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Edited Transcript of BRKM5.SA earnings conference call or presentation 14-Mar-19 4:00pm GMT

Q4 2018 Braskem SA Earnings Call

São Paulo Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Braskem SA earnings conference call or presentation Thursday, March 14, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Musa

Braskem S.A. - CEO

* Pedro Teixeira Carvalho

* Pedro van Langendonck Teixeira de Freitas

Braskem S.A. - VP Executive Officer, CFO & Director of IR

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Conference Call Participants

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* Bruno Montanari

Morgan Stanley, Research Division - Equity Analyst

* Fernanda Perez Da Cunha

Citigroup Inc, Research Division - Senior Associate

* Gustavo Allevato

Santander Investment Securities Inc., Research Division - Research Analyst

* Lilyanna Yang

HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas

* Luiz Carvalho

UBS Investment Bank, Research Division - Director and Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem Fourth Quarter of 2018 Earnings Conference Call. Today with us we have Fernando Musa, CEO; Pedro Freitas, CFO; and Pedro Teixeira, Corporate Financial and Investor Relations Director.

We would like to inform you that this event is being recorded. (Operator Instructions) We have simultaneous webcast that may be accessed through Braskem IR website at www.braskem-ri.com.br and then the [IQ] 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 website.

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 and uncertainties and assumptions because they relate to future events and, therefore, depend on circumstance that may or may not occur in the future. Investors should understand that general economic conditions, industry condition and other operating factors could also affect the future results of Braskem and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Pedro Freitas. Mr. Freitas, you may begin your conference.

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Pedro van Langendonck Teixeira de Freitas, Braskem S.A. - VP Executive Officer, CFO & Director of IR [2]

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Hello, everyone. Thanks for participating in the conference call for the year-end 2018. Let's jump straight to the Slide# 4, where we talk about the main levers that for this year.

In terms of operational highlights, we want to highlight to you that 2018 was the full year of the Camaçari unit in Bahia running as a flexible cracker, and 18% of that unit was produced using in the flexible cracker that we have in Brazil.

In terms of value creation, Braskem 2018 engaged in a Voluntary Commitment to the Circular Economy of Plastics together with other ABIQUIM members and also along with 27 other global companies in the plastics value chain founded the Alliance for the End of Plastic Waste.

Also, the company involvement in the construction of the new PP plant in the U.S. reaching 48.3% of completion and have already invested USD 382 million in this specific project.

Braskem signed a wind power purchase agreement that we allow the expansion of Folha Larga Wind Power Complex in Bahia state that EDF Renewables is currently developing. On the same environmental angle, Braskem and Siemens established a partnership to improve energy efficiency in the cracker of São Paulo. Finally, in 2018, it was a year that Braskem opened its new office in India aiming to develop new business opportunities and sales in this region.

In regards to Braskem management, 2018 was a year that the company decide to prepay $200 million of its perpetual bonds as it tries to reduce the debt interest expenses. And also Braskem came closed 2 [credit] facilities, 1 with BRL $225 million to finance its investment -- a portion of its investment in the new PP plant in the U.S. and also a facility of $295 million with SACE for regular investments of Braskem, boosting the relationship of Braskem with its other suppliers.

With respect to credit rating, S&P and Moody's changes Braskem outlook to stable from negative, which is positive. And for the first time, Braskem is rated 3 notches above the sovereign Brazilian rates by S&P.

And Braskem remains investment grade by S&P and Fitch.

And finally, Braskem posted in 2018 a record free cash flow generation of BRL 7.1 billion in 2018, an increase by 187% to the same -- to the amount that was posted in 2017. And with that amount, the company is proposing a dividend distribution of BRL 2,670,000,000, which represents approximately 100% of the net income attributable to shareholders.

Moving on to Slide #5. We will begin to talk about the operational performance of in each of the main reasons -- regions of Braskem.

So in Brazil, the demand will

(technical difficulty)

in 2018 by 2%. And it is important to highlight that was the first year -- 2018 was the first year after 4 consecutive years whereby the [DBC] market increased. So it shows at the beginning of the recuperation of the DBC market.

Sales of Braskem were down by 2% in 2018 as compared to 2017 as a consequence of the truck strike [suffered from the pain] of the blackout and the accident of the chlorine facility that we had in the first quarter 2018. So a lot of unpredictable events affected the availability of the resin. And this impacted also the market share of the company that where it was reduced from 69% to 66% and also the availability of products to be exported.

In Brazil, Braskem post an EBITDA of $1.9 billion, 25% down as compared to 2017 and representing 61% of the total EBITDA of Braskem.

