Pedro Teixeira - Chief Financial Officer and Investor Relations Officer Fernando Musa - Chief Executive Officer.
Adam Rodriguez - GBM Grupo Bursatil Mexicano Hassan Ahmed - Alembic Global Advisors Michael Wolcott - Barclays Investment Bank Lilyanna Yang - HSBC.
Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem’s Second Quarter 2016 Earnings Conference Call. Today with us we have Fernando Musa, CEO; Pedro Freitas, CFO; and Pedro Teixeira, IR Controller and Project Finance Director.
We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After Braskem remarks are completed there will be a question-and-answer section. At that time further instructions will be given.
[Operator Instructions] We have simultaneous webcast that may be accessed through Braskem’s IR website, http://www.braskem-ri.com.br/ 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 the questions which will be answered during the Q&A session may be posted in advance on the website. Before proceeding, let me mention that forward-looking statements are being based under the Safe Harbor of the Securities Litigation Reform Act of 1996.
Forward-looking statements are based on the 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 the 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 Pedro Teixeira, IR Controller and Project Finance Director. Mr. Teixeira, you may begin your conference..
capturing the operating efficiency gains in plants to serve the Brazilian market, exporting any volumes not sold in Brazil, conducting maintenance shutdown on one of the lines at the Bahia cracker in the fourth quarter, and completing feedstock flexibility project in Bahia. In the U.S.
and Europe the focus will be on seizing opportunities presented by healthy spreads and market, and seeking new opportunities for growth in PP based on competitive propylene feedstock in U.S.
In Mexico, the focus will be on ensuring the operational stability of the complex, sales in the domestic Mexican market and strengthening relationship with local clients, and conducting exporting synergies with various other Braskem operations in U.S., Europe and South America.
And in terms of liquidity and financial health, the focus will be on cash generation and the ongoing implementation of the program to cut fixed cost with potential annual recurring savings on R$400 million. That concludes today’s presentation. Let’s go to the Q&A session..
Thank you. The floor is now open for questions. [Operator Instructions] Please hold while we poll for questions. Our first question comes from Mr. Adam Rodriguez from GBM..
Hello, thank you for taking my call and congratulations on the results. There has been a lot of uncertainty regarding the supply of ethylene from Pemex.
Can you explain what would happen in a scenario, in which Pemex was unable to deliver their contractual ethylene amounts? Specifically, what are the liabilities to Braskem and Pemex in this scenario? Thank you..
Hello, Adam. Good afternoon, everybody. On the supply contract in Mexico, we have a very strong contract with a list of rights for the projects, which include very strong delivery mechanism. But we also have a series of protections from an operation flexible point of view.
This contract was reviewed extensively under the project finance and restructuring and led to a situation where the fact that it’s a non-recourse project finance clients required a very tight, very perfected guarantee around the availabilities of ethane. So it has been approved by 17 different lenders.
And we are very comfortable that the contract is very strong and that in the eventuality that Pemex does not provide us with the ethane that the penalties that they would pay would compensate for that lack of supply..
Okay. Thank you for your comments..
Our next question comes from Hassan Ahmed from Alembic Global..
Good afternoon, folks. I think obviously Q2 was a bit of an interesting quarter from a demand perspective, not just you guys domestically within Brazil, but it just seems, be it Asia polyethylene demand, be it North American polyethylene demand seem to be quite strong. So the question I have is around inventory.
Again, complicating things further in Q2 was the fact that, obviously it was a very heavy turnaround quarter, right? So my question is that on one side you have turnarounds, on the other side obviously oil prices were going up, which between demand looking good and oil prices going up, obviously, polyethylene prices went up as well.
So how much do you think this - how much of this positive demand growth that we saw in Q2 stems from an inventory build on the back of rising prices, turnarounds and the like, and how much was just true sort of organic demand growth?.
Hello, Hassan. I think if you look at the timing of the turnaround, a good chunk of the inventory build down was done actually in the first quarter in the U.S. A part of it was at beginning of the second quarter. I would say, if we look at Brazil from a specific point of view, we see strength in demand.
There was some restocking in the value chain by our clients that has very low inventories. So this was the component. Based on what we see in the U.S. and global markets, I would say that, I mean, this strength is coming from a turnaround season that reduced the inventories.
