Braskem's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.14.14 | About: Braskem S.A. (BAK)

Braskem S.A. (NYSE:BAK)

Q4 2013 Earnings Call

February 14, 2014 9:00 a.m. ET

Executives

Carlos Fadigas – CEO

Mario Augusto Da Silva – CFO

Roberta Varella - Head of IR

Analysts

Denis Parisien - Deutsche Bank

Marcus Sequeira – Deutsche Bank

Operator

Good morning, ladies and gentlemen. At this time, we'd like to welcome everyone to Braskem Fourth Quarter 2013 and Full Year 2013 Earnings Conference Call. Today with us, we have Carlos Fadigas, CEO; Mario Augusto Da Silva, CFO; and Roberta Varella, Head of Investor Relations. We would like to inform you that this event is being recorded. [Operator Instructions] We have simultaneous webcast that may be accessed through Braskem's IR website, www.braskem.com.br/ir. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay facility for this call on the website. We remind you that questions, which we will be answered during the Q&A session, may be posted in advance on their website.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of Securities Litigation Reform Act of 1996. Forward-looking statements are based on beliefs and assumptions of Braskem management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Braskem and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Roberta Varella, Head of IR. Ms. Varella, you may begin your conference.

Roberta Varella

Good morning ladies and gentlemen. Thank you for participating in Braskem’s earnings conference call. Today, we will be commenting on our results for the fourth quarter and the year of 2013. We'd like to remind you that pursuant to Federal Law 11638 as of 2007, the results present in today's presentation reflect the adoption of International Financial Reporting Standards, or IFRS. Note also that as of the second quarter of 2012, the company began to recognize investments in jointly controlled companies using the equity method and no longer based on proportionate consolidation. Furthermore the decision to maintain the investments in Quantiq, which is the company responsible for the chemical product distribution, Braskem’s consolidated results reflect the consolidation of its result in the financial statements for the fourth quarter and fiscal year 2013, as well as the restatement of the quarterly and annual financial statements for 2012. The information in today's presentation was reviewed by the independent external auditor.

Let's go to next slides where we'll begin our comments. The Slide 3 presents the highlights of the fourth quarter of 2013. The capacity utilization rate of Braskem's crackers averaged 84%, down 6 percentage points from the average in the previous quarter mainly reflecting the scheduled shutdown at the cracker at Camaçari that began in late September and lasted 40 days.

The Brazilian market of thermoplastic resins totaled 1.3 million tons, growing 2% from third quarter driven by the opportunistic entry of imported PE [ph], replaced rate of the additional import tariff of polyethylene and the risk coking plant [ph] in the PVC can.

Compared to the fourth quarter of 2012, resin demand grew by 80%, Braskem sales followed this growth to reach 900 and 5000 pounds in the quarter. EBITDA was around R$1.2 billion in the fourth quarter. In US dollar, EBITDA was US$521 million. The increase when compared to the recurring EBITDA of fourth quarter 2012 was mainly explained by the recovery in international markets and tax relief on raw material purchase.

To meet the region's growing demand and to further strengthen its vinyls chain Braskem announced an agreement with Solvay for the acquisition of its controlling interest in Solvay Indupa, a PVC and caustic soda producer in Brazil and Argentina, which is still subject to approval by regulatory agencies in both countries. The acquisition add Braskem’s capacity in Brazil and in the regional markets, making the fourth largest PVC producer in the Americas, as part of the diversified feedstock metrics and make it more competitive, the consortium on the new petrochemical complex in Mexico continues to sell it with the project phase of completion between 68% in the quarter.

Another highlight was the withdrawal by the subsidiary Braskem-Idesa of the second instalment of the project finance in the amount of US$547 million, in line with its commitment to its financial health, Braskem leverage as measured by the ratio of net debt to EBITDA ended the quarter at 2.87 times in US dollar, a decline of 12% from the fourth quarter of 2012, the second improvement in operation performance between the periods.

Let’s go now to Slide 4. This slide presents Braskem’s highlights in 2013. PE crackers operating at an average utilization rate of 90%, Braskem posted a record high ethylene production of 2.4 million tons. The scheduled maintenance shutdown and some operating issues in the period were offset by the high utilization rates registered in the first half of the year. The company also posted record high polyethylene production of 2.6 million tons in the year.

The Brazilian market of thermoplastic resins totaled 5.4 million tons, up 80% from 2012 driven by the restocking trend in the chain and the better performance of some sectors as infrastructure and agriculture. In the scenario, Braskem sales grew by 6% to reach 3.7 million tons.

Also, EBITDA in the year was R$4.8 billion, growing by 22% from 2012. Excluding the non-recurring effect, consolidated EBITDA increased 150% [ph]. The main factors were the higher sales volume, the recovery in the petrochemical spreads in the international markets, the tax relief on raw material purchases and the Brazilian real exchange. In U.S. dollar, EBITDA in 2013 grew to R$2.2 billion.