Moving to the next slide, then we talk about the results and the operational performance in the U.S. and Europe. In the U.S., the demand remains very robust. It was an -- there was an increase in 2018 by 3%. We -- however, we had several unpredictable issues -- operational issues in 2018. The [plant] turnarounds due to the severe winter that affect the region and anticipated around in the Oyster Creek -- Creek that affected the availability of products. That's why our sales in U.S. were down by 9%.

In Europe, the demand was reduced by 3%, affected by the reduction in the economic growth, affecting especially the automotive sector, and our sales were down by 11%. There was some logistic restriction for moving propylene, which is the pit stop that we use in Europe. In that region, U.S. and Europe, EBITDA was down by 6%, totaling $680 million, representing 90% of the total EBITDA of Braskem.

Moving to the next slide. Now we'll talk about the results in Mexico. In Mexico, demand remains robust. There was an increase in 2018 by 2.7%. However, our sales in the domestic market and exports were down by 18% due to the lower stock supply and also a scheduled turnaround that happened in the first semester of 2018. It is important to highlight the breakdown of exports. We are now channeling [lead] export to Asia and focusing more in exports to Central America. In Mexico, we post an of EBITDA of $617 million, 1% down to 2017, representing 20% of the EBITDA of Braskem.

Moving to the next slide. We talk about the corporate CapEx without considering the CapEx of Braskem Idesa, and we invested BRL 2.8 billion in 2018, BRL 1.9 billion in operational investment and the remaining amount in regards to strategic investment. From the facility investment, the biggest amount referred to the investment in the PP facility that we are building in the U.S. that in 2018 required around $200 million. However, we have already invested $382 million. This facility is expected to become operational in the first half of 2020. And as of now, as of at the end of 2018, it reached a completion rate of 48.3%.

For 2019, the expect -- it is expected that the -- total investment of BRL 3.3 billion. We need to highlight that there's still an important amount to be invested in the PP plant, around $220 million for 2019. And also, on the operational side, we have main investment in the Bahia crackers turnaround that is expected to happen in the fourth quarter 2019 and also BRL 145 million for health and safety and environmental.

Moving to the Slide #8, then we talk about the free cash flow generation of the company. So the company posted a total EBITDA of BRL 11.3 billion. It helped with the number -- with working capital variation positive 1 of BRL 1 billion, then came with a CapEx at BRL 1.8 billion -- BRL 1.9 billion that we have already discussed, BRL 1.9 billion of interest base that was lower this year as compared to 2017 and an amount of BRL 930 million of income tax and the 826 of strategic investment. So if we add all of these numbers, we get to a number of 7 -- around BRL 7.1 billion, which is a record free cash flow, and it represents an increase by 187% of the free cash flow generation of the company in 2017.

Moving to the Slide #9. It shows the debt profile of Braskem, the leverage rate. The debt profile remains relatively stable. We ended the year with a very robust cash position, $1.8 billion, without counting the $1 billion of revolving credit facility that we have available for -- if the company need, it can draw this revolving credit facility. The company closed the year with a net debt-EBITDA ratio of 2.06, an average debt term of 40 years and the cash positions available to cover the amortization of the debt for 4 years. The average weighted cost of capital is FX variation plus 5.5, which is lower than 2017 as a consequence of the liability management the company made in 2018.

Moving to Slide #11 (sic) [#10]. Then we -- the company total a net profit for 2018 of BRL 2.9 billion, 30% down as compared to 2017. An important point to highlight here is the negative impact of the tax variation in our financing expenses.

Earning expenses -- earnings per share were also down by 30%. We posted a BRL 3.6 per share of earning in 2018, and the company is proposing a dividend payment for 2019 using -- of BRL 2.6 billion. This amount represents 37% of the free cash flow generation of the company -- that the company generated in 2018. And if approved by the shareholders that it is expected to happen in April. It will represent 100% of the net income distributable to the shareholders.

Moving on. Let's talk about the scenario. In general, the spreads that we were affect by -- that we produce in Brazil are expected to be lower in 2019 as compared to 2018. There is the slowdown in the growth of the demand in China, and also there is yet some new capacity of PE that is expected to enter -- to become operational in 2019, and this should affect the spread, especially for PE.

And it is important to highlight that on the vinyl side, it is important -- it is expected an improve -- an improvement of the spread. So there is a -- it is expect a recuperation, especially on the caustic soda prices.

On the international business of Braskem, the spreads remain very, very attractive in the U.S. It is expected an increase by 7.5% for 2019 as compared to 2018. And the company should be able to begin to capture more of these spreads once its product -- its projects of the new PP facility becomes operational in the beginning of 2020.

In the U.S., the outlook is negative because of the lower demand. And in Mexico, we expect a drop in the spread by 35, 36 -- 33.5% given the higher ethane prices as a consequence of fracking and the logistic restriction.

