Braskem - Q2 2023

Transcript

Operator (participant)

Good morning. Thank you for waiting. Welcome to this conference call to discuss Braskem's second quarter of 2023 results. We have with us today Roberto Bischoff, CEO of Braskem, Pedro Freitas, CFO of Braskem, and Rosana Avolio, Investor Relations, Strategic Planning and Corporate Market Intelligence Director. This event is being recorded. All participants will be in a listen-only mode during the company's presentation. After Braskem's remarks, 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 star zero to reach the operator. This event is also being broadcast live via webcast and may be accessed through Braskem's website at www.braskem-ri.com.br, where the presentation will also be available. The selection of slides will be controlled by yourselves. The audio will be available shortly after the event is complete.

We'd like to remind you that 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. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Braskem management, and on information currently available to the company. They involve risks and uncertainties because they relate to future events, and therefore depend on circumstances that may or may not occur. Investors and analysts should understand that macroeconomic conditions, industry conditions, and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mrs. Rosana Avolio, Investor Relations, Strategic Planning, and Corporate Market Intelligence Director. Mrs. Avolio, please go ahead and begin your presentation.

Rosana Avolio (Director of Investor Relations, Strategic Planning, and Corporate Market Intelligence)

Good morning, ladies and gentlemen, and thank you for participating in Braskem's Earnings Conference Call for the second quarter of 2023. Let's start the presentation on slide 3 with the highlights of the period. Braskem delivered recurring EBITDA of $140 million in the second quarter of 2023, a non-cash loss of $156 million, and cash consumption of $5 million. Considering the payments regarding the geological event in Alagoas, the cash consumption accounts for $132 million. I would like to point out that Braskem maintained a robust liquidity position that is sufficient to cover all of its liabilities coming due over the next six years, as well as a very long debt maturity profile with an average term of 13 years.

In terms of operational highlights, our global recordable and lost time injury frequency rate was stable in relation to the first quarter of this year. Another operational highlight was the capacity utilization rate of the Mexico segment, increasing by 14 percentage points compared to the last quarter, reaching 86%, with the second quarter also recording the highest polyethylene production volume of the last six years. Regarding sales volume, Mexico and United States and Europe segments registered an increase in the sales in the quarter. On the strategic front, we are pleased to announce that we concluded our green ethylene production expansion project by 30% at the Triunfo Petrochemical Complex in the state of Rio Grande do Sul. We will give more details on this project later on.

Following here, we continue to advance on the construction of ethane import terminal in Mexico, which reached the completion of around 40% in end June 2023. Lastly, we exercised in the quarter the option to purchase shares of Wind Power Farm from Casa dos Ventos and the SE Santo Artur, which also will contribute with our strategy of utilizing competitive, renewable energy in our portfolio. Now, let's go to the next slide, please. The global petrochemical scenario in the second quarter of 2023 continued to be impacted mainly by the downturn in global consumption due to the high interest rates and persistent inflationary pressure by the destocking trend in the chain and by the below expectation recovery in China's industrial activity.

Note also that the lower demand, combined with the start-up of new polyethylene and polypropylene capacities, continued to affect petrochemical spreads in the international market, which in consequence, affected Braskem's and the industry's results. In this scenario, Braskem posted recurring EBITDA of $100 million in the second quarter of 2023. This result is explained mainly by lower sales volume for resins and main chemicals in Brazil, for polypropylene in Europe, due to lower demand in the period, by the reduction in spread in the international market for PVC in Brazil, and for PP in Europe and PE in Mexico, and lastly, by the appreciation of the Brazilian real against the U.S. dollars of 5% in the period. Let's go to the next slide.

In the Brazil segment, in the second quarter of 2023, the petrochemical complexes operated at a capacity utilization rate of 72%, down 5 percentage points compared to the prior quarter, mainly explained by the adaptation of product to the lower demand in the period. The short production shutdowns during the quarter and the feedstock supply constraints at the petrochemical complexes in Rio de Janeiro and Rio Grande do Sul. The resin sales volume decreased by 11% from the first quarter of 2023, reflecting the lower demand for polyethylene, polypropylene, and PVC in the Brazilian market, mainly from the packaging, home appliance, and hospital material sectors. In this context, recurring EBITDA in Brazil in the second quarter of 2023 was $81 million, accounting for 56% of the company's consolidating recurring EBITDA. Following to the next slide, please.

During the second quarter of 2023, Braskem concluded the project to expand green ethylene production capacity in Rio Grande do Sul. The capacity increased by 30%, the annual production capacity of our renewable bio-based ethylene plant. I would like to highlight that we accounted a historical record for monthly production of green ethylene in June 2023. It's worth to highlight that besides enabling the plant to produce annually up to 260,000 tons of green ethylene a year, and consequently, the green polyethylene initiative, will enable us to meet the growing demand for renewable products and help us reach our commitment to becoming carbon neutral by 2050. Moving on to the next slide, we would like to show the progress on the actions, fronts related to the geological event in Alagoas.