As mentioned before, in line with Braskem’s strategy to diversify its feedstock profile and make it more competitive, the construction of the Mexico project continued to advance. Regarding the project finance structure, the subsidiary Braskem-Idesa withdrew two installments of the project finance totaling US$2 billion. The first disbursement was used it by the subsidiary to update disbursements [ph] and advanced by its shareholders, which in the case of Braskem was 649 million.

Another highlight in the area was the adoption of hedged accounting, leading its net exposure to dollar and to better reflect – exchange valuation in Brazil, Braskem decided to designate a portion of its dollar-denominated liabilities as hedge for its future exports. This means that exchange valuation on these liabilities will be temporarily recorded as the shareholders’ equity and transferred to the income statement only when these exports occur, making possible the simultaneous recognition of the impact on these liabilities and exports.

Braskem posted net income of R$507 million in the year. Based on these results, management has proposed the payment of dividends in the amount of R$483 million.

Let’s go to the next slide please. Slide 5 shows the performance of the Brazilian market of thermoplastic resins and Braskem’s sales. In the fourth quarter of 2013, the Brazilian – thermoplastic resins was 1.3 million tons, growing by 2% from the previous quarter. The highlights include – PVC market driven by the expectations of the continued strong performance of the construction industry and the opportunistic entry of PE imports for August and October and the expiration of the additional import tariff of polyethylene. In this context, Braskem sales were 900 and 5000 with market share of 68% in line with the previous quarter, in a year in which the Brazilian GDP growth once again – forecast.

Domestic demand for thermoplastic resins grew by 80% to 5.4 million tons. As mentioned, this growth – is explained by the performance of certain taxes and by the restocking trend in the chain on the first semester. Braskem sales – were 2.7 million tons, a growth of 6%.

Let’s go to the next slide please. Slide 6 details the factors that influenced EBITDA in the fourth quarter of 2013 compared to the same quarter of the previous year. Braskem’s consolidated EBITDA was close to R$1.2 billion, an increase over 20% from the recurring EBITDA of the last quarter of 2012. The main factors that contributed to this performance were: recovery in thermoplastic resin spreads in the international markets, the higher sales volume and the tax relief on raw material purchase. The depreciation in the Brazilian real also had a positive impact of R$254 million which resulted from a positive revenue impact of around R$1 billion and a negative cost impact of R$850 million.

Let’s go now to Slide 7. This slide presents the factors that influenced EBITDA in 2013. Braskem’s consolidated EBITDA in the year was R$4.8 billion, growing by 23% from 2012. In dollars, EBITDA was 2.2 billion, 11% higher. Excluding the non-recurring effect, Braskem 2013 EBITDA grew by 57% in reais and 43% in U.S. dollars. The main drivers of this performance were: the improvement in contribution margin which benefitted from the recovering resins and petrochemical spreads in the international markets which increase – by 28% and 12% respectively, the better sales mix and the tax relief on raw material purchase. Another highlight was the processing tax from real depreciation of R$180 million with the positive revenue impact close to R$4 billion and a negative cost impact of around R$6 billion.

Let’s go to the next slide please. Slide 8 shows Braskem’s debt. Since investment in the Mexico project by the subsidiary Braskem-Idesa is financed under a project finance model, this debt – using the project on cash generation, the – presented here does not – this financing structure. In this context, on December 31, 2013, Braskem’s gross debt stood at $7.9 billion, down 2% from the balance on September 3. In Brazilian real, gross debt increased by 2% reflecting the impact from the 5% U.S. dollar appreciation in the period. At the end of the period, 7% of gross debt was denominated in U.S. dollar. The balance of cash investment remained virtually stable in relation to the third quarter at $1.6 billion.

In line with the strategy to maintain high liquidity and its financial health, the company also maintains 3 standby credit facilities with two in the aggregate amount of $600 million and one in the amount of R$450 million, which do not include any restrictive covenants on withdrawals during the times of adverse market and which will not happen in the period.

As a result, Braskem's net debt in U.S. dollars stood at $6.4 billion, down 3%. In Brazilian real, consolidated net debt grew by 2% to R$15 billion. The percentage of net debt denominated in dollar was 75%. Financial leverage as measured by the ratio of net debt-to-EBITDA in U.S. dollars ended the year at 2.78x, down 5% from leverage ratio in December 2012, it’s driven by the better operational performance. In Brazilian real, the leverage ratio stood at 3.09x.

At the end of December, the average debt term was approximately 15 years. Considering only the dollar-denominated portion of the debt, the average term was around 21 years. Only 7% of the company's total debt matures in 2014, and its high liquidity ensures that its cash and cash equivalents cover the payment of obligations maturing over the next 32 months.