Finally, getting to the final slide of the presentation. This is the outlook for 2019. So in terms of the spread, spread for the products that we produce in Brazil is negative. It should be on average positive in the U.S. since we have more capacity in the U.S. than in Europe. And it should especially be negative in Mexico for the reasons that we have already discussed.

In terms of demand, the outlook is positive in other regions. In Brazil, the demand for resins should grow by 2.2%. And actually, the demand -- the growth of the economy should be around 2.2%. And it's important to remember that we have elasticity -- the resin demand has an elasticity of 1.5x the growth of the economy.

In the U.S., the growth of the economy should be around 2.5%; and the growth in the eurozone should be a bit less, 1.6%; and the elasticity in that region is a little bit lower than it is in Brazil. It's a more major market; it's 1x.

In Mexico, the growth is expected to be 2.1%. The growth of the economy and the elasticity in demand in Mexico is 1.5x. It is important to highlight that the utilization rate for 2019 should be better, especially in Brazil and in U.S, whereby in 2018 we had several unpredictable events like -- such as the truck strike, some -- a blackout in Brazil, the accident that we faced in the soda chlorine facility in the first quarter of 2018 and some outage that we had in our facilities in U.S. for maintenance that we don't expect to happen again in 2019.

In Mexico, we expect the same level of ethane supply, so we are not considering better utilization rates. All in all, we expect EBITDA for 2019 relatively stable as comparing to the EBITDA that we posted in 2016.

So let's move to our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Gustavo Allevato from Santander would like to ask a question.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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I have 3 questions. The first one regarding your operation in Brazil. I'd like to understand the reasons for the 4 points of market share loss during the third quarter -- or partially third quarter. So the 63% is well below the past -- the [design] of the line that company had in the past. If I'm not wrong, it was about [70%]. So I want to know -- try to understand the reasons. The second question regarding the issues that affected production in the United States, Europe and Mexico in 2018. Are they totally solved? And then last, focusing the recycle of plastics that the company mentioned in the release. How could it impact the demand for resins in the company during for the next year? And also, the invested of $4.5 billion for the program that the company joined. Will the company [need to show] a stake in this investments or not?

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Fernando Musa, Braskem S.A. - CEO [3]

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Gustavo, I want to start with the market share loss by commenting that it's important to look in the aggregate and not focus too much on the month by month, especially in the back end of the year when we have a lot of challenges from inventory building or not by client. And in this fourth quarter, given the significant drop in oil prices that happened in the middle of the quarter, it generated a lot of behavior around clients to postpone purchases. And if you look at the market share in Brazil and the alternative supplier, it's important to have a longer lead time for decision-making, so product-wise that were decided 2, 3 months before. So I would encourage you to look more on the overall picture. 2018 was indeed a year where we loss some market share but a lot because of our challenges on the production side that led to a small reduction overall in market share. We had for the year 66% compared to 69% the previous year. And also, as we said in the -- in previous calls, with the start-up of a lot of polyethylene plants in the U.S., it is expected that we would suffer increased import of PE in Brazil from U.S. before generating a small jump for us in market share. Second, about the production in U.S. and Mexico, as Pedro Teixeira mentioned, the U.S. was a lot about the winter -- very severe winter in Texas in the beginning of last year, which was not the case this year, so we're not suffering that much from that point of view, and a pretty large turnaround that took longer than we anticipated at one of our plants. And this year, we don't have any major turnaround. So yes, we do expect that the issues in the U.S. are behind us. As far as Mexico, it was all about the supply of ethane by PEMEX. And PEMEX took a series of action during the year -- last year to improve its ability to import ethane into the country as well as to work on some of the challenges and bottlenecks they have in their own system for production and transportation of ethane. We do expect that the situation now is stable. We don't expect it to improve significantly. It's important to highlight that in a 10-year period from 2009 to 2018 the local production of ethane in Mexico was reduced by 30%. So it is a period with limited availability of ethane, and we do expect it to be stable. Therefore, a similar situation next year compared to this year. Finally, on the recycling side. This is a topic that is gaining a lot of attention with the media, with consumers, with brand owners and, of course, with our industry. And we've been addressing it at Braskem and as an industry in different ways. The expectation is that recycled plastics will increase its share of use in plastic applications as time goes by. The challenge right now is from a quality and availability of recycled resins to enable it to be a perfect substitute for the virgin resins. And this is one example of actions that Braskem is taking to invest in the evaluation and development of recycling technologies to improve quality of the recycled products to enable it to be at more parity with the virgin crop. So yes, there will be an impact in demand. But as we continue to have expectations for relevant growth, I would say that the recycling would take a part of the growth. So the current plant will continue to need to grow. The regular virgin production needs to grow, but a part of the market growth will be fulfilled -- a more relevant part of the growth will be fulfilled by resin -- recycled resins going to the future. As far as the alliance is concerned, as we disclosed and the alliance disclosed, this is a efforts that started with around 30 companies, and we do have the expectations that more companies will join. The investment of $1.5 billion means that some of all investments towards the objectives of the alliance being done by the companies and the alliance. And yes, we do expect to invest in this type of actions, and we will have our fair share, let's call it, of investments. We actually believe that proportionally our investment in those topics is going to be much higher than what would be a fair share of the $1.5 billion. We see this topic as a crucial topic for the industry, a crucial topic for Braskem. We have been very focused on sustainability since Braskem creation, and we've been investing in different formats and actions around recycling and other types of circular economy activities. And those investments are more than enough to fulfill our commitments to the alliance investment goal.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [4]

