Fernando Musa - Chief Executive Officer Pedro Freitas - Chief Financial Officer Pedro Teixeira - Investor Relations and Controller Director.

Vicente Falanga - Bank of America Gustavo Allevato - Santander Luiz Carvalho - UBS Hassan Ahmed - Alembic Global Fernando Siqueira - Citibank Sarah Leshner - Barclays Vicente Falanga - Bank of America Pedro Medeiros - Citigroup.

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem's Fourth Quarter and Full Year of 2017 Earnings Conference Call. Today with us, we have Fernando Musa, CEO; Pedro Freitas, CFO and Pedro Teixeira, IR and Controller Director.

We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. After Braskem remarks are completed, there will be a question-and-answer session. At that time, further instructions will be given [Operator Instructions].

We have simultaneous webcast that may be accessed through Braskem's IR website at www.braskem-ri.com.br and the MZiQ platform, where the slide presentation is available for download. 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 will be answered during the Q&A session may be posted in advance on the Web site. Before proceeding, let me mention that forward-looking statements are being made 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 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'll turn the conference over to Pedro Teixeira, IR and Controller Director. Mr.

Teixeira, you may begin your conference..

Hello, good morning, everyone. Welcome to the Braskem conference call for the year-end 2017. At this time, we decide to prepare a shorter presentation. We intend to deliver just the key highlights for the performance of 2017, the company expects for the year-end of 2018.

So I ask you to move to Slide number three when -- where we will begin our presentation. So Slide number three, it is the summary about what we initially expected for the year of 2017 and what actually happened. So in Brazil, in terms of regional sales, the company is geographically diversified. We have operations in Brazil, U.S., Europe and Mexico.

In general, all the regions, the sales in those regions were positive. There was a growth by 4% in Brazil, 5% in U.S. and Europe, and a huge growth in Mexico, especially because in 2016 during the first semester, the project was pretty much pre-operational. So this is the reason why the increase was so relevant in Mexico.

In terms of spreads, in the beginning of 2017, we expected some volatility. We expected positive spreads for basic petrochemical, and effect for 2017, the spreads were very much robust. I would say, extraordinary, especially in the beginning of 2017. The growth again in 2016 was 28%.

We were little bit more negative in the beginning of the year with respect to the spreads of resins in Brazil. But in the end, the spreads remain a little bit flat as compared to 2016. For U.S. and Europe, we were stable but in the end, the spreads turn out to be a little bit worse than we expect in the beginning.

And in Mexico, we expected a positive spread in the beginning of the year, and the spreads were in fact positive, especially in the end of the year where we see an appreciation of the PE prices and ethane prices remain as stable. In terms of EBITDA in the beginning of the year, we expected a smaller EBITDA for Brazilian operations.

But in the end, the EBITDA turn out to be positive. There was a growth by 2% as compared to 2016. The EBITDA was relatively stable for U.S.

and Europe, in fact there was a decrease by 7%, but the absolute value remain very much robust, and there was, as expected, a relevant increase in the EBITDA from Mexico by 282% compared year-over-year and on a consolidated basis, there was an increase by 17%. The company posted its record EBITDA of $3.8 billion, equivalent to BRL12.3 billion.

In terms of free cash flow, there was also an increase by 9% comparing year-over-year and the earnings per share were also positive in 2016. We had a negative net income. In 2017, the net income was positive of around BRL4 billion and these turn out in a very positive earnings per share in 2017.

So moving to Slide number 4, these we highlighted five key highlights that the company performed in 2017. So in terms of operational performance, it was a year -- 2017 was a year of record of production. So, we posted, record of production of ethylene, butadiene, gasoline, polyethylene, polypropylene in Brazil, PP in the U.S. and Europe.

There were also record of sales in the main chemicals that are produced in Brazil, PE in the Brazilian markets, it was a record as well. Exports of butadiene and ethylene and PP in U.S. and Europe. So the consolidated EBITDA, it was a record of $ 3.8 billion, 17% higher than in 2016.

In terms of value creation, 2017 was a year where we stabilized, actually where we started up in the beginning of 2017 and we stabilized our UTEC production in the U.S. Also we concluded investment for flexibilization of feedstock in the Bahia cracker. Now we can run half of the cracker using ethane instead of naphtha in Bahia.

And this investment was completed by the end of 2017. So it was an achievement for the company in 2017.

And also the board of Braskem, the Board of Director approved the investment for new PP plant in U.S., an investment of up to $675 million for a new PP plant and the total capacity of 450,000 tons that are expected to become operational in the first half of 2020. Also 2017 was an year of liability management.