Considering the standby credit facilities as well, this coverage increased to 35 months. In line with its debt lengthening strategy, Braskem issued $500 million on bonds due in February 2014. The proceeds were used exclusively in an offering to repurchase shorter-term bonds.

Let’s go now to Slide 9. This slide shows CapEx in fiscal year 2013 and the outlook for expanded in 2014. Maintaining its commitment to making investments with returns above the cost of capital, Braskem invested R$2.7 billion in 2013. Of this total, 40% or around R$1 billion went to the Mexico project. The deviation from the amount initially planned for the project in 2013 is explained mainly by the Mexico project. The main factors were: the anticipation of part of these disbursements with the arrival and assembly of large equipment on the site; the delay by the Mexican government in the process to refund the value-added tax levied on equipment purchases; and the effects of currency variation on the translation of amounts invested in U.S. dollar into Brazilian real.

It is important to clarify however that Braskem continues to be committed with its financial discipline and this deviation does not reflect in an increase of cost in the process of transaction. The company also invested R$1.4 billion in maintenance in order to keep its basic operating at high levels of operating efficiencies and reliability. For 2014, Braskem investments are estimated at R$2.7 billion. Of this amount, approximately 25% will go to the Mexico project and around 60% will be allocated to the maintenance, productivity improvements and reliability of its assets, including the scheduled maintenance shutdowns at Rio Grande do Sul and São Paulo crackers. The remainder will go to other strategic projects, being the COMPERJ project one of them.

Let’s go to the next slide please. Slide 10 covers the global petrochemical industry and its outlook. In the fourth quarter, petrochemical spreads in international market remained at high levels, with – recovery in mature economies and scheduled shutdowns were delayed – in the short term, we expect to maintain their current pace. The harsh winter pressured feedstock prices in the United States and petrochemical price has followed this trend. Scheduled maintenance shutdown and expectation of a stronger demand at the global level are also positive factors for the scenario.

For 2014, the outlook of the world economy growth driven by stronger growth in developed economies continues to positively influence the demand and petrochemical industry profitability. We expect there are few associated with [indiscernible] region and the impacts on the dynamics of oil price, and consequently naphtha price. The growing U.S. production will also be an important factor in this dynamic. In Brazil, 2014 forecast is of a weaker domestic consumption [indiscernible] and there is certain political scenario which may impact the demand for petrochemicals.

For the mid to long term, the outlook for petrochemical industry calls for a better recovery in international spreads, reflecting a better global scenario. Uncertainty with that, the timing of the startup of some projects that we announced continue to be a favourable lever for the recovery in taxes for stability. We expect the new capacity project announced in the United States to start up as of 2017, which should resume pressure on the global petrochemical for stability. However it’s important to note that this new capacity is not expected to change the pricing dynamic which continue to [indiscernible] feedstock.

Let’s go to the last slide please. On this slide, we present the main areas management is currently focusing on. As explained on last slide, expectation for 2014 points that global economy will continue in recovery. However this scenario is fragile and the lower growth may affect the demand for petrochemicals impacting sectors for stability. In this context, Braskem strategy remains focused on strengthening its business and making it more competitive while optimizing the management of its cost. The company has invested in projects to diversify feedstock matrix and improve its business on the global cost curve by using the integrated petrochemical complex [indiscernible] polyethylene, analyzing the construction of the petrochemical complex in Rio de Janeiro and analyzing the opportunities in the U.S. markets arising from the availability of shale gas.

Braskem also may focus on in its partnership with clients, investments in innovation with the development of new applications and efforts to support the growth of the plastics manufacturing industry, its continued pursuit of higher operating efficiency by increasing the capacity utilization rate; and the closing of the acquisition of controlling interest in Solvay Indupa and all these without losing sight of maintaining the company's financial health and cost discipline.

That concludes today's presentation. So let's go now to the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Mr. Denis Parisien from Deutsche Bank would like to make a question.

Denis Parisien - Deutsche Bank

I am wondering if you could quantify for us the impact on EBITDA of the tax – fiscal seems the tax break on raw material cost in the fourth quarter, and how much was it in the third quarter? You mentioned this as being a contributor to EBITDA. Maybe I missed that, I don’t know if you have that in the slide that explains EBITDA, if it was there, sorry. I didn’t see any quantification of it in the press release. And I have another question after that.

Carlos Fadigas

Hi Denis, this is Carlos Fadigas. The impact of the reduction in taxes on raw materials, feedstock, tax in raw materials in the year was roughly R$600 million. Half of that was the direct market of the year. So basically half in half in the last two quarters of the year. It started in May but it took some time to hit to income statement because growth [indiscernible]. So pretty much half, half of the third and half of the fourth, that’s somehow between the second quarter 2014 as well.