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Okay. Very clear. Just going back to the first question, trying to understand the first of '19. Can you expect a market share recover for Braskem, given by the reduction? Or can do some specific [products]? Or we can expect -- I see a lot of pressure for [resin] products?

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Fernando Musa, Braskem S.A. - CEO [5]

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We do expect the market growth to be relevant for Brazil. And under that context, yes, we have improved production in Brazil. We expect to recover some market share. But important to remind ourselves of the polyethylene increase production in the U.S. So yes, we do expect a recovery in market share. But it's not going to be very, very strong. It's a minor, a small recovery market share in Brazil given that situation.

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Operator [6]

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Luiz Carvalho from UBS would like to ask a question.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [7]

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The first one is regarding the decision of ICMS inclusion in the (inaudible). The company has [put] something around 450 million of [Norequintal] -- of the Norequintal results in the fourth quarter '18 EBITDA due to the high tax paid during 2017 and '18. My question is how much should we expect in a hybrid basis regarding you understand on fiscal impacts? And the second one is regarding the 20-F. The company was [written] by an additional extension for (inaudible) until mid-May to file its 2017 20-F. In the case of (inaudible), may you provide more color on how this work and how it could impact the U.S. level?

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Pedro van Langendonck Teixeira de Freitas, Braskem S.A. - VP Executive Officer, CFO & Director of IR [8]

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Gabriel, this is Pedro Freitas. Thank you for the questions. On ICMS, on fiscal [fee], so we took the -- we had 2 legal cases that were finalized last year, and they were amounted to the [BRL 520 million] of credits that we recovered in the last quarter of last year. You asked about the recurring elements going forward. We don't see a lot of that because it's credits and debits that we -- when we buy, when we sell and then the net off what we collect when we sell to what we pay when we buy the amount that we pay. So the legal case was about how those tax income -- that tax income would be calculated. Going forward, we don't see a lot of additional results for the company based on that. So it's just adjustments of the way that we calculate those taxes, but they go to the government by the end of the day. So it's, again, not that relevant on a recurring basis. On the 20-F, so the scenario is we have an extension by the NYSE until May 15 -- May 16, sorry. So we do have a line of sight to filing the 20-F before that, so we are working towards that. It is a complex process, so we cannot be 100% sure that we will get there, but I would say that we do have a plan and a line of sight to getting it before that deadline. In the case that we do go after May 2016, the NYSE will delist the company. What does that mean? It means that we go from the NYSE listed -- delist on the trading floor to the over-the-counter trading environment in the U.S. And that is something that could happen very, very, very soon after May 16. And after that -- there is an appeals period. So there is a period for us to discuss that with the NYSE. During that appeals period, if we file the 20-F, our listing goes automatically back to the NYSE trading -- regular trading list. So that's how it works. So the main implication is our shares would be -- the trading of our shares will go to the over-the-counter environment. So that's the way that delisting works. In fact, on Lyondell you -- I would suggest that you ask Lyondell about that. It's their view that, that would be important there.

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Operator [9]

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Ms. Fernanda Cunha from Citibank would like to ask a question.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [10]

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I want to follow up on the first question. Regarding the loss in market share, you mentioned that you might recover part of it in 2019. I just wanted to understand if that recovery will come from a stronger growth. I think you have here on your outlook that GDP is growing 2.2 and with a demand elasticity of 1.5. You are currently estimating around 4% growth. So are you thinking of maybe catching up with this growth? Or are you planning any commercial strategy of reducing your domestic spreads? The second question I have is regarding capital allocation. You currently have a leverage ratio of around 2x, but when we grow the dividend to be distributed here, your leverage ratio is around 2.5x. Just wanted to understand what level would you be comfortable with? And also, what's your cash allocation prioritization for this year? Is it maybe to anticipate your expansion projects in U.S.? Or are we still thinking about shareholder returns? And the third question I have is regarding the Mexico project. I just wanted -- there has been some changes in the accounting, especially booked under the other revenues. I just wanted to understand, what would be the recurring EBITDA for this project? And second, what is your forecast for EBITDA the utilization rates for this year on the Mexico project, given that we have seen that in January the ethane production in Mexico has also come down? So I was just trying to understand here if you are around 80% level or more towards the 70% level?

