Call.
Today with us, we have Carlos Fadigas, CEO; Mario Augusto Da Silva, CFO; and Roberta Varella, Head of Investor Relations. We would like to inform you that this event is being recorded.
[Operator Instructions] We have 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 website.
We remind you that questions, which we will be answered during the Q&A session, may be posted in advance on their website. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of Securities Litigation Reform Act of 1996.
Forward-looking statements are based on 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 could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Ms.
Roberta Varella, Head of IR. Ms.
Varella, you may begin the conference. [Audio Gap]
Roberta Varella
Conference call. Today, we will be commenting on our results for the third quarter and the 9 months of 2013.
First, we'd like to remind you that pursuant to Federal Law 11638 as of 2007, the results present in today's presentation reflect the adoption of International Financial Reporting Standards. Note also that as of the second quarter of 2012, the company began to recognize investments in jointly controlled companies using the equity method and no longer based on proportionate consolidation.
The company also currently has assets in the process of divestment. And therefore, the results are recognized as discontinued operation results.
The information in today's presentation was reviewed by the independent external auditor. Let's go to next slide, where we'll begin our comments.
On Slide 3, we present the highlights of the third quarter of 2013. The average capacity utilization rate of Braskem's crackers stood at 92%, down 2 percentage points from the previous quarter.
The decline was due to the power outage that affected Northeast of Brazil in late August and forced -- and scheduled shutdown at Braskem's plant in the region. The Brazilian market of thermoplastic resins amounted to 1.3 million tons, decreasing 8% from the second quarter when demand presented a sound performance.
Compared to the same quarter of last year, the Brazilian thermoplastic resins market decreased by 3%. In this scenario, Braskem's sales came to 898,000 tons or 6% lower than the second quarter, which led to a 2-percentage-point recovery in its market share.
EBITDA reached BRL 1.6 billion, benefit from the contribution margin and the positive impact from depreciation in the Brazilian real. Another factor was the positive impact from the recently completed tax rate relief on raw material purchase, which was one of the proposals made by the chemical industry and was approved by the federal government in September.
In response to this measure, which strictly support the recovery in the industry's competitiveness and attracts new investments, Braskem, in partnership with Braskem manufacturers, developed the plan to incentivize competitiveness in the plastics chain, called PIC. The initiative has included promoting exports of manufactured goods, supporting relations and strengthening the advantage of plastic application.
In keeping with the latest strategy of adding value to the existing chains, Braskem announced the execution of a memorandum of understanding with Styrolution to assess the possibility of forming a joint venture in Brazil. The objective is to analyze the economic feasibility of installing a plant with annual production capacity of 100,000 tons of styrenics specialties and the copolymers like ABS and SAN.
Braskem also announced that we will invest close to BRL 50 million to expand and convert one of its polyethylene production lines in Bahia to produce metallocene-based polyethylene, which has a more modern technology and intends to meet the needs of plastic films converters. As part of the strategy to diversify our feedstock matrix, the construction on the new petrochemical complex in Mexico continues to advance, with the project reaching 48.4% completion.
In line with this commitment to financial health, Braskem's leverage, measured by the ratio of net debt-to-EBITDA, reached 2.73x in U.S. dollar, a decline of 9% from the second quarter, mainly explained by EBITDA growth in the last several months and a reduction in FX.
Let's go now to Slide 4. Slide 4 shows the performance of the Brazilian markets of thermoplastic resins and Braskem's sales.
In the third quarter, apparent consumption of thermoplastic resins was 1.3 million tons, down 8% from the previous quarter, explained by the slowdown in production and the stocking trend observed in the second quarter. Braskem's sales followed the weaker demand and declined by only 5%, which led to a 2-percentage-point recovery in its market share, which ended the quarter at 68%.
Compared to the third quarter of 2012, when the economy responds to the government's stimulus measures, Brazilian resin demand held by 3%. In the first 9 months of the year, Brazilian consumption of thermoplastic resin's grew by 9% driven by the good performance of certain factors such as agricultural, automotive and infrastructure.