The company issued two bonds in the total amount of $1.7 billion. This enabled the company to refinance its short-term debt and extend the tenure of the total debt of the company. The demand for this offer exceeded by eight times and represented the largest funding transaction of the company and with the lowest cost ever made.

With respect to credit rating, Braskem maintained its investment grade by rating by S&P and Fitch, so the company's BBB plus by these two rating agencies.

More recently, the company -- the outlook that was negative from S&P was stabilized and Braskem now was eligible by S&P to become three notches above the Brazilian sovereign, so considering the diversification in terms of geography, the diversification in terms of feedstock, the company is more detached from the Brazilian sovereign risk.

And let's talk about dividends. We had an early distribution of BRL1 billion in the end of the year, more precisely in December. These represented around 25% of the net profit of the company. So the minimum dividend was paid in the end of last year.

And the company is suggesting an additional distribution of BRL1.5 billion to be approved within the next Annual Shareholder Meeting. So the company -- all the good performance, good result of the company is being shared also with investors. So let's move to Slide Number 5.

Let's talk a little bit about the CapEx for the company what we posted for 2017 and what we expected for the year of 2018. In 2017, we posted a CapEx of BRL 2.3 billion, BRL1.5 billion is related to operational CapEx and BRL823 million were related to those strategic projects that I have already mentioned.

And this was a decrease of 31% as compared to 2016, especially because in 2016, we still had some contributions to the Mexican project that was concluded and no additional investments or cash was required by the project in 2017. For 2018, we do expect an increase in the amount of investment.

In the operational side, there would be a scheduled maintenance shutdown for the cracker in Triunfo in the south of Brazil that will demand more investment for the year of 2018. And also the new PP plant, 2018 would account for around 40% of expected investments for this project in U.S.

It's 40% of $675 million that are expected to be invested in 2018. So the total investment would increase from BRL2.3 billion to BRL2.9 billion. So let's move to Slide number 6 and we are sharing with all of you how the market in terms of spreads, what is expected for the year of 2018 as compared with 2017. The source of this spreads is IHS.

So for 2017, the PE spread, so the difference between PE prices and naphtha prices was around $720 per ton. It is expected an increase by 3.6%, so the average increase expected by IHS for the year of 2018 will be around $740 per ton, so better spreads are expected by IHS, even considering the new capacities that are becoming operational.

In fact, five new PE plants have started up until now in U.S. with a total capacity of 4.4 million tons and two more expected to begin its operation in the second half of 2018. And also five new ethylene plants have started up until now in the U.S. and in the total capacity of 5.5 million tons of ethylene.

So even though those capacity will start up and are starting up, the spreads, the IHS remain very positive in terms of PE spreads. The same happens for PP. The spreads should increase by 12%. That's the perception of IHS. So 2017, the average spread was $590 per ton, that's the difference of PP against Naphtha ARA.

And the spread should go up to $665 per ton. Some projects mainly in China were postponed to up to 2020. And the demand growth for these projects for PE and PP remain very much robust. So let's move to our last slide, Slide number 7, and here, it's how we see the outlook for 2018 versus 2017.

Utilization rate, the company expected utilization rate should remain stable. There is no much reason to believe that utilization rate should become much lower than 2017, even though in 2017, was a year of record of production. In terms of demand, we see demand very positive in U.S.

and Europe, and important to highlight that in Mexico, the demand should also be positive especially in Brazil and in Mexico, and there is an elasticity in terms of the resin market, which is higher than if compared with the U.S. and Europe region. So we expect a growth for the resin demand in U.S., in Mexico and in Brazil of 1.5 times the GDP.

In terms of spreads, in bottom up, in Mexico, the spreads, we expect to be better, international expected, it is aligned with the view of IHS; U.S. and Europe, it is the same.

We produce polypropylene and in Brazil spreads should be relatively stable, the combination of resins should be relatively stable and the negative side that we expect for 2018 related to chemicals is in fact 2017, we have an extraordinary spreads for chemicals.

We posted very extraordinary impacts in the result of 2017 of around $300 million and we are not expecting at least for now, this spreads being the same for the year of 2018. So, in the end, the consolidated EBITDA for 2018 should be smaller as compared with 2017, even though the EBITDA should be smaller.

The consolidated cash flow for 2018 is expected to be higher. In 2017, we had an important impact in terms of working capital consumption that we do not expect to happen again in 2018. So that will be a pro.