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Fernando Musa, Braskem S.A. - CEO [11]

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Fernanda, I'll start with the market share, and then Pedro to talk a little bit more about the dividends, and I'll come back with the Mexico. So the market share is a combination of a couple of factors. The first one is what you described. I mean, higher growth in the local markets where being the local producer with the plants here, inventory on the ground puts us in a better position to capture growth. Second, as I said, part of the loss was the significant decline in prices globally in the fourth quarter that was really fast and led to decision-making that it's easier or faster to cut purchases from us than to stop imports that are, obviously, coming to Brazil. So this is part of rebound. We expect [this] and go back to normal in this inventory management cycle of the chain. And third, I mean, we've been developing a series of innovations and product developments improving our ability to compete from a quality service point of view. So we do believe that we are continuing to do this and that this will contribute for our ability to recover. We're not planning to cut prices to recover market share. We have a healthy balance between the market share we have and the price point that we have. And as I said, the expectation of recovery is small. It's more a contribution of the sectors I mentioned before. So I hand over to Pedro on the dividend, and I'll come back on the Mexico.

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Pedro Teixeira Carvalho, [12]

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So Fernanda, on the dividend, I would say there are several factors that affected the decision on the dividend proposal. We had the strongest cash flow ever for Braskem last year. So a very good cash position together with a very comfortable debt position. We don't have any significant short-term pressure in terms of debt maturing. So together, very strong cash flow. No issues in terms of liability management. And added on top of that, we also -- I mean, the biggest investment that we have going forward is the Delta project in the U.S., which is on track and is also already -- I mean, the financing for that has already been arranged. So really going forward, we do see that this trade-off between cash flow and our ability to pay dividend and investments that we have going forward, all of that gives us a very comfortable equation in terms of paying dividends. On top of that, we have last year approved a dividend policy which gives us the guidelines for paying dividends. And what the policy says is that we should maximize dividend provided that on a forward-looking basis, looking at the current year for those 2 years ahead, we are comfortable that we will not cross the 2.5 net debt-to-EBITDA threshold. So we did that exercise, and the projections that we have show that we will not reach the 2.5 net debt-to-EBITDA threshold. So we don't expect to cross that line. And thus, I mean, the analysis show that we could pay, I would say, a higher dividend (inaudible). But compared to the cash flow, if you go back to last year, for example, we paid a little more -- bit more than 100% of the 2017 cash flow. This year, we're paying less than 40% of the 2018 cash flow. So -- I mean, this all shows that it's a very, I would say, comfortable situation, and we really did put a lot of thought on how to approach this. Given that the company is generating a lot of cash, we thought that would be the right approach towards our shareholders.

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Fernando Musa, Braskem S.A. - CEO [13]

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And going back to the Mexico question. As mentioned before, the supply situation in Mexico was challenging in 2018. We do expect that the situation in 2019 is going to be similar. So the availability of local ethane is still challenging, but Thermax did some actions toward improving the capability to import ethane into the country, and this is already operational. So we do expect to be at least (inaudible) that we had in 2018 with an expected lower volatility on a day-by-day or month-to-month availability. So as far as recurring EBITDA, we don't provide guidance. So we wouldn't share any recurring EBITDA.

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Operator [14]

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Mr. [Peter] from Barclays would like to ask a question.

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Unidentified Analyst, [15]

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This is [Peter Guoshenko] with Barclays. The first question, I wanted to follow up on the Mexico situation. You did describe where you mentioned PEMEX potentially ramping up imports. But I mean, is there a scenario where maybe PEMEX is not able to grow supply and you have to import ethane for the cracker? I'm just curious. And is there an alternative that you can think of?