Braskem continued to make progress in the relocation and financial compensation of families from the risk areas in Maceió. As of end June 2023, 99% of the financial compensation proposals to the families had already been presented, and 90% of the estimated total had already been paid. The acceptance rate remained in high levels. In addition, the program to relocate the residents was 99% concluded as of end June 2023. On the closing and monitoring of the salt mining wells, as of the end of June 2023, out of the 35 wells, we had nine wells in the sand filling group, of which three have been concluded and five are in progress. In the natural filling group, there are five wells which were fully closed, and from the tamponamento group, 14 of the 15 wells were fully tamponated.

Let's move on to the next slide, still addressing the geological event in Alagoas, showing the advances on the social and urban development measures, in addition to providing details on the provision related to the topic. I would like to highlight the key advances in the social, urban, and environmental measures. All the 11 mobility actions are ongoing, seven of which with executive project concluded, three already in the construction phase, and one planned for the start of the fourth quarter of 2023. We're still making progress on the urban integration project and the development of the Flexal, with 10 urban requalification actions implemented. We also started to execute the actions of the environmental plan. We highlight the celebration and approval of the term of global agreement with the municipality of Maceió, held in July 2023.

Therefore, the total amount of provisions made by the end of the second quarter of 2023, related to the geological event in Alagoas, was BRL 14.3 billion, of which BRL 8.2 billion already been disbursed as of the end of June 2023. The balance of provisions at the end of the second quarter of 2023 was approximately BRL 6.5 billion. Note that Braskem cannot eliminate the possibility of any future developments related to the matter or the associated expenses, and any costs to be actually incurred could differ from our estimates for cumulative amounts. Let's move on to the next slide. In the United States and Europe segment, the utilization rate ended the second quarter of 2023 was 80%, in line with the prior quarter and with the same quarter of last year.

Sales volume in the segment grew by 3% in comparison to the first quarter of 2023, reflecting the higher demand after the destocking trend in the chain in the prior quarter. Compared to the second quarter of last year, sales volume grew by 2% due to the higher availability of product for sale in Europe, given the region's higher utilization rate. The reduction in recurring EBITDA compared to the first quarter, was due to the effect from the propylene stocks acquired in prior periods in the United States, as well as the 3% reduction in the polypropylene spread in Europe. The United States and Europe segment recurring EBITDA accounted for 16% of the company's consolidated recurring EBITDA. Let's go to the next slide, which covers the Mexico segment.

In Mexico, the utilization rate in the second quarter of 2023 was 86%, increasing 14 percentage points from the first quarter, and up 19 percentage points on the same quarter of last year, representing the highest polyethylene production volume of the last six years. This increase is related to the higher ethane supply from Pemex to around 36,000 barrels of ethane per day, and the higher supply of imported ethanes, complementing the feedstock supply with around 21,000 barrels per day via the fast-track solution. The higher production volume also had a positive impact on the polyethylene sales volume in the period, growing by 8% in relation to the first quarter of 2023, and by 13% in comparison to the second quarter of 2022.

In this scenario, the segment's recurring EBITDA grew by 50% when compared to the first quarter of 2023, given the increase in sales volume, the reduction in production costs as a result of the higher utilization rate, and the lower prices of ethane and natural gas in the international market. The segment's recurring EBITDA accounted for 28% of the company's consolidated recurring EBITDA. Let's move on to the next slide, please. Braskem's consolidated cash flow recorded a positive variation in working capital of BRL 962 million, due to the improvement in the period. This positive effect was offset by operational and strategic investment carried out in the period, interest payments, and the payment of income tax and social contribution due in the quarter, which led to cash consumption of BRL 27 million.

Lastly, adding the payments related to the geological event in Alagoas, cash consumption in the 2Q came to BRL 655 million in the 2Q of 2023. Let's move on to the next slide. Braskem maintained a healthy debt profile with an average payment term of 13 years and an average weighted cost of exchange variation of +6%. I also highlight that more than half of the company's debt is concentrated in 2030 onwards. Braskem's cash position is sufficient to cover its obligation for the next six years, without considering the international standby credit facility of $1 billion, which is available for the company until 2026. Moving on, the next slide shows the corporate credit and leverage metrics.

The corporate leverage ratio ended the second quarter of 2023 at 7.9x due to the lower EBITDA, since net debt remained stable in relation to the first quarter of the year. I would like to reinforce that Braskem continues to present solid credit metrics with a healthy and comfortable level of liquidity. Let's move on to the next slide, please. The company concluded its analysis of climate risks for 2030 and for 2050, which identified the physical and transitional risks that could impact Braskem's operations over the coming years, considering the different climate scenarios and aligned with the TCFD. In addition, the company exercised the purchase option for another wind power plant from Casa dos Ventos, the SPE Santo Artur.