Meanwhile, Braskem's sales grew by 7%, impacted by the scheduled shutdowns at polypropylene and PVC units. Let's go to the next slide, please.
Slide 5 will tell you the factors that increased EBITDA in the third quarter of 2013 compared to the previous quarter. Braskem's consolidated EBITDA was BRL 1,650 million, a growth of 57%, mainly explained by the better contribution margin, which benefits from sales of resins and basic petrochemicals produced from less expensive feedstock; the 3-month moving average of the naphtha price, which is the reference for domestic supply, declined by 5% between the periods; the stability international spreads for resins and basic petrochemicals; and the positive impact from the PIS and COFINS tax rate relief on raw material purchase.
Another factor impacting EBITDA performance was the U.S. dollar appreciation, which generated a positive impact of BRL 274 million, formed by a positive impact close to BRL 1 billion in revenue and a negative impact of BRL 750 million on costs.
Let's go now to Slide 6. This slide presents the factor that influenced EBITDA in the first 9 months of 2013.
Braskem's consolidated EBITDA reached BRL 3.6 billion, growing by 42% from the same period last year. This performance is mainly explained by improvement in contribution margin, which benefit from the recovery of the spread for resins and basic petrochemicals in international markets, which increased by 23% and 13%, respectively; the positive impact in the quarter from the 3-month moving average for naphtha prices; the higher sales volume in the domestic market; and the tax relief on raw material purchase.
Another factor was the appreciation in the average U.S. dollar exchange rate, which generated positive gain of BRL 664 million, formed by a positive impact on resin of BRL 2.8 billion and a negative cost impact of BRL 2.1 billion.
Let's go to the next slide, please. Slide 7 shows Braskem's debts.
Since the investment made in Mexico project by the subsidiary, Braskem-Idesa, is financed under our project finance model, with debt repaid using the project from cash generation, the analysis here presented of Braskem debt excludes this amount. On this basis, on September 30, Braskem's gross debt stood at $8.1 billion or 5% lower than on the end of June, which is mainly explained by the reimbursement of the bridge loan of $649 million advanced by Braskem to the Mexico project.
The amount was repaid to the company following the first withdrawal of project finance funds by the subsidiary Braskem-Idesa in the amount of $1.5 billion. In Brazilian real, gross debt fell by 4%.
At the end of the quarter, 69% of gross debt was denominated in U.S. dollars.
The balance of cash and investments remain virtually stable in relation to the second quarter, at $1.6 billion. In line with this is strategy of maintaining high liquidity and its financial health, the company also maintains 3 revolving standby credit facilities, with two in the aggregate amount of $600 million and one in the amount of BRL 450 million, which do not include any restrictive covenants on withdrawals during the times of diverse market and which will not happen in the period.
As a result, Braskem's net debt stood at $6.6 billion or BRL 14.6 billion, which represent decrease of 6% and 5%, respectively. At end of the period, 73% of net debt was denominated in U.S.
dollars. The EBITDA growth in the last 12 months of 12% to $2.4 billion, combined with the reduction in net debt, led to a 9% reduction in financial leverage measured by the ratio of net debt-to-EBITDA in U.S.
dollars from 3x to 2.73x. In Brazilian real, the leverage ratio decreased by 12% to 2.9x.
On September 30, the average debt term was 15 years. And considering only the dollar-denominated debt, the average debt term expands to around 21 years.
Only 3% of the company's total debt matures in 2013, and it's high liquidity ensures that its cash and cash equivalents cover the payment of obligations maturing over the next 23 months. Considering the revolving standby credit facilities, this coverage extends to 33 months.
In line with the strategy to maintain that profile and its commitment to maintain comfortable liquidity levels, on October 25, Braskem renegotiated, to 2021, the maturity of BRL 1 billion in export credit notes that previously was maturing in 2014 and 2015. Let's go now to Slide 8.
This slide shows CapEx in the first 9 months of the year. Maintaining its commitment to making investments with returns above the cost of capital, Braskem made operational investments totaling BRL 1.7 billion.
Of this amount, 42% or BRL 716 million were allocated to the project in Mexico. The deviation from the amount initially planned for the project in 2013 is explained mainly by the disbursement resulting from the delivery and assembly of large pieces of equipment on the site.