In terms of interest, as a consequence of the liability management and optimization that the company made in its debt profile, we expect to have lower interest rates and gross debt for the year of 2018. This would be a positive. There was a U.S. tax reforms that would enable the company to reduce its income tax paid in U.S.

that would be another positive. In terms of CapEx, as I already mentioned, the CapEx would be higher in 2018, as compared to 2016. It is important to note that in 2017, we paid BRL1.5 billion of around -- of global settlement and for this year, we expect to pay around BRL300 million.

So it's much lower payment that will be due this year to the authorities with respect to the global settlement that was closed in 2016. So in the end, the consolidated cash flow of the company for 2018 should be higher than in 2017. Thank you very much. I will turn to the Q&A session and thanks..

[Operator Instructions] Our first question comes from Mr. Vicente Falanga from Bank of America..

I had a couple of questions. First on the outlook for polyethylene, the market seems to be growing more and more optimistic with the PE cycles. Some experts already mentioning the possibility of an extended up cycle throughout the next five years.

On the other hand, I mean, 1 risk that we do see is the potential effects of a global trade war affecting polyethylene. In other words, Asian producers potentially retaliating tariffs imposed on steel by the U.S. with tariffs on products such as polyethylene. In a scenario that this eventually happens and then U.S.

has to redirect its imminent new supply from Asia to smaller regions like Latin America, for example.

How do you see the region responding and could the countries in [indiscernible] articulate to rise import tariffs on PE at least temporarily? How likely would you see this happening? And then my second question related to the naphtha supply contract agreement with Petrobras.

There are expectations at least from the market side, that Petrobras could revise naphtha supply contract with Braskem soon, since it expires in a couple of years.

To the best of your knowledge and based on what you're able to share, of course, are these conversations currently ongoing? And also, do you see Petrobras's intentions to sell some refineries potentially getting in the way of the volumes they want to compromise with Braskem.

And then, just the last comment still on that subject if I may, sorry, Petrobras just announced that they will build a gas treatment facility in Itaborai, Rio de Janeiro.

Would the company consider adding more flexibility to its crackers on top of the potential [ethylene] supply coming from this plant?.

Vicente, thank you for your question. I'll start with the polyethylene outlook and the question that you have.

On this view, there is in fact this optimistic view from North America or from the market in terms of the demand growth for polyethylene and you can see that on the spread that IHS is forecasting for 2018, even with the entry of the new capacities almost 6.5 million tons of new capacity, forecasted to come in to the market in 2018, of which 3 million tons in the U.S.

The industry, as reflected by IHS is forecasting an increase in spreads on the PE to naphtha spread, which is, I would say, a realization of the optimistic view that you mentioned. The potential effect of an eventual trade war, you have to look at it region by region.

Polyethylene is a highly global commodity and you have a very high degree of international trade in polyethylene. And Asia, China in particular, are net importers -- significant net importer regions. So you have the U.S. and the Middle East exporting polyethylene and basically Asia as the major importer.

So if there is a trade war and that compels in many different ways. So it's hard to forecast what could happen. But let's say that global tariffs increase everywhere. So how would that affect us? I would say, there are couple of ways of how that could affect us.

I mean, first the Mexico project and the Mexico operation now would be, I would say, positively affected. Mexico is a huge net importer of polyethylene. We are the largest local producers. So if Mexico imposes tariff that would actually be positive for us. And we don't export a lot. And we would direct more of the production to the internal market.

So our exports from Mexico will not be materially affected. I would assume. In Brazil, which is the other region where we produce polyethylene. I mean, we follow international prices. So we would have to discuss a little bit what happens to international prices and also the exports of polyethylene from Brazil follow international prices.

So I think the more relevant discussion for what would happen to the Brazilian operation is what would happen to international prices. Hard to foresee, but as I said, Asia is an importer, huge net importer. So if Asia imposes tariffs, it will be -- could mean an increase in prices in Asia, local prices, but the exporters from the U.S.

or from the Middle East would probably be getting roughly the same sort of profitability. So, I'm not sure it would affect our exports from Brazil or even the domestic prices in Brazil that follow these prices. But again, it's a hard question to address because there are lots of moving parts, it's a very complex system.

Sorry, I was going to the next question, but if you have any follow-up on this one?.

No, no that's perfect, thanks..

So, Petrobras naphtha. Sorry, Fernando, I am not sure if you want to make any comment on that..

To just reinforce, I think the point Pedro just made that at the end of the day, this is a global market and the trade flows will adjust, the different regions have their own production and demand balance, and if there is retaliation towards PE produced in U.S., the Middle East will need to supply Asia, especially China. And the U.S.

will serve the other markets currently served by the Middle East.

So at the end of the day, it's all about the global balance between supply and demand, which as mentioned before in the presentation and by Pedro seems to be going towards a positive territory with strong demand in most of the capacity additions already starting up, not a lot of new capacity is expected for the next two, three years to come online.