In relation to the sales volume of recycled products in the second quarter of 2023, the sales volume for resins with a recycled content from the Wenew brand increased by 22% in relation to the first quarter of 2023. Regarding the second quarter of 2022, resin sales increased 83%, reflecting the company's commercial strategy in the consolidation of sales volumes coming from Wise. In addition, the company created the Upsyde, a joint venture with Terra Circular in the Netherlands, a company focused on solid residues in order to enhance circular economy. During the second quarter of 2023, Braskem delivered the first lot of donation of polypropylene to the Association for Assistance of Disabled Children, AACD.

Out of the 14.3 tons, 6.9 have already been delivered and will be used to make around 70,000 prostheses and orthoses for the organizational patients. Let's go to the next slide, which will recommend the perspectives for the second half of 2023 in relation to the first half of the year. Regarding Brazil segment, we expect a reduction in the ethylene production levels in the second half, due to the maintenance shutdown of the petrochemical complex in Bahia scheduled to the second half of 2023. In the sales front, we expect a growth in the sales volume for resins due to higher demand and a reduction for the main chemicals in function of the lower utilization rate. Spreads shall present a reduction explained by the global imbalance in supply and demand.

For the United States and Europe, the utilization rate shall remain stable. Sales volume shall increase due to inventory contraction in the chain. Spreads shall also remain stable. Lastly, in Mexico, we expect a raise in production due to the higher ethane availability, which affects positively the sales volume in the semester. According to the main external consultants, spreads shall decrease due to the global imbalance between supply and demand of polyethylene. Moving on to the next slide, please. We will comment on the updates of the initiatives to maximize the company's EBITDA and cash generation. Regarding initiatives with an impact on EBITDA, we made progress in our initiatives related to optimizing revenue, reaching about 20% of the estimated result for the year.

In relation to initiatives with an impact of fixed and variable costs, $64 million were delivered until the end of the first half of the year. I will also highlight that additional opportunities were identified, which would imply an additional $100 million to the estimated previously announced. Regarding the Transform for Value program, the program ended the first half of 2023 with an accumulated gain of approximately $78 million additional compared to this 2022. Moving on to the initiatives with an impact on cash generation, we had made progress in all fronts, especially the optimization of working capital, which had an important contribution to the company's cash flow in the semester, and non-recurring monetization initiatives, which reached approximately 75% of its completion in the first half of 2023.

It's worth reinforcing that the company remains committed to the implementation of all the initiatives mapped out and engaged in identifying potential new opportunities. The next slide, please. On this slide, I would like to reinforce our main priorities for the year, considering our strategic pillars. The first priority is related to optimizing the operations of assets with a focus on cost discipline to capture synergies in all regions. The second priority is to continue implementing financial preservation actions, creating value for our shareholders. Next, regarding the growth strategy, the focus is on executing the investments related to the commitments to eliminating plastic waste and combating climate change, as well as continuing to implement initiatives related to social responsibility and human rights. On the innovation front, the company continues to focus on expanding strategic innovation and its digital transformation.

Finally, we will continue to make progress on all action fronts related to the geological event in Alagoas, meeting all the commitments established in the agreement. Lastly, I would like to reinforce that safe operations are and will always be the focus of Braskem's operation as a permanent and non-negotiable value. That concludes today's presentation of Braskem's results for the second quarter of 2023. Thanks, everyone, for your attention, and let's move on to the Q&A session.

Operator (participant)

Thank you, Rosana. Now, I would like to pass the floor on to Mr. Pedro Freitas, who will be guiding us through this question and answer session.

Pedro Freitas (CFO)

Thank you. Good morning, everyone. I just have a comment I'd like to make about the sale process. I think it would be best to get ahead of this topic because it's likely to come up. We don't have any major news. The information exchange process is still underway with interested parties and all under NDAs and confidentiality agreements. However, without any major news to report on. I wanted to mention that right off. The offers that Braskem has become aware of have already been shared, but we are not active parts of the negotiation procedure, nor do we have a schedule with the different stages involved in the sale process.

We continue to provide all sorts of information that we have access to. This is the extent of Braskem's involvement right now. Thank you. I think we can now open for other questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your phone. If at any time you'd like to remove yourself from the queue, please press star two. Our first question comes from Gabriel Barra from Citibank. Go ahead, Gabriel.

Hi, Roberto, Pedro, Rosana. Thanks for taking my question. I have two questions, actually. Near the end of the presentation, when you mentioned the initiatives to dilute the impact of a potentially more challenging petrochemical scenario in the company's numbers.

Gabriel Barra (Equity Research Analyst)

In the last meeting, we were already looking at a more difficult scenario coming up ahead. Could you say a few words about that? Do we have the hope of improving for the second semester? My question is: I'd like to understand your forecast with regard to operating cash. Do you believe that those forecasts of a neutral scenario and the cash generation during this year is still viable? Can we do better than the, the six different points you mentioned, three for cash generation? Specifically with regard to CapEx, is there room for us to get more out of our investment this year? The second point about Alagoas, there was recently a BRL 5.7 million agreement, but there are still some open discussions there. Could you speak a little bit about that?