Denis Parisien - Deutsche Bank

My other question is the surge in imports that you faced in the fourth quarter due to the expiration of the tariff. I was a little bit surprised by that considering that the real obviously is at a much more competitive level than it has been in the previous couple of years, as your previous press release had talked about regaining market share versus imports. You have that tax break on raw materials as it obviously makes the company or the country more competitive and yet the lowering of the tariff from whatever I guess with its special rate 20% back down to 12% caused the surge in imports. And I mean that tariff has been remained at the new lower level right. So that sounds like a little bit of a concern, that you still are having a severe import competition unless you get a special higher tariff, what does that tell us about your cost competitiveness or can you give us a little bit of color on year over year, quarter over quarter market share in that product and what you expect going forward? I mean you just address it on a broad scale, your competitiveness vis-à-vis the imports?

Carlos Fadigas

Denis, let me address your concern. First point is that as you mentioned, we had import tariff that moved up from 14 to 20 from October of ’12 and came back from 20, back to 14 from October 2013. Because of that, the surge let’s say towards with action [ph] I believe – from the third quarter into the fourth quarter. So whoever wanted to import, there was an incentive, two weeks to the tariff came back from 20 to 14. So we saw some imports that most likely would have entered the market in the third quarter that actually entered the market in the fourth quarter because of that. So when you see the market share of Braskem, yes it came back from 70% to 68% in overall of the market share from comparing 2012, 70% with 2013 68%. It’s not a net change. I don’t expect imports to keep moving up because of the return to 14. We have believed 14 not in the same year. That’s a rather to have plenty. That we have been living with 14 for 14 years. And the interest rate that you mention and all the other things which have helped us, you also have to bear in mind that we have prices here that we align with international price constantly. So whenever interest rates grew up, we can either hold a little bit and work – and improving the market share or you can raise them though the next month tariff and therefore it has a bit of impact on market.

Trying to summarize what I am telling you – it’s not a new trend, going to a high end imported – it’s delayed in the third to fourth quarter. All the things we have mentioned explaining to our benefit to raw material to real into all the sectors winning the size of our price strategy, our price strategy is to find – and the market share and [inaudible] and the margin we want to have. So, that’s how we’re going to be managing mix and I didn’t see any significant change in the competitive landscape that should point to constant decline in market share from what – sorry, from Braskem but it’s a constant process in terms of the pure management needs month-by-month monitoring imports. And 2017 I think that overall international price of polyethylene may change because of new capacity, I think we’re going to have plenty of time to discuss that between now and then but we’re also working here on other long-term strategies to increase competitive mix of Braskem for when that time comes. I hope I have answered at least part of your question.

Denis Parisien - Deutsche Bank

That’s very helpful. Thank you very much. Last question, if I may, the credit lines that you mentioned several times, that during the presentation Daniel mentioned several times during the presentation are any of them committed credit lines? Is there a credit fee for any of them?

Mario Augusto Da Silva

Hi, Denis. This is Mario. Good to talk to you again. We do keep a – a rough estimate, we have 3.5 billion, 3.6 billion real of cash position and on top of that, given the cost of keeping cash in the Company, we do have on top of that 1.8 billion real of committed credit line as a variable cost in terms of commitment piece associated with that. It’s better to have those committed lines rather than having cash where you can have a strong negative carry on that cash position. So, there is no net cost on those credit lines, no net cost so – and we can have access to those credit lines at any point.

Denis Parisien - Deutsche Bank

Excellent. Thank you very much.

Mario Augusto Da Silva

Thank you.

Operator

Mr. Everett Cordelia [ph] from GBM would like to make a question.

Unidentified Analyst

Hello. Thank you for the call. I wanted to ask you about the increase in naphtha prices from Petrobras. I wanted to know if it’s going to materialize and if so how much will it increase in terms of percentage? I know the original plan was to raise the prices as a percent but I would like to know if you have an advance on these matters?

Mario Augusto Da Silva

Hi, Andres, thank you for your participation in the call. First of all, I can’t talk much about the negotiations, they’re sensitive topics and some of the conditions discussed that are also relevant to competitors of Braskem so I won’t be able to address some of your points. The only point I would like to make is first of all the 5% [inaudible] that came from the press that was an assumption made by the press. But I cannot, again, comment to whether it is right or wrong but it’s not a number that came from the Company management. What I can also tell you is that the way we see it there is no space – for sure no space for addition of ground support segment and I mentioned that because as you know we face competition from [inaudible] the price of producing polyethylene from gas is much, much lower than producing from – it’s actually some $800,000 to $900,000 lower than producing from [inaudible] and also the Brazilian Chemical Society has a huge crazy debt on its balance – commercial balance. So we have reached a record $32 billion net in terms of trade balance of the chemical society in Brazil. Roughly, one-third of the chemical products market in Brazil is already in the hands of imported products – all kinds of products. And I mentioned the chemical, not only resin, because Braskem runs three raw material Braskem Brazil one, [inaudible] naphtha and from that point we stored hundreds of blueprints in these [inaudible] chemical society in Brazil, so [inaudible] cost of shale gas in those space for ready raw material price in Brazil and that’s our main focus on the discussion with Petrobras. So, that’s what I can comment that product we mentioned to you, I apologize if I can’t go into more details.