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Fernando Musa, Braskem S.A. - CEO [16]

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[Peter], yes, this is something that we've been evaluating. We have a contract with PEMEX that supply -- that theoretically supplies 100% of our needs. As the past 2 years have shown, PEMEX is facing challenges to fulfill its obligation from a volume availability to us. And we see a very positive move that they are working on imports. But as you all are aware, we already are in the business of moving ethane into the cracker. We have last year produced 11% of the ethylene in the Bahia cracker using ethane imported from Texas. So we have been looking at what are our other options of moving ethane into a cracker on top of the solutions that PEMEX is looking for from an imports point of view. And also, it's important to remember that the challenges on PEMEX (inaudible) is not around reserves. It's around productivity. The reserves are there, so they continue to invest and tweak on their operational system at the platform level and also at the fractionation and transportation to improve their production but are facing challenges on that overall system, so that's why they decided to invest a little bit more on the import option. But we are looking at alternatives as well, either to complement and fulfill the 100% needs or eventually to work on a small debottleneck for the cracker if and when the situation under current contract with PEMEX stabilizes at the 100% delivery.

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Unidentified Analyst, [17]

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Second question I had, maybe if you could please provide some color on what you're seeing regarding the polypropylene and DDH capacity additions in North America? Also, I saw IHS had the -- polypropylene import in the U.S. spiked kind of late last year. I'm wondering if you think that was just a temporary event given maybe restrictions on the production. You obviously listed numerous reasons for that, including scheduled shutdowns. But I'm wondering like what's your view on the margins in North America is for this year?

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Fernando Musa, Braskem S.A. - CEO [18]

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Yes, the situation in the U.S. is clearly a situation of price and market as far the balance -- demand of PP. This is what drove -- we believe what drove us to the decision to invest last year in the -- or a couple of years ago in the construction of this new plant that is coming. There are other plants already announced. [Promatas] is building a smaller plant than ours. And Exxon a couple of weeks ago announced that they will start construction of a polypropylene plant similar size to ours in the U.S. as well, which from my point of view confirms the read that we had that the market would need at least 3 new polypropylene plants in the '18 to '21, '22 time frame. And then now we have ours and Exxon's and [Promatas']. On top of this, there are a couple of projects being discussed in Canada which would incorporate a propane-to-propylene [TDH] projects together with PP lines to transform the propylene into PP. So these 2 -- there are currently 2 projects being talked about and, frankly, receiving funds from their sponsors. They would also help to balance the market. We do expect that the spread in U.S. PP market will see improvement in '19 because a lot of the new capacity. The first one to come into the market is going to be ours, and it's early 2020. And therefore, with the still very strong demand profile that we see, the market will need imports. One important aspect is that a good part of this import is from ourself. We do ship product from Brazil into the U.S. and leverage our local presence and our local portfolio production to facilitate that process. So we do expect increased import to fulfill that gap. And from our own market share, we do expect our ability to produce to be a little bit higher this year. We don't have the larger amount [out], and we didn't have the challenge in the beginning of the year that we faced with the winter and a couple other smaller upsets. So we do expect to have more product locally produced and a little bit more coming from Brazil to help us fill the gaps that we see in the market given the very healthy demand for plastic.

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Unidentified Analyst, [19]

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Got it. That's very helpful. And the third question I had on -- maybe if you can comment on the liability management front. How do you think of the 2020, '21 maturities? Would you consider raising new bonds on them? And like the type of financing would you contemplate?

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Fernando Musa, Braskem S.A. - CEO [20]

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So [Peter], we do have a -- there's a bond maturing 2020, but it's not a very large amount outstanding, about $400 million. And then $1 billion maturing 2021. So as part of our discussion for this year the refinancing of that. It's a -- it's an ongoing discussion with the company how we're going to address that and when. There is also the discussion about market timing. But I mean, there are several different alternatives that we can pursue doing that. I mean, we could do something here in the Brazilian market, which is very liquid right now. The European market looks attractive for certain types of deals as well. So we're looking at the different alternatives. And when the time is right, we will come to the market with those operations.

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Pedro van Langendonck Teixeira de Freitas, Braskem S.A. - VP Executive Officer, CFO & Director of IR [21]

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And I just want to reinforce and highlight that it's a 2021 question, so we have time to think and discuss the 2020 bonds. I mean it's -- [proportionally] [to our] expected cash flow generation.

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Unidentified Analyst, [22]

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Got it. And last, if I may. There were some headlines recently from the government officials and Petrobras regarding their current [incentive] to do the stake. I'm curious if you can maybe provide any recent thoughts or updates on the process with the Lyondell?

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Fernando Musa, Braskem S.A. - CEO [23]

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Okay. So on the LyondellBasell deal, as we mentioned several times over last year, management is not part of the negotiations. We supported the due diligence, which has been completed. I think that a status update has been given by Bob Patel when the -- Lyondell disclosed results. So he talked about the deal, so I'll repeat what he said, that the due diligence was done. It was high quality and now that they were in conversations with the Petrobras about finalizing the dialogue between the 2 of them and to decide how to proceed. So again, we're not part of the negotiations. We're not part of the process. Therefore, there's not much else we can say beyond what Lyondell had already shared publicly, which is the best information I have.