How are things looking with regard to the state? Could you give us a bit more information about the other processes, the other cases that are still ongoing? Can we foresee the end of this process, and do we have information about the numbers, the financial numbers? There's another relevant point that, if there's any other relevant points that I didn't mention, please.

Pedro Freitas (CFO)

Hi, Gabriel. Good morning. Thanks for your questions. With regard to generating cash, I'd say that it's true, the scenario is a little bit more challenging than we envisioned a quarter ago. In April, we saw better results than we expected. Starting in May, there was a lack of recovery within the market that we hadn't foreseen.

When we look at how this is going to move forward, and then going back to your question about generating cash, I have a comment I'd like to make. If we look at the first semester as a whole, cash flow generation was essentially due to Alagoas, and the rest of the operation was neutral. It is not generating cash, but neither is it consuming cash. What is consuming cash has been the payments and disbursements that we've made in Alagoas. What we do have, looking ahead, is a recovery, a slow recovery, that's probably only going to be realized in the fourth quarter, and we've signed agreements with the city hall for additional funds. We are adopting additional measures for to contain the situation, as Rosana mentioned.

Again, as Rosana also mentioned, the financial situation and the cash status is quite comfortable for the company's management. The fact is that our operations are, broadly speaking, giving us a neutral cash situation. Alagoas is consuming cash. If you ask, what can we do to save more cash, in fact? Well, we are working on every line we can. For CapEx, which was your question specifically, I would say that we have very firm, very strong actions, measures to restrict new investments. Our major focus is on secure investments, everything else is, we are being very selective about everything else, about what we approve.

The CapEx forecast for next year should be lower than this year, but there are some things we can do around the edges that we can work on to hold back the tide. The major values, the major sums, have already been, they're already. They've already been done. They've already been invested in. We have a scheduled maintenance in Bahia for the third quarter that needs to occur, and it will occur. There is this reduction should show its results later on next year, and perhaps 20% compared to last year. This is still being discussed, and as I mentioned, we are being very selective about what we do, what we invest in. With regard to other points in Alagoas, CBTU, and the state government, those discussions are ongoing.

The CBTU is a very technical discussion about what should be done, what shouldn't be done, what are the alternatives, this is something that we have – we've had long discussions about, we've been having, because it's a very complex topic. This is something we've been discussing at length about how to work on this technically with specialists, geologists, and the railway specialists as well, because a secure operation is our ultimate value. This is the line we're heading toward, and in fact, the operation was delayed. It was actually frozen. There is a legal case that has been frozen up until January so that we have time to move forward technically. That's CBTU. That's where we're at right now there in operating that line.

With regard to the state government, we have a, a portion of the state that's linked to, state public, entities. We agree that this should be the target of an agreement. This is. It, it's, it's a given that Braskem will assume. The state decided to bring to the courts another claim, and it's a claim that we do not agree about. We are not in agreement with the state government in that sense, in this new initiative. This, this other case is, we'll see what the courts say. That's what we have in the scope of the state of Alagoas.

Gabriel Barra (Equity Research Analyst)

Pedro, could you give me a follow-up with a timeline as for paying this agreement with the municipal government? What's your timeline look like for that?

Pedro Freitas (CFO)

Well, there's a portion that's going to be paid – 40% is going to be paid still in 2023, and the other 60% next year.

Gabriel Barra (Equity Research Analyst)

Excellent. Thank you. That was very clear.

Operator (participant)

Our next question is from Pedro Soares, from BTG Pactual.

Pedro Soares (Equity Research Analyst)

Good morning, everyone, Roberto, Pedro, Rosana. I'd like to follow up on the CapEx discussion, just to be clear. Pedro, I think you mentioned the expectation, the forecast of additional CapEx, and that next year should be less than this year. Could you comment a little bit about your, your forecasts for operating CapEx, or is this going to be purely strategic? There's projects focused more on, on growth. I'm trying to understand if there really is more space for growth for next year's CapEx, because the numbers we saw are, are rather low.

For my next question, as for your leverage, could you explain what is your forecast for those higher levels? With regard to the ratings agencies, what impact does that have? Last time, there was an analysis that doesn't, doesn't cover fully the company's present scenario. Could you comment a little bit about that, please?

Pedro Freitas (CFO)

Well, Pedro, thanks for your questions. With regard to CapEx, the review is likely to be balanced strategically. Things are probably a little bit higher than operational, but for next year, we don't foresee any petrochemical in-influence in our operating CapEx. Just as a reminder, for strategic, we do have an investment in that we're thinking about for next year.

There's a whole set of concerns there that we are working on to install all the different stops, especially in the major centers, wherever they are needed. There are new technologies, new forms of operation that we have – we've delayed some of those stops, or adjust the scheduled stops for a more positive scenario. On the other hand, we are also keeping our focus on growth. We're still being very selective, and we have projects that we're balancing for next year. With regard to the covenants rating, Braskem does not have financial covenants, so that's a fact. With regard to the ratings, I will let Rosana comment because she's more involved.