Unidentified Analyst

Okay. It’s perfect. Thank you very much.

Operator

Mr. Marc Sequeira from Deutsche Bank would like to make a question.

Marcus Sequeira – Deutsche Bank

Hi, good morning, everyone. Sorry if they already have been asked but if you look at my numbers they point out to a gradual decline in spreads throughout 2014, so I was wondering if you guys see the same trends? And also the second question is that, you know, given how the macroeconomic activity in Brazil has been and the expectations for this year, do you expect that it would be easy for you or how do you see passing through prices and passing through real devaluation into prices? Thanks.

Carlos Fadigas

Hi, Marc, Carlos Fadigas, thanks for the question. The number we’ve got from international consortiums, if we talk about flat, if we talk about GMI is now called ISS, at least they point to a increased impact but even the consortiums with high revenue tell you our perspective that we see a spread both for petrochemicals and revenues in 2014, we believe they’re going to stay – naturally that’s really depended on economic environment but based on the economic environment we see right now, we’ve been staying around what we saw in the second half of 2013. Therefore on average we see better spread 4Q when compared to the whole year of 2013. So, that’s our expectations for spreads going forward. Regarding prices in the [inaudible] of devaluation of real, first of all we have to digress that how this segment has been giving us frights for the last 20 years and – I know that’s not the question but if we just quickly discuss it, right. The couch has been done and that’s how it’s going [inaudible] so it has between [inaudible] we have reduced the price of [inaudible] and international price and we’re actually going to go after we have the price is [inaudible] I think the few words I would say that in some cases it may take us from two to four months in tougher economic environment, it may take us from three to four months to [inaudible] but [inaudible] we do that in as lower pay [inaudible] raw material but we do that on a lower pay to our customers because we know this is push back and we try to pass through that to the final – to the energy reserve that food and beverages or whatever. There is a relevant price increase to the factory at this point where we are here with February. Actually we have stop with enough – we have now 2.49, we finished last year at 2.34, so there is a relevant price exchange rates to be positive. It’s hard for us to guess that going forward but it will move up and actually we hope to move up for the benefit of Brazilian industry and it’s competitors, but in the event it goes up [inaudible] I don’t know it’s going to be something between 3 and 3.5 billion but it will be that rate naturally.

Marcus Sequeira – Deutsche Bank

Just one follow-up on the question asked by another participant. When you talk about the industry [inaudible] of sort of high up cost, high raw material costs, but today when you look at the amount of things that you import independently and the materials you buy from Petrobras, what is the price differential between those two products? I know there is a differential due to quality of naphtha but if you could put apples-to-apples what’s the differentiation?

Mario Augusto Da Silva

Okay. That’s a very good question, Marc. First of all, we have to go back to the notion, what you call naphtha it seems to be a pretty standard thing, there is a lot in terms of competition and the difference is now even more important because of the aromatics content of the naphtha, to produce aromatics like benzene, toluene or xylene and you, as you move from naphtha, it has already moved from naphtha, today we’re not able to produce some of these aromatics and [inaudible] therefore our naphtha gets a higher content of heavier, longer product change has more value to it. That’s why you call the same thing that has difference among them. Having said that, I would [inaudible] of price of naphtha that you have also to take into consideration several other factors, apparently the use of this naphtha for Petrobras – over several years Petrobras has [inaudible] has exported, now it’s in a different position then what we expected, what would be the long-term experience with Petrobras is obviously they’re going to be not exporters, they’re not importers. So, that’s how the – you have to take into consideration obviously alternative for them and so – again, just like with the question asked by Andres there are some issues that are associated with our raw material contracts between Petrobras [inaudible] another tech that are very relevant to competitor in the call, I won’t be able to go into detail, I apologize for that.

Marcus Sequeira – Deutsche Bank

That’s okay. Thank you very much.

Mario Augusto Da Silva

Thank you.

Operator

Mr. Keith Burke from Barclays [ph] would like to make a question.

Unidentified Analyst

Yes, good morning, thanks. I was hoping to follow-up on the tax question and was wondering, you indicated that there was about 300 million real impact in the quarter and I was wondering if you could help us figure out where that is embedded in slide six and where’s that in the contribution margin and if you could also help us what else is in that margin and why it was so much lower in the fourth quarter when you had a very large benefit of 965 million on the year?

Mario Augusto Da Silva

Let Mr. Frank speak.