The advanced stage of the project construction and the delay by the Mexican government in reversing the amount of VAT tax paid on the investment made. This amount was also impacted by the exchange variation effect on the translation of the dollar-denominated investments to Brazilian real, which is the company's functional currency.
The company also invested BRL 836 million in maintenance in order to keep its assets operating at high levels of operating efficiency and reliability. For 2013, the initial investment estimate of BRL 2.2 billion should reach some BRL 2.5 billion, with the same reason described above.
Let's go to the next slide, please. Slide 9 covers the global scenario in the petrochemical industry.
International spreads stayed at high levels in the third quarter, affected by the better demand from China and by the positive signs coming from the Eurozone and U.S. economy.
The average naphtha price, which is influenced by oil price dynamics, increased by 9% when compared to the second quarter. Prices for resins and basic petrochemicals follow the same trend, increasing by 4% and 3%, respectively.
The expected outlook for the short term is that spreads in the international market will remain similar to the levels presented on the last 2 quarters. For the mid to long term, spreads are expected to have gradually recovered, reflecting a better global demand.
And certainty regarding the start up of some projects is another positive risk factor for the recovery in profitability of the world petrochemical industry. The new gas-based projects announced in the United States shall be commissioned as of 2017, which should resume pressure on global spreads.
However, it's important to note that this new capacity is not expected to retain the pricing dynamics of the global petrochemical market, which we will continue to use naphtha as its main feedstock. Let's go to the next slide, please.
On this next slide, we present the outlook in main areas on which management is currently focused. In the economic scenario, the uncertainties persist, with signs of global growth in emerging countries and of recovery in developed countries.
The geopolitical issues in the Persian Gulf region also generated volatility and affect the dynamics of oil and naphtha price. This dynamic also affects the behavior of the U.S.
dollar, which change the appreciation trends against the Brazilian real and should present a lower average exchange rate in the fourth quarter of the year when compared to the third quarter. The approval of the measure to release the PIS and COFINS tax rate on raw material purchases has already began to generate a positive impact.
However, the industry continues to suffer from the issues related to feedstock competitiveness, infrastructure, productivity and exchange rates, which bring forth the need for a more comprehensive industry policy that continues to train Brazilian petrochemical industry and plastics chain. The extension of the entire program, which expires at the end of 2013, it would be another important measure to assist in improving the competitiveness of the Brazilian industry and reduce the trade deficit in manufacturing products.
Note that in the chemical industry alone, the trade deficit already reached BRL 32 billion. In this context, Braskem has invested in projects to diversify its feedstock matrix and make it more competitive in the global cost curve.
I do reiterate that we're waiting on petrochemical complex in Mexico for the production of polyethylene and on advancing the engineering studies proposals in the petrochemical complex in Rio de Janeiro. The company also remains focused on its partnership with clients, which has fortunately recovered its market share; investments in innovation with the development of new applications and, therefore, to support the growth of the plastics converter industry; its continued pursuit of higher operating efficiency by increasing the capacity utilization rate; and all these without losing sight of maintaining the company's financial health and cost discipline.
That concludes today's presentation. So let's go now to the question-and-answer session.
Operator
[Operator Instructions] Mr. Denis Parisien from Deutsche Bank would like to make a question.
Denis Parisien - Deutsche Bank AG, Research Division
I have a couple of questions. The first one is could you help me reconcile, please, the statements on Page 2 of the press release, where you discussed the repayment of -- reimbursement of $649 million of the previous bridge loan debt with the project finance debt with -- on Page 12, where you discuss total consolidated debt, including the project finance debt would be $9.625 billion and then the debt of minus the project finance would be $8.145 billion.
And I guess the difference there you give on that page being $1.4 billion, so it rounded up to $1.5 billion. And how should we consider your total debt with the project finance?
I guess, is the $9.625 billion -- is that -- but I'm not just sure how the $650 million reimbursement fits into that.
Mario Augusto Da Silva
Hi, Denis. This Mario.