So moving on....

[Technical Difficulty] Fernando, you're breaking up..

Why don't you take it and I will find another line here..

So the other question was about the Petrobras naphtha. I mean, we have a contract that is valid until December 2020. We are operating with it, so that is the situation now.

Petrobras is rumored to be looking at refinery shares, but we are the only consumer in Brazil, so it's a discussion that we always have with Petrobras around feedstock and what are the possibilities around that. But the contracts are there. The contract is there, it expires in 2020, so I mean, it's something that in due time we will discuss with them.

And the third point on the investment in the gas treatment facility in Itaborai. We are always interested in new feedstock opportunities. We already have a gas cracker in Rio de Janeiro close to Itaborai.

So, it would make sense in our view to take any available liquids from the gas processing and use those liquids to supply our facility, potentially even for an expansion of the facility depending on the volumes available.

But we would need to look at the investment that Petrobras is making and understand what are the volumes there to then start a discussion evaluation of any project based on that. But we do see it as a positive, evolution in terms of having more feedstock available in Brazil that would be positive for us, positive for the industry.

So, we have, I think, a good perspective on this investment by Petrobras..

Our next question comes from Mr. Gustavo Allevato from Santander..

So I have three questions here. First one is regarding the local demand year-to-date, so talking with other companies in different sectors, the companies you have mentioned that demand is lower than initial expected.

So how the companies are seeing the resin demand for local market in the first quarter? Has it been strong or a little bit slower than initial expectations? The second question is regarding the Mexico project. So there is a deliver or pay for Pemex regarding the ethylene supply there.

So when would it impact the operating results, since Pemex supply last tender was for signing the contract. And the third and the last question is regarding the naphtha supply contract. When it was signed in 2015, if I am not wrong, the naphtha price was around $500 per ton. Now, it's above $600 per ton.

So at the time of the contract, had a clause mentioned that in case of further increases in raw materials, the reference price could be reviewed.

So I would like to know, if you could share with us, if you are in the level that the 102.1% is the price that Braskem is still paying, or since naphtha price went up, Braskem is paying a little bit less than this reference?.

Hello Gustavo, thank you for the question. So starting from demand growth, we are seeing a sustained recovery in demand. Last year, demand growth as Pedro mentioned was around 4%. We are expecting for this year looking at the results already of the first quarter around 4% demand growth, again for PE, PP, PVC.

I would say, a strong demand from consumption, the auto industry is recovering as well, white goods, so electronics as well. And then agro -- the agriculture demand and demand for agricultural applications has been especially good.

The sector that is still lagging a little bit is construction in general, which already is showing some aspects of growth. PVC now has already slightly positive growth in the market. But I mean, still in the lower growth level than the other polymers that we have.

In terms of the Mexico DOP, in 2017, we had a revenue of $19.5 million, so that was the accrued revenue and we did have -- we already received or settled a portion of that, so the cash flow is on the deliver or pay is happening in Mexico.

So the contracts is working as expected, in terms of the protection to Braskem Idesa, in terms of the operating results of the JV. The other, I think positive aspect is that, even though we are not receiving all the feedstock that we had expected at first, the operating rate is pretty good at 88% on average.

And also the EBITDA margins are above 50%, so actually 55% for the average of the year and 60% in the fourth quarter. So again, very good results, even though we're not receiving all the volumes that we had expected.

Fernando, if you have any comments on either Brazilian demand or Mexico? Otherwise, I'll take the other question on the contract -- the naphtha contract..

No, it was very clear..

So just Gustavo, you asked about also the contract, naphtha was at, as you said, around $400 per ton back in 2015, now it's at $600 per ton, or $550 is the expected for the current price, I would say. But anyway, it is a higher level. We think, the contract is operating well for us and we do have that fixed price conceptually.

We think that a more -- let's say flexible pricing formula would be better for the industry. So a pricing formula that had more variation depending on the level of oil or naphtha prices would be better for Braskem. But the current contract is actually working well, so it has generated the results that we've seen.

I think, the point to look at is -- is less on the naphtha price level and more on the spread level. And the spread have been pretty good, given the point in the cycle that we are at. So, and that's what gives us the results that we have..

This is Fernando, just to reinforce this. The relevant indicator is the spread.

As Pedro mentioned, flexibility in the contract would be a welcome, especially given the fact that at high oil prices, there is a tendency for the naphtha to the products, the polymer spreads to compress and at low oil prices, there is a tendency for this spread to open up.