As you said, it was a strong turnaround season and feel pretty good healthy demand around the world, thanks to reasonable economic situation in general around the world. Not the case in Brazil, but we’re starting to see the shift towards a more positive economic environment in Brazil. So even in Brazil, we saw in the second quarter stronger demand.
And this contributed to the strengthened prices that came from higher cost, because of oil price and tighter supply because of the turnaround season..
There you say. And I appreciate the sort of part of the presentation, where you give us sort of your views about ethylene supply-demand fundamentals and sort of slippage in terms of the timing of capacity additions and the like.
I would appreciate your sort of views on the other side of the equation, meaning, the feedstock side of the equation particularly as it pertains to the NGL side. Obviously, you guys are polypropylene producers, polypropylene to propylene spreads are quite important to you.
And there seems to be a favorite debate going on right now, A, associated with potentially nat-gas prices going much higher; and then, part and parcel with that, a combination of NGL exports as well as sort of capacity additions within North America resulting in NGL supply-demand fundamentals tightening quite quickly.
So would love to hear your views on that..
Yes. I think if you look at what’s happening on the demand side for NGLs, we see a wave of announcements of postponements. So, on the demand side it looks like there is a loosening up of the potential pressure on the pricing coming on the demand side. The data we shared comes mainly from IHS external sources.
But you guys have been following the recent announcements by two players in U.S. last week, talking about postponements or delays in projects. So in that sense, I think there is a positive development from the feedstock point of view, because the….
And, by the way, it seems reflective in pricing as well, because pricing obviously for ethane went up to US$0.20 to US$0.23 a gallon and now seems to have come all the way back down to US$0.16 again..
Yes. So this is one aspect. And the other aspect is, I mean, on the availability of NGLs, with oil now in this US$40 to US$50 range and going back and forth. We see in many companies in U.S.
announcing the restart of drilling operations, many companies adding rigs, which if you go back six months, every single month you would see and hear, that the news would be even more rigs being cut, more rigs being mothballed.
And in the recent weeks, I believe almost every single week, we had a company announcing, want to put one rig back on, two, three.
So, I mean, now, we have the US$40 to US$50 and the development in operational costs for shale exploration and those costs going down, you’re going to see a healthy stream of investments in the drilling side that will help balance the supply and make it stable to rising.
So, if you couple this with slightly lower demand internally in the US, if you couple this with slightly less pressure from the exports market, because if oil stays at this price the naphtha crackers are reasonably competitive, as we have seen in our operations here in Brazil, you could have a situation where, I mean, you have stability in NGL pricing.
Even with some increases in NGL exports, the market should balance between the supply decrease and the demand locally, and the slight decrease in exports demand. We’ve heard many reports about China is slowing down, TGH project; therefore, spreading more lengths with propane.
Many of the US-based projects for TGH have been delayed beyond the two that are - I mean, the one that is already operational and the second one that starts early next year. So, I’m more optimistic, quote unquote, in the sense that I see a balanced availability. And you mentioned a significant increase in natural gas prices.
I don’t see a significant increase, unless you’re talking about $0.50 per MBTU being significant. Yes, we could see that, but we’re not going to see $2, $3, $4 of increase in the natural gas prices in the near future in my point of view..
Very helpful, thank you so much..
[Operator Instructions] Our next question comes from Mr. Michael Wolcott from Barclays..
Hi, thank you for taking my question. So first, I was wondering if you can give us a sense of CapEx outlays for the next few years.
And, since specifically what is the scale of your investment that would potentially be involved with building a new polypropylene plant in U.S? And then second, now that that leverage has come down so substantially, is there a target that you would like to stay below and looking at potential new projects or M&A? Thank you..
Hello. Michael. As far as the CapEx, the company usually invests in any given year anywhere between R$1.2 billion and R$1.8 billion of maintenance CapEx and operational CapEx to support the current operations it has.
This is a number as I said, anywhere between R$1.2 billion and R$1.8 billion is pretty stable, and it’s a pretty good estimate for expectations for the future. On top of this, we have the strategic projects. We just ended, I would say, where the Mexico project was a relevant part of it.