Good to talk to you again. So what you can see here, right, we have $9.6 billion of net -- gross debt as of September, and we had a disbursement of $1.5 billion.
A portion of that disbursement was dedicated to reimburse both shareholders, to reimburse Braskem in the amount of $649 million. Remember that last year, we had to anticipate resources to the project in the form of bridge loan.
So as a consequence, when we had the disbursement of the project finance, a portion of that money was dedicated to reimburse both Braskem, let's say, in Brazil and Idesa, the other shareholder that we have in the project after Mexico -- in Mexico. So it's just a matter of the use of proceeds of debt to $1.5 billion that was disbursed in July.
So gross debt of $9.6 billion. We thought the project finance $8.1 billion.
And in terms of net debt, the $8.1 million minus the cash position that we have at this point, we have a $6.5 billion net debt, excluding the project finance of Mexico. So it was just a matter of use of proceeds of the long-term debt that was disbursed in July.
I don't know if this answers your question.
Denis Parisien - Deutsche Bank AG, Research Division
Yes. If I might go on, you mentioned in several places, the tax break on raw materials helped reduce cost and increase EBITDA margin in the quarter.
And then you have a fourth factor of, I guess, a onetime reimbursement for PIS/COFINS coming from RioPol. But is it possible to quantify the amount that your COGS were reduced or your EBITDA benefited from the tax -- the new tax and accounts scheme in the quarter?
And how much you expect that to be in the fourth quarter? Looking at the moving average -- the 3-month moving average of naphtha prices in the market, clearly, you had a very nice average down in the third quarter.
And as you pointed out and hinted on in your press release, that average is now sliding back up in the fourth quarter. How much of that's due to the spike obviously that occurred in the third quarter, but averages in, in the fourth quarter?
I'm just wondering if we can get some kind of idea of how much of that increase in the average price of naphtha that's coming in the fourth quarter that will feed through your cost. How much of that would be offset by the tax -- the new tax regime that's giving you a break there?
And can you quantify how much that was in the third quarter?
Carlos José Fadigas De Souza Filho
Okay. Denis, it's Carlos Fadigas speaking.
First of all, hi, good talking to you. We had a onetime regarding RioPol that we mentioned.
So that's one, that wasn't the last quarter. What is recurring is the tax rate from raw materials and debt at the current exchange rates and at the current naphtha price represents roughly about BRL 250 million per quarter.
This number, naturally, because it's the percentage on the cost of raw materials. It will vary with the cost of raw materials in Brazilian reals.
Metric means that it will vary with the cost of raw material in dollar plus the exchange rate, at the current level of naphtha and at the current exchange rate. BRL 250 million is a good estimate of the reduction on taxes we had on raw material.
Regarding the naphtha price in order to reduce the volatility, as you mentioned in your question, the price of the naphtha paid by Braskem at every single month is calculated using the average of naphtha price over the last 3 months. So it's a pretty straightforward calculation that could give you an idea of how much you have spent each month once we have the data of the previous months.
To finish, I will tell you at this point that the average price we're going to pay into the fourth quarter will be slightly higher than the average price for the spot naphtha in the quarter. So if you compare replacement value, I mean, right now, the naphtha price right now with the price that we obtained with these lags, the average on the quarter will be slightly lower than what we're going to be paying because we're going to paying based on the last few months' average.
To get to a more specific number, you'd have to run the math. If you want to do with that, let me encourage you to get in contact with Investor Relations team via email.
We can provide the information because it's actually public information on naphtha prices coming from others, I see it from Bloomberg. And it's easy to make this calculation.
Is that good enough?
Denis Parisien - Deutsche Bank AG, Research Division
That's great, yes. We have the -- we used to be able to get the add-up price off Bloomberg, but they stopped providing it.
So it'd be great if you guys could help us out with that. That would be fantastic.
Carlos José Fadigas De Souza Filho
We can do that.
Denis Parisien - Deutsche Bank AG, Research Division
That's great. That's very helpful for us for modeling purposes.
A last quick one. It seems like you're indicating that the cost of raw materials are going up around 9%, and you're suggesting that polyolefins goods' price is going up 4% to 5%.