Rosana Avolio (Director of Investor Relations, Strategic Planning, and Corporate Market Intelligence)

Thank you, Pedro. There's a consideration I would like to make before I talk about the rating agencies. My answer would be considering Braskem, since we have aggregated ratings. My comment will be related to Braskem. Yeah, and the way the rating agencies look at the company. First, we believe and we trust in the way we have made our financial preservation. When we look at the cash position, we see that the spread started to deteriorate as of May. Our cash position is very robust, and the debt is very extended. This is an exercise that we did beforehand, so we anticipated so that we could have this financial security. The decision of the rating of the company and in how is from the decision-makers of those rating companies. We are in a sector with cycles.

There is a cyclic impact on our business, but we believe that this cycle will go back to its normal level in the medium term. Anyhow, this is a decision by the board of the rating agencies.

Pedro Soares (Equity Research Analyst)

Thank you, Pedro. Thank you, Rosana.

Operator (participant)

Our next question comes from Rodrigo Almeida from Santander. Go ahead, Rodrigo.

Rodrigo Almeida (Equity Analyst)

Good morning, Roberto, Pedro, Rosana. I'd like to explore a few topics and go back to basics and talk about the Brazilian operations to understand how you currently see the Mexico market with regard to the changes we've had with regard to import fees. I think there wasn't a major impact, and it's since it's a large import process. I'd like to understand what things look like for – in that sense, and what is likely to change in the next few months. How has this impacted you here for Mexico in the second quarter and also looking forward for the second half of the year? Could you talk a little bit about the other potential impacts?

Could you also share your forecast for Europe and the U.S.? I'd like to understand what... When you mention the improved volume, where is that coming from, specifically? From Europe? Because there is a cost of imported products, too. What is your outlook in that sense? What do you foresee for the second semester in the U.S. and Europe? Finally, again, back to Mexico, I'd like to understand how do you foresee the second semester in terms of the raw inputs? Let's, let's keep the question based around the basics, please. Thank you.

Pedro Freitas (CFO)

Sure. Yes. Thank you, Rodrigo. Well, for Brazil, we have, we've been forecasting growing demand over the year. The, the, the chain is, is not very focused at the moment, so we've been deprioritizing and trying to focus on what Braskem does best, so that we can, we, we can choose products with bigger margins and vendors who really recognize Braskem's abilities. That's our commercial focus. Now, when we look at the, the rating reviews that the agencies have made for Brazil, this is a positive impact on the Brazilian market. Nevertheless, we do still have, the chain is still very unfocused, and this has an impact on demand. Now, with regard to the import fees, it is still lower than the historical average. I'd say that it's more in line with the, the rest of the economy.

I think given this, the scenario, a more international scenario with tighter spreads, it's, it's really not something that should have an impact on the results. When we look at the fee changes, they usually have to do with market share. This time, with the surplus of offers around the world and the impact to productivity in the chains in the US and the Middle East in particular, we really are not capturing this change in fee as, as we normally would in terms of market share. Really, it brings us back toward the balance in tandem with other materials, other chains. In terms of results, we're squarely within the bounds, but it's not what we usually would do. REIQ is something that we've continued to discuss with Abiquim and the federal government.

We've been doing lots of work there in contact and speaking with state governments. A very strong focus on presenting data about our competitiveness in Brazil. This is having an impact in Brazil. REIQ is something that's already been approved by Congress here. We just need the Treasury Department to give its go-ahead, and it's likely to be published very soon. We just need to see what the government is actually going to do. This, this discussion has been ongoing and very productive, too. This is something that is going to be... We need to see in order for the industry to remain competitive here in Brazil. As for Europe, there is a seasonality, and the inventory levels there are a little bit lower.

Every time we talk about improvements in the U.S. and Europe, they mean seasonality and the restocking of the whole chain. In Mexico, we do have a forecast for the provision of ethane at a better level in the next quarter. We've had good operations in the fast track process, and at the same time, Pemex has been providing supplies as well. I think that's why we, we did the 86%. It was an improvement, and we foresee that this scenario will continue on into the second semester. For the second semester, it's not really an improvement compared to the second quarter. It's not really a jump ahead, but it should. This level should remain and perhaps some kind of a marginal improvement, definitely less variance with the fast track underway, and actually because Pemex improved its production over the past few years.

Rodrigo Almeida (Equity Analyst)

Excellent. Thank you. Just, just to take the opportunity for a follow-up about the initiatives. I'd like to really understand, when we look at the updated estimates, 1.2 for fixed and variable costs, that's one of the situations that impacted the EBITDA. What's the reason for that delta? Is it variable or fixed cost? What are you looking at? I, I'd really like to understand a little better.