So the competitiveness of the whole petrochemical chain fluctuates with the -- that is naphtha base fluctuates with the oil price and therefore if there were some flexibility in the contracting, as we had in previous contracts, it would make it at these extremes high or low oil prices more competitive.

At the current price level, $400 to $550, $600 that we've been experiencing, the current formula works given that the volatility in the spreads and the competitiveness between the naphtha base and the [live feed] based is not fluctuating as much..

Our next question comes from Mr. Luiz Carvalho from UBS..

I have three questions as well. Fernando, maybe if I can touch on the naphtha contract on a different angle, is this negotiation happening from the management level, I mean Braskem with Petrobras or it's happening more in the [culturally] shareholder's agreement between Odebrecht and Petrobras.

Just understand where we are in terms of negotiations so far? And that's the first question. The second question, it's regarding also the Pemex supply. If there is anything regarding the diversification there in terms of the potential pipeline bringing gas from U.S.

or something that you can share with us, in order to look at a bit more longer-term supply if Pemex is not able to fulfill the full contract? And third question, it's related to dividends. And in this year, we saw, if I am not wrong, 60% payout. According to your presentation, you expect in 2018, lower EBITDA level, but a higher free cash flow.

So I just would like to understand how do you see or what's the management, way of thinking regarding the dividend payment for 2018?.

On naphtha contract, all feedstock contracts are negotiated, managed, dealt with by management with suppliers. All suppliers including Petrobras. So this is management responsibility, not shareholder responsibility to guarantee the adequate supply of feedstock for our operations and our teams around the world deal with different suppliers.

There's been a lot of talk about the naphtha contract, because of the announcements of potential changes in governance that were made by Petrobras confirmed by Odebrecht. But dealing with feedstock suppliers is a management responsibility and not a shareholders' responsibility.

On Pemex supply, Pemex is already working around the alternatives to guarantee the supply that they committed under the contract. They have started to import ethane from the U.S. into Mexico to help increase the flow for the petrochemical industry in Mexico. We see this as a good initiative by Pemex.

Many companies around the world are doing that activity of moving ethane around the world, including Braskem, which we started late November. So this is something that we see a very positive as a way to -- in combination with the efforts that Pemex is doing at the production side and fractionation side of its systems in Mexico.

It creates a risk mitigator for the supply which is good from our point of view. As far as the dividends that could be paid out early '19 from the '18 results, this is a decision that will be made at the end of the year. But as we mentioned in the presentation, our expectation is of a strong cash flow generation.

We have an increase in CapEx, but a reduction in the payouts coming from the global settlements that the company signed in December '16. So this should lead to a discussion that we will have at the end of the year, once we have more clarity on expectation for '19 and '20 that, as of today, it seems to be improving.

This will lead to a decision that if you look at the past few years, our payout ratio has been in this 50% to 60% of net income ratio. So we'll make the decision by the end of the year. But the underlying expectation of results, leads to a strong cash flow and therefore a decent payout for next year as well.

I was going to ask if Pedro wants to add anything on the dividend question?.

No, I think, that's it..

And just a quick follow-up on this one. More and taking the opportunity that you are both on the call.

Really to capital allocation, this high payout with a high, cash flow and then how do you see potential acquisitions or for the projects underway? I mean, you already made a significant large project, which is the Ethylene XXI, you're now with a project of PP in U.S., but how can we think looking forward in terms of the -- through the capital allocation when you look to the cycle, right?.

Yes, thanks for the question. This is something that now that the Mexico investment is behind us, as far as cash needs and we're in full steam ahead with the new PP plant in the U.S. We do anticipate that new opportunities will come to the company, be it new projects, new construction or acquisitions.

We have always looked at those opportunities, nothing interesting came up besides the PP plant that was approved last year. But this is constantly being analyzed. We have a very disciplined process to look through our strategy and the positioning we have in the different regions and businesses where we are operating. We'll continue to look for that.

The acquisition route is one where the very strong results has been leading to high valuations in our point of view, for a cyclical industry. And I think, the new expectations around positive cycle going forward might lead to tougher negotiations around any potential acquisition.

Having said that, if the right asset or company comes up for sale, we will certainly look at those, given our very strong track record of making the acquisitions in a very successful way for Braskem shareholders, generating a lot of value from the acquisitions made over the years.

So it is part of our plan, and we'll certainly be, as I mentioned, part of the decision-making in the back end of the year early '19 around dividends is going to be this potential new projects will come into the equation when we make any decisions about dividends for the upcoming years..

Just a complement there, Fernando. The discussion around dividend payout and also on investment, always goes also through the discussion about leverage. So we always consider the company's ability to leverage and limits to leverage so that we don't over extend ourselves.