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Operator [24]

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Ms. Lilyanna Yang from HSBC would like to ask a question.

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Lilyanna Yang, HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas [25]

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I actually have 2 questions. One is more straightforward, right, is it -- it is on the federal tax credit of fiscal fees over the feedstocks. I wonder if you see any risk of Braskem losing such credit in the near term. The other question is again on Mexico. I actually have 2 smaller questions [on it]. The first one is, well, saw you booked again for the noncompliance of the ethane supply contract with PEMEX. So could you clarify how fast the about $90 million receivables can become cash? And how much would you say you have as of now in terms of receivables from PEMEX? Because I would assume they might have grown from December to February. And related to these, could you just let us know the update of the alternative supply route plans? Is that something that you -- kind of guided your thinking of in [studying] in the last third quarter earnings call?

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Fernando Musa, Braskem S.A. - CEO [26]

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Lilyanna, on the federal tax credit around purchasing a feedstock in Brazil, what's called [vaykey]. We -- there was a lot of discussion last year about termination of that program. It ended up not being terminated. I would say that [current] if you listen to what the government is saying there's an expectation of dealing with some of the reforms that are needed in the country. One of them around tax and the tax system in Brazil. We do expect that any of -- given everything that Paulo Guedes, who the finance minister, is saying that any changes will take into consideration the competitiveness of local Brazilian production. They see as important factor the industrial fabric that exists in Brazil. So any changes would be somehow compensated/mitigated, but other changes that facilitate doing business in Brazil reduce what we call the Brazil costs around infrastructure logistics or other complexities around doing business in Brazil from a tax or the public's point of view. So it's going to depend on what the government does and how they proceed with their reform plan. In the short term, we don't expect any change. Plus when -- we need to consider the marker, the different reforms that the government is prioritizing, with the financial reform being the top priority now. And I think it's going to depend a lot on how this goes that we'll have more clarity on what they want to. As far as the Mexico situation, as I said before, we are working on alternative routes. Some of them are in "partnership" with PEMEX, leveraging their infrastructure, and some of them do not include any leveraging of PEMEX structure. Those evaluations are still underway. We have no -- have not made any decision. We do expect to start to make decisions at some point this year. It depends a lot on the engineering studies and the commercial conversations that we have with potential partners for those alternatives. So my expectation is that we'll have a decision sometime in 2019. Some of the alternatives have very short cycle investments to be operational. Others take a little bit longer, and this is also going to be a factor in our decision-making. As far as the liquidated damages as -- in the Mexico contract, I'll ask Pedro to address your question.

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Pedro Teixeira Carvalho, [27]

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So Lilyanna, nice talking to you. We are -- we have as of December 2018 close to $51 million in receivables -- in liquidated damages receivables from PEMEX, so that's what is included in the balance sheet. And we have received through the year in cash $56 million from PEMEX. So that is kind of the cash situation and the balance sheet situation regarding that.

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Lilyanna Yang, HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas [28]

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[Could you] comment -- would you give color if this amount is increasing this year? Or is it relatively stable?

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Fernando Musa, Braskem S.A. - CEO [29]

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It's very hard to forecast. It's a function of the PEMEX supply. So it depends a lot -- and [they have things] right, so it depends on certain factors going forward. In terms of cash flow, I mean, PEMEX has 6 months to make up for the shortfall that they have. So a portion of this provision -- a portion of the shortfall they have they could make up for given -- with additional ethane. Given the scenario, it depends a lot on their supply situation. But again, I mean, it's very hard looking forward to understand or to forecast what the year is going to be -- going to look like.

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Lilyanna Yang, HSBC, Research Division - Analyst, LatAm Utilities, Oil and Gas [30]

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If I may, can I ask a quick question on CapEx. You have the 2019 guidance. It is up when I exclude the PP project in the U.S. So could you let us know if there's anything that is more big and major and nonrecurring so that I can think of the what is the appropriate (inaudible) CapEx for 2020 and onwards? In other words, [BRL 2 billion] -- I thought BRL 2.5 billion was the right level.

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Fernando Musa, Braskem S.A. - CEO [31]

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So the total is BRL 3.3 billion. And if you go back in the U.S. is BRL 800 million. So the net of that is a bit less than BRL 2.5 billion for 2019. We do have a large turnaround in the fourth quarter of 2019 in the Northeast of Brazil, so that is relevant. Our kind of ballpark number going forward is about $600 million of operational CapEx every year. So that's how we're looking at it. But we do have a large turnaround in the last quarter of this year.