Pedro Freitas (CFO)

Well, Rodrigo, it's on both, and we've been improving our purchase of raw materials, but proportionally, I think it's a little bit more on the fixed side than the variable side. It's, I'd say it really is more, more fixed than variable.

Roberto Bischoff (CEO)

Excellent. Thanks, Pedro. Thanks, everyone.

Operator (participant)

Our next question comes from Luiz Carvalho from UBS Bank. Go ahead, Luiz.

Luiz Carvalho (Senior Equtiy Research Anlayst)

Good morning, everyone. Thanks for the Q&A. I have three questions.

First, Pedro, could you go back to the topic of Mexico? Rosana mentioned a little bit. Actually, she discarded the question of IDE. Could you explain a little bit about the investor relations, what things are like for, with discussion, with the partner about leverage? There are different guarantees, right? Could you give us a little bit more texture about how that is impacting or if it can impact your project? My second question, I know you've already mentioned the Novonor process, but could you say a few words about what your forecast is in terms of that improvement and how you see a go or no-go for that process? It's been a few years now that Odebrecht has not.

Odebrecht may be the last crown jewel. I think the banks and creditors are really the ones who will decide to use that guarantee. For Braskem, I think the process is a little bit more complicated. Do you have any visibility about that and the timing for a final decision about whether it'll be go or no-go? To what extent does that get in the way of the company's day-to-day? My third question, I guess, is a little bit more structural or long-term. We have the impression that Brazil is going to have more, more offers of gas near the end of the decade without any specific projects. How do you envision that scenario?

Perhaps more competitive access to raw materials or given this volatility, let's say, in, in practice and using Petrobras refineries, gasoline, could you speak a little bit about the gas scenario in the mid to long term?

Pedro Freitas (CFO)

Sure, Luiz. Good morning, and thanks for your questions. About Mexico, things are looking pretty good. I think everyone knows that Idesa changed its controllers, and their main shareholder is now Inbursa from Carlos Slim. He is the Idesa shareholder now. They suffer the same challenges in the cycle that we also do, and the people who are in charge of Idesa are the same people, so that relationship remains pretty good. People who know the process, who know Idesa and that asset.

We don't, we haven't been feeling any impact as a result of that change to the Idesa's shareholder control and the change there. The, the scenario remains, the environment remains. Today, there's no need for Ideas to really make any changes. I would say that everything remains within normal bounds, just as we've seen over the past few years. With regard to Novonor, I have two comments. One is about the Novonor engagement. We continue to engage with Novonor. There was a sale to LyondellBasell a few years ago that was discussed, and unfortunately, it didn't move forward. A new sale process was initiated, a sale of participation, and we don't know what offers they may or may not have received. We've seen their engagement, the due diligence that was prepared as part of that process.

It didn't move forward, yet again. They, they tried to say part of their participation in the stock market. It was, it was rather effective. Many banks did get in on that, and so did our team look into it. That was between 2021-2022, and then went back to the M&A process. The process is ongoing. It's difficult and complex. It's not simple. The petrochemical industry is cyclical, so this also brings volatility into the process. The shareholder structure has Novonor, has Petrobras. If we look at the proposals that are on the table now, some of them have expectations that Petrobras will stay, others, that it will leave. There are many stakeholders. There are five banks involved. They all have decision-making power within the process.

There are many stakeholders involved, and it's a company that is also not very simple. Assessing it isn't simple, and transacting it is also not simple. This is the situation, but we see engagement with Novonor and are likely to move forward. With regard to day-to-day impact, today, it's limited to a very small team that handles the due diligence details and providing them. Now, there are some people in legal who, who feel the, the extent of that impact and who provide information. At some point in the due diligence, more people would be involved. We haven't reached that stage yet, but I would say that everyone's already prepared. They've done this before, so it's really not, not that concerning. Otherwise, decisions and strategic decisions for the company, they, they still remain with no impact on that potential reorganization among the shareholders.

Lastly, your, your strategic question about the offer of gas up until 2030. We're, we're excited to see gas reach the shores. We would love to have competitive raw material, competitive energy in Brazil. We have a competitiveness challenge that's been put before us now. This has been very clear. Structurally, moving into the future, the U.S. and Middle East remain. They have important competitive advantage there. As I mentioned, this is cyclical, we are, we are always searching for structurally competitive ventures. One option is to reduce the cost of energy. Another is to bring competitive raw materials for petrochemical purposes. The most obvious thing to happen here in Brazil is the expansion of the Rio de Janeiro Center.

It was built with a potential expansion in mind. What happens is that the CapEx for that expansion is significantly reduced. This is the center that we have. It started in 2006, but due to a lack of raw materials, it was not, it didn't go ahead. This will only make sense if there is raw material. With the arrival of gas by 2030, we could certainly see a feasible project be implemented, and there should be a relevant increase in capacity in Rio.

Luiz Carvalho (Senior Equtiy Research Anlayst)

Excellent. Could you just go back about the follow-on? You mentioned that possibility. I think the vast majority of banks were involved.