So that's also part of the consideration that we always have whenever we are discussing this balance between new investments and dividend payout..

Our next question comes from the Hassan Ahmed from Alembic Global..

You know a two part question, one about the near-term and one about the longer-term. On the nearer-term side of things, you talked about compressing EBITDA year-on-year in 2018. Just a bit confused about that, because as I take a look at the fundamentals, clearly Brent crude is up $15 a barrel relative to 2017 averages.

So at least in my mind that should equate to $0.07 to $0.08 a pound tailwind in the price of polyethylene, and we are obviously seeing that particularly in the U.S. market, where contract pricing has gone up.

So on the ethylene, polyethylene side, and you also obviously alluded to sort of expanding spreads year-on-year, then we are obviously in the near-term entering a pretty heavy turnaround season, particularly in Europe. I think in April alone there are five ethylene crackers that are going to be turned around.

Then I take a look at the polypropylene dynamics near-term, supply-demand continues to get tighter. So I'd imagine polypropylene margins will be up year-on-year as well. And finally, you have chlorovinyls where the fundamentals look extremely attractive.

So the near-term question really is, why do you feel that you will see compressing EBITDA in 2018 relative to 2017? So that's the near-term side. On the longer-term side, I mean obviously, we, post 2018, we're entering a capacity addition vacuum period.

So the handful of companies that had already announced some incremental capacity, it seems even they now are backing off, meaning the other day, Chevron came out with an announcement that they were reconsidering the NextGen cracker on the back of higher capital costs.

Obviously, higher steel prices, higher energy prices and the like, so longer-term, I'd love to hear your view, I mean, are we basically going to see to a tight side -- what was going to be a pretty tight environment even get tighter? So that's kind of my two part thing about the near and long-term?.

On the short-term, I think there is a couple of factors that need to be included here in the discussion. First, Braskem is much larger than PE.

So if you look at the crackers profitability, especially the naphtha crackers in Brazil, in the first half of the year in 2017, the co-products had very, very strong price increases that led to significant profitability in our operations, thanks to that.

The expectation is that those co-product price increases will not happen this year, we didn't see it last year, it happened in the first quarter, we didn't see it happening this year. And this should put more pressure on the overall basic chemicals spreads.

Second, even though the scenario for PE is one where the spreads should be healthy, it's important to remind ourselves that there is a lot of new production coming online in the U.S., some of it will target South America.

So we do expect increased competition in the region, which should lead to a tampering of this spread increase translating into concrete margin increase for us. So we probably will see more competition from the U.S.-based production in South America, which will be counterbalanced by the better spreads in general, as mentioned before.

And the net-net combined with chemicals, in our point of view, right now is that this should lead to a decrease.

Two other extraordinary factors that are important to factor in is, we did have a positive EBIT contribution from the acquisition of quantiQ last year, it will not repeat itself [Indiscernible] divestment of quantiQ and the -- in Brazil there is a tax incentive the PASEP, which has a lower rate in '18 compared to '17.

So the impact of its to our profitability will be reduced as well. So when you put all this into the equation, it leads to our expectation of declining EBITDA for the short-term.

Having said that, if the optimism that we're seeing in the industry around PE and PP really goes to a very positive scenario, this could, I mean, lead us to being closer to last year's results. If those spreads really stay strong or get even stronger than currently anticipated for the back end of the year.

On the mid-term, I think at the end of the day, even [demand] perceived to be very strong over the next few years, this will lead to investment. If CapEx becomes even more expensive in the U.S.

as it had become over the last four to six years, I think, the fact that people have mastered the ability to move the ethane around the world could create the ability of investments being made in other regions with ethane flowing from the U.S. towards that.

So we already start to hear news of ethane crackers being built in China with imported ethane, and the capital intensity in China is significantly lower than what you see in the U.S. Gulf Coast. So either the CapEx cost in the U.S. will go to -- back to a more reasonable level and the projects will be built in the U.S.

or even project will be built in China, India or other places where capital intensity is slower and the feedstock will flow as the industry master the ability to move ethane around the world.

So, my expectation is, we might have an extended positive cycle, but eventually projects will be needed -- product will be needed and I mean projects will be built to deal with it..

Now a boring follow-up if I may. I was taking a look at your consolidated EBITDA and there seems to be BRL 182 million drag to EBITDA in the quarter, and it seems that it was under the eliminations and reclassifications line. And it seems for the last couple of quarters, there has been a negative drag as that line item.

And that drag prior to call it, two, three quarters, was not there.

So just trying to understand what that drag is?.