That sounds like you're expecting an erosion in spreads in the fourth quarter. Or is there something in that calculation I'm not understanding?
Carlos José Fadigas De Souza Filho
We don't expect an erosion in margin. But the point that -- we'd probably have to factor in the price of the core product in naphtha.
So sometimes polyethylene, polypropylene don't move up as fast as naphtha, but that gets compensated by the fact that out of the core products, butadine, benzene, paroxetine and so on also move with naphtha. And so my final point is, overall, we do not expect an erosion in margin that we see in the fourth quarter compared to the third quarter in the international market.
It's a lot of moving pieces, but the end result is that we expect stable margins. We're seeing stable margins in the fourth quarter for the [indiscernible] to producer coming from naphtha.
Operator
[Operator Instructions] Mr. Christopher Buck from Barclays would like to make a question.
Christopher Buck - Barclays Capital, Research Division
I'm wondering if you can clarify the CapEx? I wasn't able to fully understand the comments you made.
It's now expected that CapEx for this year is going up to BRL 2.5 billion from BRL 2.2 billion. I mean, could you clarify again that has to do with a tax reimbursement in Mexico?
Carlos José Fadigas De Souza Filho
Fadigas speaking. You are right.
At this point, we believe that we're going to finish the year with a total CapEx of roughly BRL 2.5 billion. Some BRL 300 million above the initial forecast of BRL 2.2 billion.
The full difference is coming from the difference in the investment in Mexico and the fact that we're spending more cash with the Mexican investment this year has to do with 3 things: The first one you mentioned, and let me explain the first one in more detail. When you make an investment in Mexico, you pay the full amount for equipment and services that you entitled, so we receive back some of the taxes embedded in the price of the equipment themselves.
We forecasted the cash flow disbursement considering that the government would give us back these taxes faster than what we are actually reimbursing up. It's purely a time effect.
So it may take us 1 or 2 quarters more to get this money back, but it does not change the overall cost of construction. So it's very important to mention that we are not talking about a cost that we want.
It's not the case. It's just, in each quarter, we are getting the money back and that's the first effect that we make an investment in Mexico within the year.
The second one has to do with the exchange rate. The investment there is relatively limited investment, and the guidance we have given in Brazilian reals, so guidance was built, designed, defined about a year ago at the end of 2012.
And therefore, we have to factor that spending the few amount of dollars in Mexico will present a little bit more off Brazilian reals. And the third and final effect has to do with a guarantee that the critical equipment gets on site as fast as we can.
So it has -- it doesn't change the schedule for the construction -- for the assembly of the project. So this BRL 300 million of additional CapEx that you are forecasting for this year, roughly $150 million, $140 million has to do with these 3 effects, all of them associated with the Mexican project and, again, we are not talking about any cost that we want.
We have had a good discipline in the past with investments, and we are working very hard to keep this instance in this case.
Christopher Buck - Barclays Capital, Research Division
Okay, great. Do these factors -- how should we think about them in 2014?
And we saw some headlines -- or comments that investment might increase next year. Can you comment on that?
Carlos José Fadigas De Souza Filho
Yes. First of all, the Mexican overall investment as, I mentioned, will remain the same, even when we add all the years coming from '11.
And I believe we had some cash growth from '11, '12, '13 and '14 and, actually, '15 as well. So that won't change.
What has changed is how it gets allocated between '13, '14 and '15 between these 3 years. When we say the overall investment for Braskem may increase next year, that has to do with the fact that we want to have another maintenance stoppage in all our crackers in Brazil.
They stop work every 6 years, that's industry standard. You have to stop them.
Actually, we've been pushing to make this to a limit -- in the past, we stopped them once every 4 years. And then we move to 5.
And now we move to 6. And it's been challenging to the teams to increase the business between one, again, stoppage and another one.
In 2013, we had one, again, stoppage that just happened at our cracker in Bahia in our case review. But Next year, we are going to have 2 crackers stopping.
We're going to have the one in Río Grande do Sul, the Southernmost state of the country, and we're going to have the Guacuri in the state of São Paulo stopping as well. We've stoppage of -- it's roughly BRL 200 million to BRL 300 million to give you a round number.