Unidentified Participant

Keith, if you are go back to slide six that it mentions with compared to fourth quarter 2012 with the fourth quarter of last year, yes, the number of gains on average for the end of last year and for this year is roughly 300 million real, right. This considerate growth in volume in margin contribution it’s not on the other bar, so it’s both of that and it’s actually – so when you have the 43 million real and 83 million real from both volume and margin contribution [inaudible] and equity volume in this place [inaudible] it has a benefit, so a bit of that is there. What we also have in the fourth quarter of that partially is margin contribution, that’s why you didn’t see the 200 million, 300 million, there is an increase in naphtha price when you compare one quarter to the other and that also reflect the fact that we buy naphtha on the last three months average to write naphtha cost – even parts of the margin contribution that is there. On top of that we also had debt, and when I say debt I’m talking about containing [inaudible] we use in the propylene we have in the State of Rio De Janeiro, so when we see the increase in raw material that has impacted the contribution margin each of the [inaudible] we haven’t quite fixed. So, does that answer your question. I think Keith has left already – no longer be able to talk so that’s where the 300 million real quarter shows up in slide six and our expectations for 2014 we have similar impact in all those quarters of the year.

Operator

Youssef Cripus [ph] from Barclays would like to make a question.

Unidentified Analyst

Hi sorry, I got cut off there. That was helpful on the margin issue, can you give us some guidance for margins in 2014, there was a lot of volatility between the 15% margins in the third quarter and the lower margins in the fourth quarter. So where should we expect things to be moving forward?

Carlos Fadigas

What I was talking about percentage points and particularly EBITDA margin, I am talking about from – we had – the comment on the third quarter, we had on the third quarter a benefit of the lag of the asset – three months lag we had with the rising naphtha and petrochemical prices. During the third quarter we had higher base petrochemical products that we sell and if you had the lag to lower naphtha price. So that’s why you see the volatility quarter over quarter because of this lag.

Talking about the naphtha in 2014, what we are focusing is the exchange rate, even if you follow EBITDA, Braskem EBITDA on those products, you have to bear in mind that we have – they are reais denominated, they are local currency denominated, mainly the seller is in the U.S. and so on. Our naphtha and gas price, they are associated with dollar, but some portion of our costs are reais denominated, naturally when the spreads and yield follow, they are going to have a more less when it’s starting this. So therefore even in dollars, Braskem EBITDA on dollars would depreciate help real use a positive effect.

The second important point is markets, we do believe that is going to have a growth, not a big growth but something around 3% on revenue demand into 2014, I am talking about the Brazilian market. In the US where we have the polypropene, we also see a positive trend with US growing between 2.5% and 3% and that should also help our sales in the US.

In terms of spreads, think of petrochemical margins, we see margins – in the second half of ’13, compared with the overall year ’14, with the overall year of ’13, we expect to have a better margin, a slightly better margin. We have a positive trend there for 2014 and I hope it translates into a better performance for Braskem as well.

Unidentified Analyst

So it sounds like we should expect to maybe marginally higher margins in ’14 than ’13?

Carlos Fadigas

Exactly right.

Unidentified Analyst

And final question from me, just wondering how your discussion is going with the rating agencies, if you guys expect to be pulled off of negative watch at this point, that was certainly the indication you gave us in the last call. So I am just wondering any update there.

Mario Augusto Da Silva

This is Mario. Yes we look forward the rating agencies to remove negative outlook that we have. Just remember on some imports we do have a stable outlook, on future moves we have a negative outlook. The position on the rating agency side, they want us a little bit more strong operational results, and if we have a first quarter – a good first quarter we are going to keep working to remove the negative outlook as soon as possible. One more detail for you is that if you take a look in the release, the last release from Fitch, they say that “if this scenario materializes in 2013, the company’s raising outlook should be revised it to stable”. So for the first time they opened a window to remove the negative outlook.

Operator

(Operator Instructions) Mr. Mario Edgebaum [ph] from Three Capital would like to make a question.

Unidentified Analyst

Hi everybody. Again, I apologize if someone asked this question, but I have two questions. First, could you update on the development of the Mexico project? If you could tell us when you’re looking for the start date. And if you could also tell us if the net debt that you mentioned in the presentation, does that include the debt, your portion of the debt associated with the projects, or is that separate?

Carlos Fadigas

Hi Mario. The Mexican project as you know is under construction. We finished last year, the year 2013 with 58 completions out of the EPC, engineering, procurement and construction. At this point, the best forecasting we have for the end of ’14 is roughly 85% completion on the EPC. So it’s progressing well, we have already $2 billion that the bank has lent us through disbursements that add up to $2 billion. So the bank is fully committed to the project as well. And startup date is still around third quarter of 2015. So it’s progressing well, a lot of work. Mexico is usually there, roughly 10,000 workers at the construction site and as I mentioned, progressing. We have also already started pre-marketing activities. We already have a commercial team and we have already started relationship with several Mexican customers. It’s progressing smoothly. I would say that’s considered but I’m sure that it’s – Mexico is working hard but it’s progressing according to forecast. I’ll pass to Mario to comment on your question on net debt.