Pedro, do you want to take this, this is more of a….

So Hassan, what we have been doing is, we have on the segments, because we export from Brazil to Europe and to the U.S., a little bit, but more to Europe. We are adding the profitability of those exports or the margin of those exports to both businesses, to the Brazil segment and to the Europe segment.

And then we eliminate that on the consolidation so that we don't have a double count on the consolidated results. So that's the main reason for that..

Our next question comes from Fernando Siqueira from Citibank..

I have two follow-up questions. My first one was regarding Mexico projects, given that Pemex production -- ethane production is dropping and I understand the importance we did have.

But can you give us a guidance of what would be a reasonable utilization rate of that project for this year? And also I understand that this quarter, you were reimbursed for the difference in the utilization rate for the second quarter '17, given that Pemex did not deliver the 100% supply of ethane.

I am just trying to do back of the envelope math here, and I'm trying to understand whether you're going to be reimbursed for only the ethane cost or you actually going to be reimbursed from the margin, from not producing the PE. So those are my two questions regarding the Mexico projects and my last one is on dividend.

What is the reasonable leverage ratio? What is your target leverage ratio going forward? I'm just trying to understand if it's reasonable to think that your dividend payout going forward should be close to free cash flow for the end of this quarter, as far as, as it was this year?.

On Mexico, our expectation is to be running anywhere between 85% to 90%, depending on availability of supply from Pemex. As far as the penalties, the deliver or pay penalties, they partially offset the margin, they do not compensate for the full margin and the structure of the contract is not linked to a margin compensation.

And as far as leverage, we -- the dialog with the board is to have 2.5 as a top number for leverage. We could eventually go a little bit above that in the case of a relevant acquisition if it makes sense. But this would happen if we had very strong synergies, expectations that would quickly bring us back below 2.5.

Pedro, I don't know if you want to add anything on the two topic?.

Yes, just to reinforce that this leverage of 2.5 is a ceiling reference, it's not anywhere close to where we are right now. We are roughly 1.9 and even with dividend payments, we will get maybe closer to two, but nowhere close to 2.5..

And I would also add, Fernando that these penalty, it partially offset the margin, especially because now the ethane price it's very low, it's close to $100, $200 per ton and in that situation where the ethane price pulls up, of course, the margin would be more compensated by these deliver or pay penalty..

Actually so -- basically you have a range of how much you would be compensated for the ethane not supplied by Pemex, right?.

We don't provide exactly percentage, but it's a percentage over the ethane price. So if the ethane price is higher, the absolute value of the compensation will be higher as well, that's the rationale behind it..

Our next question comes from Mrs. Sarah Leshner from Barclays..

So most of what I wanted to ask has been answered.

But I just have one small question remaining, which is whether you are aware of negotiations continuing or not continuing between your shareholders, in particular as it relates to Petrobras stated interest in divesting its stake?.

So the information I have is that the dialog between Petrobras and Odebrecht is ongoing. As I mentioned in previous calls, we are not directly part of it. This is a discussion between the shareholders. As of today, I have not been informed of either concrete progress or the stop of the conversations.

So I would say, the dialog is still happening between the shareholders given the fact that I did not receive any information to the contrary..

Perfect. And I just have one very, very small confirmation. So I recall that for 2018, the guidance for utilization at the Mexico operations was 90% and you came in right around 90% or the 88%. But you mentioned that for 2019, it was 85% to 90%.

So I'm just wondering, is it your intention that those numbers should be considered flat? Like we should expect to see relatively similar utilizations from 2018 to 2019 or is it a deliberate change in your guidance from 90% in 2018 to a lower range in 2019?.

I would say, even given all the actions that Pemex is taking, including the start of import of ethane. Our expectation is to have similar type of performance on the Pemex side. So that's why we have this range of 85% to 90%. We fluctuated during the year and ended the year at 88% on average for the year. This is a range for where we expect.

It will depend a lot on, way more on Pemex performance and the amount of imports that we will be doing. They tested their system for the imports over the last month, month-and-a-half, and it's going to be now their decision to increase that import rates or not based on how well the production side and the midstream side of their systems operates.

They have the reserves, they have the capabilities to produce more ethane locally, so let's see how they manage the system overall and how much imports they will bring..

Our next question comes from Mr. Vicente Falanga from Bank of America..

Thank you for taking one more question. It will be quick one, I promise.

Could you remind us what is Braskem's naphtha importing capacity to Brazil today in a smooth way without having to take any supply timing risks? And if you were to import your naphtha, would you likely get similar pricing conditions as a contract that you have with Petrobras?.