And because we're going to have 2 of them, that should push the total investment up a little bit. So it won't have to do with next, it has to do with the factory that's going to have run from this amount kind of stoppage for the next year.
We are, right now, discussing this number with the shareholders. We're going to have a Board of Directors meeting at December to discuss the forecast and the budget for 2014, and that's why I can't give you the exact number right now.
I know we have to agree on that with the board. But beginning in January, you're going to have this number available to give you an idea of how much we're going to be investing in 2014.
Christopher Buck - Barclays Capital, Research Division
Okay, great. Could you also comment on your discussions with the rating agencies and if there's been any changes given the rising EBITDA?
Or what are the other factors that the rating agencies are looking at when thinking about your rating?
Mario Augusto Da Silva
Hi, Chris. This is Mario.
We have been having discussion with some of the rating agencies in the past 3 months. Probably, you know that S&P -- both S&P and Fitch, they have reviewed our rating, and we show an investment-grade company in the case of S&P, with a stable outlook in the case of Fitch.
To a negative outlook, however, if you take a look in the reviews of Fitch is already indicating that if we continue the level of results that we've been showing in 2013. There is a window of opportunity to revise the outlook from negative to stable.
So I think we're improving the financial indicators of the company. At this point, we have a net debt-to-EBITDA of about 2.7 coming from 3.3 in the beginning of the year, 3 in the second quarter, now 2.7.
So I think as a result of the stronger demand and cash generation that we had this year, financial indicators are better. We keep working with them.
And we expect that beginning of 2014, we're going to keep trying to remove the negative outlook that we have with both Fitch and Moody's. S&P still have a positive view for the Braskem piece, okay?
Operator
[Operator Instructions] I will turn over to Mr. Carlos Fadigas for closing remarks.
Carlos José Fadigas De Souza Filho
Well, let me thank you for joining us at this call. Thanks for your interest in Braskem.
And actually, we had a good quarter. EBITDA increased significantly, so we're glad to have notable efforts are paying back.
The Braskem teams in the different areas have been working very hard to reduce fixed cost against an environment where with inflation is roughly 5% to 6%, labor inflation -- labor associated inflation is 8%. But we work with this gross.
We've been working to increase the operating rate of the cracker that we have. We increased market share.
At the same time, we have managed to get some tax reductions on raw materials. We are keeping the discipline on investments we are making.
The most relevant one is the Mexican investment. So we've been working very hard to make -- to do everything we can to improve profitability of the current assets we have, and this quarter shows we have been successful in that front.
We also have been working very hard to build additional capacity and, based on that, be more competitive to have a more balanced raw material matrix. That's the case again for Mexico.
That's the case for Comperj. We've been working hard with [indiscernible] with the Brazilian government to make sure we do develop the petrochemical complex in Rio de Janeiro.
At the same time, we also had been looking for opportunities, searching for opportunity in the U.S. as well around the ethane, ethylene, polyethylene front.
We are the leader in polypropylene, but we don't have a presence in North America, in United States right now in polyethylene, and that's something we are looking into. So that's our commitment, improving profitability of our current assets, at the same time, as we work to build a bigger, more competitive Braskem going forward.
So thanks, again, for your interest. I invite you all to visit our Investor Relations website.
We have posted a video of our Mexican project there. It's a very nice video.
It's a short one at 1.5 minutes. So it's a small time investment to see what it looks like, a huge petrochemical complex, being viewed with more than 10,000 people working at the same time with more than 80 cranes available to move equipment and to start the assembly of this petrochemical complex.
It's much more than just building one plant. We are building power stations.
We are building utilities, water treatment, and as we viewed the cracker and the 3 polyethylene lines, all at the same time, for our total in years of bringing new projects. So I invite you to visit.
It's a very interesting feature. I wish you'd have a good weekend, and we're going to have another call again, one in the beginning of next year, so anticipate here my wishes of happy holidays.
Merry Christmas to everyone of you. Thanks.
Operator
Thank you. This concludes today's Braskem's Earnings Conference Call.
You may disconnect your lines at this time.