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Operator [32]

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Mr. Luiz Carvalho from UBS would like to ask a question.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [33]

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I just have a quick follow-up. The first one is related to the naphtha contract negotiation with Petrobras, if you have any update in terms of the development in terms of this contract? I mean, apparently, Petrobras has been mentioning that this wouldn't be much of an issue for them actually to close the deal. So if you have any insights on this that would be good. The second point is [DHA] and also any update on Mexico import capacity due to the PEMEX lack of supply. Are you still considering to actually to increase the import capacity -- the feedstock import capacity for the country? And if I may, a third question. I remember one (inaudible) yesterday she mentioned that it shows what the EBITDA level we should think at a [bottom] close to $3 billion with the Mexican plant running at a full capacity, if I can put this way. With the guidance that you provided yesterday to the CapEx and also -- I mean to [related] to some of the views on the [spreads], we're coming to a number a bit lower than that, actually lower than that. I mean when we get to the new Mexico utilization rate, could you try to give us a range where you think that -- I mean, and your estimate the EBITDA for 2019 would be?

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Fernando Musa, Braskem S.A. - CEO [34]

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Luiz, first on the naphtha contract, I cannot talk about any potential conversation between LyondellBasell and Petrobras on the topic. As discussed, we're not part of the negotiation. What I can say about the naphtha contract in relationship within Braskem and Petrobras is what I've been saying for a while now is that we have a 5-year contract that expires now in 2 years' time, and 2019 is the year where we start the conversation with Petrobras around the renegotiation of that contract under a scenario that there's no deal. And so the -- this is a second half of the year discussion with Petrobras. It would give us 18 months to work on it until the expiration of the contract in December 2020. So right now, it's not part of the dialogue between myself and my team with Petrobras and should become part of it in the second half of the year. On the import capacity, as I said before, PEMEX did some improvements in their ability to import and are already operating that. We discussed with them alternatives to improve their ability to import in their own infrastructure. But we are also looking at their own alternative routes for imports so that we can manage the supply situation in Mexico and eventually even improve it beyond the current contract -- supposed availability from the PEMEX contract. And we -- as far as your last question, we don't provide guidance. So what we've been discussing in some meetings with investors is a -- not a bottom but, I mean, a ballpark expected average in the cycle kind of EBITDA in the $2.5 billion to $3 billion being a good number for finalize. [Thus], we got Mexico. If you add Mexico, you would find somewhere around a bit less than 3 to 3.5 exact. So this is not a guidance. This was a ballpark average cycle evaluation for our dialogue with investment of the (inaudible) we spent. The volatility that we should expect and to explain that given our new global footprint we have more resilience and less total volatility in our expected EBITDA and the forecast going forward. I just want to correct, one, we do not provide guidance. And two, the ballpark that we might have been discussing was not a low end of the cycle kind of number. It was more of an average expectation/ballpark than anything else.

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Operator [35]

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(Operator Instructions) Mr. Bruno Montanari from Morgan Stanley would like to ask a question.

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Bruno Montanari, Morgan Stanley, Research Division - Equity Analyst [36]

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Just a quick follow-up on something you mentioned on the last question. If Braskem did start to develop its own infrastructure to import feedstock into Mexico, how does the contract with PEMEX work? Now the -- in other words, if you import yourself is PEMEX off the hook in having to pay -- either take or pay or deliver or pay high? So how does you -- how does one reconcile the imports versus the penalties that PEMEX has to pay?

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Fernando Musa, Braskem S.A. - CEO [37]

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Bruno, no, the -- any alternative that we might develop ourselves does not have impact on obligations by PEMEX or ourselves under the current contract. So this would be an alternative, either to increase the certainty of supply or even to increase the full amount of supply of the plant. So no direct impact. There is no provision that if we are able to -- we are only saying that PEMEX is off the hook whatsoever.

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Operator [38]

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

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Fernando Musa, Braskem S.A. - CEO [39]

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I would like to thank all of you for participating in the call and for the dialogue during the year. As we discussed in the presentation and in the Q&A, we had a year of good results, very strong cash flow generation. And we do expect that the 2019 will lead to similar type of results given that despite a scenario where most of our products will face international spreads compression given the cycle, we do expect positive uptick from demand in Brazil, from demand in U.S. And on the internal side and the challenges we face from an operational point of view that lead to reduce utilization rates in 2019, yielded a loss around the $250 million to $300 million of EBITDA once we apply the average margin that we experienced during the year. And as we do not see any of those happening and do not anticipate any of those happening at this level, there is another relevant uptick from internal improved product efficiency and effectiveness in the operational side. So thank you very much for your regards, and looking forward to the next dialogue once we publish the first quarter results in a couple of months. Thanks. Bye.

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Operator [40]

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