Today, we already import a significant part of our demand of naphtha in Brazil. We have the ability to import a little more than we're currently importing. The large part of the infrastructure for the naphtha import is in Petrobras hands and control.

So this is part of our daily dialog from an operational point of view with Petrobras to facilitate our imports of naphtha.

As far as price is concerned, it varies along the year depending on the supplier, the quality of the naphtha and naphtha has different types of naphtha and depending on the olefins and aromatic contents of different naphtha, it could yield to different pricing.

I would say in the scenario we've been living over the last few months, we end up with pretty similar price points for the naphtha between the imported naphtha and the Petrobras contract.

With the naphtha fluctuating in the $500 to $600 per ton range, given the fact that our Petrobras contract is a percentage of the reference and some of the other lended cost would be more in reference plus a fix amount, typically related to freight.

So today, as I said, we're pretty close to 50/50 our imports to the -- compared to the naphtha contract with Petrobras and we could import a little bit more depending on the access to logistics, but other than the contract with Petrobras, I mean the local supply has -- makes a lot of sense to -- for them to serve us and for us to buy from them to facilitate logistics..

Our next question comes from Mr. Pedro Medeiros from Citigroup..

I apologize if this was somehow already answered on the call, I had some connection issues.

But do you mind to comment on the maturity of your supply contract for ethane with Petrobras, how it's currently working? And whether there could be any negotiations on that side? And as a follow-up to that, in light of the de-risking in the outlook for availability for ethane with Petrobras now confirming the construction to expand fractionation capacity and that should start by 2020.

What are the conditions required for you to consider an expansion in Leopoldo and when should we be discussing the start because it is the part of the investment in Braskem?.

So the ethane supply with Petrobras expires, the current contract goes to 2021. So it expires after the naphtha contract. As mentioned before, the dialog with Petrobras and all suppliers of feedstock is a constant dialog.

As we get closer to the end of the most relevant contracts like the naphtha contract or the ethane propane supply for the Rio de Janeiro cracker. We will start the dialog. We have over three years -- for more than three years for the ethane and propane supply in Rio de Janeiro, so when it's the right time, this dialog will happen with Petrobras.

As far as additional feedstock for a potential expansion of the Rio de Janeiro cracker, this is something that we have been evaluating for quite a long time. It's going to be dependent on the development of the pre-salt reserves first, and second the midstream infrastructure, the fractionation and separation units. There are multiple players now.

It goes beyond Petrobras and all those players are making their investment decisions and their investment evaluations.

As this progress, we will have more clarity from their end on future availability and we will certainly engage with both Petrobras and the other players around additional feedstock for our complex in Rio de Janeiro where we do have an opportunity at a very competitive CapEx to -- basically to double capacity there.

But when the big question is around the feedstock availability, which depends on not only the midstream, but also the production wells development by Petrobras and the other players in pre-salt..

I'll turn over the conference back to the company for closing remarks..

Okay, so thank you very much for all the questions and the attention, as discussed in the presentation and during the questions session. 2017 was a very strong year for Braskem. We had very positive operational results from a production point of view, from a commercial point of view around the world with several production records that we delivered.

We also had a set of important value adding projects, either starting or being completed be it the UTEC new plant that started early in the year, the approval of the PP plant construction in the U.S.

and the conclusion of the ethane flexibility for the Bahia cracker, which will help us be -- continue our drive to making Braskem a very competitive company going forward.

On the financial side, three highlights, I mean the liability management with the $1.75 million raised in the two bonds with a very competitive cost and really helping on the liability management and helping us push the maturity of the debt and reducing the amount of debt we need to repay over the next two to three years.

The rating agencies, looking at us and seeing all this positive results and therefore maintaining our investment grade by two of them.

Despite the downgrade that Brazil has been suffering, I think it's a clear indication that the rating agencies and the market in general is finally perceiving that Braskem -- it's not a Brazil story, it's a global story, the company even though still has a strong base of its business in Brazil.

Now really has a global footprint and it's more exposed to the overall global economy with a bias towards the Americas side. But it's less dependent on Brazil as clearly the rating being so much above the Brazil rating demonstrates. And finally, on the dividend payout, the BRL 1.5 billion on top of the BRL 1 billion that we paid out late last year.

I think, it's another indication of the confidence that the management and the board has on the solid results that we expect over the next few years, and our ability to continue to find good investment opportunities while returning value to our shareholders in the process.

So once again, thank you very much and looking forward to talking to all of you in month, month-and-a-half when we will publish the first quarter results. Thank you. Bye-bye..

Thank you. This concludes today's Braskem's earnings conference call. You may disconnect your lines at this time..