As for Petrobras and the creditor banks, there was that feeling that at the price that the market was, was trading at on the book, there was no interest, not enough interest at least. The proposals that the banks made were quite low. They were actually far below what we, we were, we were looking at, at the time. Could you say a little bit about the interest among the creditors or Petrobras in understanding the level that was proposed just now?

Pedro Freitas (CFO)

Well, Luiz, I, I don't, I'm not in the habit of conversing with creditors or with, with others involved in the decision-making process. Things are really much more operational. Oh, you know, how. What is going to be done?

That, in that sense, we have discussions, but we don't really have any ideas, any, any input about the decision-making process per se. What I can shed some light on perhaps is that, I mean, the CDI rate is 13%. For the banks and for Novonor, I don't know what the interest is set to for that debt, but it's certainly something that, that, that has an impact. I mean, the, the dynamic involving the CDI and, and interest for different banks, that doesn't help anyone, including Novonor. This is certainly an element that could have an impact on decisions. This is just me as an outsider. I'm not, I'm not part of the discussions.

Luiz Carvalho (Senior Equtiy Research Anlayst)

Thank you.

Operator (participant)

Our next question will be in English. Our next question will be in English by Annie from Bank of America.

Speaker 8

Good morning or good afternoon, Pedro, Rosana. Thanks very much for the call today. I have two questions of those, several other ones have been answered. The first one, I know it's a little bit more theoretical. Part of the weaker demand and lower prices and spreads is because of weaker demand from China, part is because of excess capacity in the market. I wonder if you could give some indication of which is more important now and maybe in the next couple of years. The second one is about liability management. You have strong cash balances and credit lines. You have a good amortization schedule. Does that mean that there would be no liability management in the near term on the debt profile?

I think the third one was asked, but indirectly, I guess, Rosana. Are you aware of any change in the way the rating agencies will look at Braskem's credit ratings? Thank you.

Pedro Freitas (CFO)

Anne's first question is a bit of a more theoretical question, and she says we have a drop in spreads that's due to a drop in demand and an increase in capacity, specifically involving China and the expanded capacity in the U.S. What's more important? I would respond that over the past two years, the expanded capacity is the most responsible influence. If we look at polyethylene as an example, the market grows by about 2.5%, 3.5% a year. This year, it's likely to grow by 2.7% or 2.5%. That's one percentage point in variance that we have compared to the baseline, whereas offers are growing by 6% or 7%. In terms of percentages, offers have had a much stronger impact.

For next year, we don't see many more offers coming in. What we do see is recovered demand. It's certainly feels like it, it's more about how demand will behave moving forward into the future, because the offers of new capacity should go online this year. Then in 2024, the growing demand is definitely an expectation of growth. At this time, the demand is going to be more important. With regard to your second question, our cash situation is pretty comfortable. Our debt is very long ahead. What are we going to do with cash and management? Well, what we've been discussing internally is that, yes, the situation is rather comfortable, but the scenario moving forward has lots of uncertainties, especially if we look at the data for China.

We do have a concern that we have uncertainties, the scenario into the future and as far as the spreads go. What we've been discussing here is that we are not going to run liability management in the short term. We are not going to, for instance, run a tender offer in the short term. We are going to wait and see what the scenario holds, and when the scenario becomes clearer, then we will decide how to move forward. It's a rather conservative position that the company has had for quite a while now. This scenario with uncertainties about the low cycle, that's, that's how we stand, specifically with regard to China.

Just as a reminder that China announced an incentive package, so there is a possibility, a perspective for still this year for things to improve, but we want to see things improve first before we actually act on them. Also because in Alagoas, we still have BRL 6 billion, which means $1.2 billion, to disperse over the next 12 months. We also need to keep that in our sights. Lastly, Anne's last question was about whether in this scenario there is any change to the ratings agencies and Braskem. We don't see any change to the methodology. They understand that during a low in spreads, the leveraging indicators are likely to go up. They do look at other indicators too, the debt repayment time, for instance, the net debt level as well. That's something they look at.

Ours has been stable, even with lower spreads. There are other elements that are looked at, and we don't foresee any – we don't see actually any change in their methodology.

Speaker 8

Thank you very much.

Operator (participant)

Just as a reminder, if you'd like to ask a question, please enter star one. To remove your question from the queue, enter star two. We will now move on to questions submitted through the web. Please stand by while we wait for questions to arrive. Well, I have a question who came from a individual investor, a retail investor. What do you expect to see in terms of normalization of petrochemical spreads? This was from Andre.

Pedro Freitas (CFO)

Well, we do have a forecast for the spread should normalize, in our opinion, it looks like it's going to normalize by 2025. Today, for the second semester of 2023, we believe that there should be some timid but extant recovery in China's demand, especially considering their incentives package. There's likely to be some additional demand from China.