Mario Augusto Da Silva

Hi Mario. Just to comment that the numbers that we show in the presentation, they do not include the project finance from Cromex. You should remember that it’s a little bit – required project finance within Mexico; we do have partners on the project level. BSA is our partner there, they have 25%. So those numbers, they do not include the project finance from Mexico.

Unidentified Analyst

Thank you.

Operator

Mr. Denis Parisien from Deutsche Bank would like to make a question.

Denis Parisien - Deutsche Bank

Hi, thanks for taking my follow up. Could you tell us some color on how we should think about the Solvay Indupa bid? Could you remind us please what the last bid was in total dollar value including assumed debt and give us some color as to timelines, roadmap, how we should think about where that call might end up?

Carlos Fadigas

Okay, Denis, it’s Carlos Fadigas. Go back to the Solvay Indupa numbers, so the price value for Solvay Indupa $290 million. Excluding debt, equity value $35 million. 70% of that is the amount to be paid plus minor adjustments through the consolidated shareholders for the total group. Up to 30% of that should be paid to the minority shareholders. The minority shareholders have 30% of the equity value. So these base calculations at the same share price would have given the minority shareholders roughly $10 million, right. We have offered 53 pesos. We actually have agreed to buy the controlling shareholders at the level of 53 -- of pesos per share. Due to their continuing loss, the offer we made to the minority shareholders was 1.35 peso per share that we offered that the local capital market authorities have asked us to review and to change. We are working on the index right now.

The amount that we disbursed by asking the independents two things, first of all, net with the share price we will end up offering and the amount of shareholders that will accept this price. At this point, we don’t know yet what will be the reaction of the market but we are not targeting to buy or they should hold it. What I’m trying to say it’s not an offer to close the capital, to collect the Solvay Indupa; it’s merely an offer that’s associated with the – not authority associated with the change in control. So that’s the base math of the – hope it’s helpful.

Denis Parisien - Deutsche Bank

Sure. For the potential increase in price applies only to the minorities?

Carlos Fadigas

Yes, exactly. And should those…

Denis Parisien - Deutsche Bank

And those that participate – so we’re talking about a relatively small amount of money relative to the all-in 290 million?

Carlos Fadigas

Yes, yes. Next week, we’re going to be very cautious here on spending on Braskem shareholders money but I will think – with your comments.

Denis Parisien - Deutsche Bank

Sure. And who would be the best person to talk to offline later on today about line by line details of the Quantiq numbers going in and out of de-consolidating and reconsolidating and all that? Would that be Mario or should I go to IR or who would be the best person to talk to about that offline?

Roberta Varella

Hi Denis, we have a team that is dedicated to the fixed income market, okay. You can talk with Marina Dalben, I will drop you an email. You can contact them, she will give you all the explanations, okay.

Denis Parisien - Deutsche Bank

Yeah, no, it’s okay. I know how to get a hold of Marina, that’s perfect. Thank you very much.

Roberta Varella

You’re welcome.

Operator

Mr. Alex Sergie [ph] from Wells Fargo Bank would like to make a question.

Unidentified Analyst

Hi guys. I have two questions today. The first one, just explaining here on the Solvay Indupa question that you just had. Can you talk a little bit more about the analysis behind the acquisition, especially with the current issues in Argentina right now and the way how you see how we could expect to see you put money in Argentina and eventually take money out of Argentina with the trading commissions. Is that an issue and I’m assuming you’ve done some analysis on that too. And then I have a second question.

Carlos Fadigas

Okay, Alex. Want to address your comment about valuation and first of all, regardless of the economic environment in Argentina right now, we believe that we have that reflected in the price we are paying for the assets. So just to – part of with the decision made in the U.S., it’s been a few years since we bought as you know. But I assure you, we didn’t have too many questions at that point with the U.S., the sense of the economic crisis when we bought the polypropylene business of Sunoco, it was really a question about how many days of – at that point. And we said that the challenging economic environment and challenging situation purchasing business in the U.S. was fully reflected in the price we paid for these assets. So if you consider the last 12 months EBITDA for these assets, there is roughly $75 million and you can compare that with the $290 million we paid for the assets, despite a multiple, that my view fully reflects economic situation both in Argentina and in Brazil. I wouldn’t like to should be critics of the situation in Argentina.

Regarding getting all that money out of Argentina, we are following the current discussions and the situation with the financial reserves. But you have to put things in perspective. First of all, Brazil is a huge trade partner of Argentina. Argentina has always been a relevant market for Brazil. It’s the same trade agreement area called MERCOSUR as Brazil. It’s almost a domestic market for the sales of those polyethylene and polypropylene we sell from Brazil into Argentina and will be just because of the geography. Argentina will be very relevant partner for branching. So again, on a long-term industry, there is also helps to keep a perspective, of a longer term perspective.