So as we talk about the future, it’s going to depend a lot on which decisions we will make around projects. We have announced a couple I would call smaller projects, like the investment in the cracker in Bahia in the north of Brazil, to create flexibility to receive ethane. That is being implemented this year and next year.
And we also shared the news that we have been evaluating a new PP plant in the US. These are two examples of what I call the strategic, that it’s very hard to provide kind of a running rate, because it’s going to depend on the strategic moves and the strategic decisions that will be approved by the board.
And as soon as they are approved they will be communicated and you guys will be able to incorporate that in your forecasts..
Okay, thank you.
And on leverage, I don’t know if you had any comment there?.
So on leverage, we’ve been for many quarters now reducing our leverage when measured in dollars. The way we measure it is we exclude the Mexico, both Mexico results and Mexico’s debt, since it is project finance with non-recourse. So when we look at that measure we ended the first quarter of this year at 1.72 times of net debt to EBITDA.
And now, we are at 1.79. There are two reasons for that increase. One is we paid R$1 billion of dividends in April, so that represents roughly 0.1 in our leverage. And the other one is we’ve made a commitment to a reserve account in the Mexico project.
So we moved that from available cash to another line in the balance sheet and that has increased our leverage by 0.03 or so. So, those are the two larger impacts on our leverage.
And our expectation is to continue to generate relevant cash to enable de-leverage of the company so that we are ready for the strategic opportunities that might come, like the ones I described, for example, the new PP plant in the US even would be a relevant investment, because it would be a world-class plant, therefore a relevant investment.
So the strategy from a financial point of view is to manage the leverage to a healthy point to enable us to act on the strategic opportunities that might come. Just an additional note, we aim this year to remain below 2, so that when the downturn in the cycle comes we don’t go over 2.5 net debt to EBITDA..
Okay. Thank you, guys. That’s very helpful..
[Operator Instructions] our next question comes from Mrs. Lilyanna Yang from HSBC..
Hi, thank you for taking my call. The number one question is on if you could provide clarity on why the maintenance CapEx has a wide range. If I understood correctly, you mentioned between R$1.2 billion to R$1.8 billion per year.
So I wonder why it would be closer to R$1.2 billion or to R$1.8 depending on the years? And on second question, it’s also regarding your leverage target, looking at the level that you feel comfortable for the coming years and thinking that the spreads will be probably benign in the short-term.
It feels like you might have room for an even higher payout, right? So, what are your considerations for increasing your payout or if you think that there are small M&A opportunities in the short-run? Thank you..
Thank you, Lilyanna. And on the wide range, the R$1.2 billion to R$1.8 billion, it’s very dependent on a year-to-year base on the turnaround at the cracker sites. So in a year where you have a large cracker turnaround, you’re going to get closer to the R$1.8 billion.
In a year where you have no large cracker turnaround you’re going to be closer to the BRL1.2 billion. So that’s the reason for the range. As far as the leverage and the higher payout, as I explained before our strategy is to maintain a healthy leverage point, so that we can act upon strategic opportunities.
So it’s going to be any decision on higher payouts of the trade-out made by the board and the shareholders, it’s when the availability of strategic opportunities and their interest to receive more dividends..
Okay, thank you..
[Operator Instructions] I’ll turn over to the company for closing remarks..
I would like to thank all of you for your attention. This was another strong quarter for the company.
Despite the challenges in the Brazilian economy, we have been able to run our operations really hard in Brazil and outside of Brazil, and shift some of the excess volumes that we had in Brazil, given the low demand situation here, to the external markets, leveraging our presence in the U.S.
and in Europe and the rest of South America, where we’ve been present for quite a while. So this was a very good continuation to a very strong year, last year, a very good first quarter. And the expectations as we go forward are pretty positive from a spread point of view. We see a lot of stability.
If the oil price stays in the $40 to $50 range, we see a lot of stability in the spreads. And the economic environment in Brazil seems to be hitting a point of inflection, and most of the indicators that we are seeing now indicate a positive trajectory for the future, which is very good for our financial results.
So once again thank you very much for your time and attention. And for any further questions you might have, the Investor Relations team will be at your disposal. Thank you very much..
Thank you. This concludes today’s Braskem’s earnings conference call. You may disconnect your lines at this time..