Next year, the, the new, the new entrants should have a lower impact at new capacity, that is. The market is – is very tight because there are. It's, there's a surplus of demand, but likely in the second semester of next year, we will see an improvement. As far as improving spreads and improving the cycle, that's likely to be seen in 2025, 2026, 2027, until there is a new cycle of investments in the industry, but that's further into the future.

Operator (participant)

There's another question here from Teresina. Also from the webcast. When is the scheduled outage and scheduled maintenance? At what site?

Pedro Freitas (CFO)

Well, the scheduled maintenance that I mentioned at one of our units in Bahia, it should occur for a period of 2-3 months. Usually, these, these scheduled maintenance stops are 30-40 days long.

Sorry, it's I was mistaken. It's scheduled for a period of 50 days, and it should occur during the fourth quarter of this year. Usually, they last 30-40 days. As part of our initiative to reduce costs, we've actually extended that scheduled outage a little bit because if – since there's no demand, not enough demand, that is, we have extended that scheduled stop slightly. We don't need it to be to be running for so long. We're, we're running that scheduled outage a little bit longer. That also means that we'll have fewer employees, fewer weekends, so we should see a, a drop in cost there. Usually, if you do have demand and the market is normal, 1 day of lost production is more than enough to recuperate expenses for those added payments.

Since the market demand is at a low point, we decided to keep that scheduled outage a little bit longer.

Operator (participant)

We now complete the question and answer session. I'd like to pass the floor on to Mr. Roberto for his final comment.

Roberto Bischoff (CEO)

Good morning, everyone. First, I'd like to thank everyone for taking part in our earnings call, and I'd like to conclude with a few remarks. The first is more focused on the scenario, which really was the topic of Rosana's presentation, and the second is more focused on what Braskem has been doing vis-a-vis that scenario. First, the scenario. It's important for us to be very clear about how atypical the scenario is. Cyclical scenarios are common in this industry, but this scenario specifically includes a few aspects that really aggravate the scenario. We are seeing.

Deep down, we're seeing China and its industry having a hard time recovering growth, and this has an impact on the global product trade. We also see that the U.S. is having some challenge in facing the deteriorating demand. Europe, which in spite of some positive signs recently, also feels an impact due to inflation and other pressures from the past few semesters, even as a result of the war from between Russia and Ukraine. In a sense, we are talking about half of the worldwide demand that has been impacted in one way or another, a very relevant impact. That's why I would say that it is atypical. There's a relevant impact on what on what we do.

We are also seeing the convergence of less global growth and the inclusion of new products, not just this year, but actually starting last year. In a sense, a more concentrated entrance of, of demand during the period, as a result of some delays that were produced by the pandemic itself, that in a way, concentrated the influx of new demand after the pandemic. These influences combined, have clearly impacted the petrochemical spreads, and they've also made it so that products from other regions, specifically North America, Asia and the Middle East, they are exporting their products to developing countries. In that sense, Braskem's agenda, in conjunction with the chemical and petrochemical sectors in Brazil, is certainly going to strengthen the Brazilian industry, trying to reduce gaps in competitive abilities compared to other regions around the world.

This is an agenda that is under development with different levels of government, the federal government, the Ministry of the Treasury and Energy, and also with some state governance that feel the impact of lack of earnings as a result. Well, the second point that I'd like to comment on, essentially, we want to highlight Braskem's efforts. As I mentioned, the industry is cyclical, and there are moments that we refer to as lows, as we see right now, and as we have seen in the past.

Rodrigo Almeida (Equity Analyst)

During these times, we need to strive for the best operating efficiency while optimizing fixed and variable costs in general, and prioritizing the cash allocation to make it as logical as possible, while striving to optimize things as much as possible. Therefore, in the first quarter of this year, we announced a program with initiatives, corporate initiatives, that sought to create a EBITDA impact in the order of $450 billion and $500 million in cash. After the first quarter, we've completed over 50%, 54% of that program has been impacted already. As I mentioned in our previous earnings call, our commitment is to continue to seek new initiatives, new synergies, and new opportunities.

Roberto Bischoff (CEO)

In this second quarter, we have already identified new initiatives for reducing fixed and variable costs that exceed $100 million, and we continue to strive for more. If on the one hand, the lack of acceleration of the global economy in the, in the perspective of markets produces less demand for products, on the other hand, in terms of costs, we also see important opportunities in reducing logistics costs, improving the international commerce, and in some way, re-create opportunities to reduce costs for our operations. Clearly, we're going to continue to seek more initiatives, and more initiatives will be seen. I hope that at each earnings call, I will be able to bring you news about more initiatives that we see, and with the goal of mitigating the effects of the current scenario.

Lastly, to wrap, I'd like to thank all of you once again for your confidence and for joining us in this earnings call. We'll see you in November when we will announce the results of the third quarter of 2023. Thank you very much and have a great day. Take care.

Operator (participant)

Braskem's video conference is now complete. Thank you all for your participation. Have a great day, and thank you for using Chorus Call.