So to wrap up what I’m telling you is that we have been present there for more than 20 years selling resin. We will be present there for the next 20 years most likely selling resin and now operating industrial plants there. The economic environment, we see it translated to growth rates, inflation wherever, it’s clearly reflected in the price.

And finally I would like to mention is that any depreciation on the local currency, I made the same comment about Brazil in the previous question that was asked about actual rates in Brazil. The depreciation of local currency in Argentina will only add to the competitiveness of the local industry because it will reduce the peso-denominated costs that the operation in Argentina has. So all in all, I still see that as a very core operation for Braskem and maybe I should have also mentioned that there is an additional plant in Brazil and PVC is a very relevant resin. Growth for Braskem and for the region we’ll see growth in infrastructure and construction in Brazil. That was the rationale behind the decision.

Unidentified Analyst

Well thank you for that. My second question that I have is more related to U.S. and Europe. It appears to me there is evolution in terms of diversification of those two places in regards to – as a percentage of your total revenues based on 62% in 2012 to 70% in 2013. So can you talk a little bit about what to expect going forward for those two regions carving out the West Virginia project, so more on an organic basis especially knowing that the peak prices have stabilized a little bit in the region?

Carlos Fadigas

Okay. With upside the quality regime and also leaving aside Mexico and focusing on the United States and Europe. The focus in Europe right now is to increase margins as the economic environment improves. We do not have any plans to increase capacity there. It’s not only us; we haven’t seen that locally in Europe because of the economic environment. We also use European operations to support exports from Brazil. So going forward, we are mostly trying to be improving our total portfolio in Europe as we have done over the last four years in the U.S. And we are going to supporting these costs from Brazil, so I don’t see material change in the profitability of the European business we have right now. If that happens, that will come from marginal improvement in the economic environment. In the U.S. we have a bigger focus in the U.S.

We have always said that our focus of growth in mainly in the Americas, part of that domestic, Mexico and assets in West Virginia and part of that through M&A. That’s how we bought the two business, polypropylene business from Sunoco and Dow. In the U.S., we are working very hard to reduce cost of raw material and we have been successful doing that. We bought the – from Sunoco and they shut down the refinery in Marcus Hook. And that has allowed us to buy refinery grade propylene to keep the raw material then polymer grade propylene. We have also increased a number of supplies in Texas where we have three plants that have reduced our cost of raw material there. And going forward, we are going to be buying propylene from propane. We have an agreement with Enterprise in the U.S., we are building right now a propane dehydrogenation to supply Braskem propylene from propane and we have what we call producer economics in the sense they are going to be buying propene at the price of propane plus the cost of – which adds to the competitiveness. We have some time – we start operating that at the end of next year. So the focus – when you ask right now, on polypropene due to the cost of propene, improving the frac of this. We also saw – in swing pools [ph] significantly at the end of next year when you have the propane dehydrogenation ETH run.

On the commercial side, we have been focused on forming segment compound for the automotive segment, we have the higher market share. Sales in the compound is industry new ramp. We have been focusing on packaging that syncs with the business in broad – doing well and we also focus on industrial segment and on the woven. And there we have also relevant market share. So commercial side is doing well. On the one or two sites we have decent progress and we hope see the progress in the future. So that’s the strategy behind these two packages. We also reconcile either side growth regime but we do expect to cater in this and we have a bit of presence in North America. We have 1.5 million tons of polypropene right now. We are going to have an additional 1 million tons of polyethylene from next quarter and something cumulative to that from us, so we have to do the – not only on the cost side but also on the revenue side, as we have a lot of polypropene customers that are willing to buy polyethylene from us and looking forward impressive one in Mexico.

Operator

I will turn it over to the company for closing remarks.

Carlos Fadigas

Well, thank you all for participating in the call. The year 2013 was actually a better year for Braskem when compared to the two previous years, both ’11 and ’12, those fiscal years for the petrochemical segment in Braskem in particular. We are glad we have increased EBITDA by 10% in the quarter and 20% in Brazilian reais. As we do that, we also kept the focus on growing the company and building a bit of presence in gas, that supply should make some product [indiscernible] completion at the end of ’13. It too a tentative discussion with Petrobras for the company’s products where we reached an agreement – as we have this project, the projects run with gas and also with the assets – products that came from a much more objective to a much more a practical objective with gas price – where we have a better understanding on the gas price. In order to do so, we have identified a site for the project and so on.

So trying to focus on greater profitability for integration and also amortization with – should grow that and making it more profitable as we move forward. We hope that we’d have a great year in 2014. I would like to focus also [indiscernible] for educational focus of that and also focus on deploying the products that we have. So thanks again. And I wish you all have a good evening. Bye, bye.

Operator

Thank you. This concludes today’s Braskem’s year end conference call. You may disconnect your lines at this time.

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