Braskem Earnings Call Insights: Competition, Current Level of Spreads

On Friday, Braskem SA ADR (NYSE:BAK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.


Frank McGann – Bank of America: Just a couple of questions. One, just in terms of the level of competition that you’re seeing from imports, obviously your share grew. So, one would expect that competitively things have improved a bit anyways, but I was just wondering from a pricing standpoint are you seeing any improvement or is it basically pricing competition and the way that this is – is being fought at this point in the competitive environment is as fierce as it was say a couple of quarters ago and how do you see that playing out over the next couple of quarters. Secondly, the CapEx number that you showed for the rest of the year would suggest I think based on what you spend in the first quarter that the numbers are going to come off sharply. I just wanted to confirm that that’s the case in terms of cash usage over the next couple of quarters? Lastly, in terms of the supplier agreement in the U.S., I was just wondering are there any other payments from that agreement that would be received over the next couple of – in the future at whatever time?

Carlos Fadigas – CEO: Hi, Frank, it’s Carlos Fadigas. Let me start by addressing your first question. First of all competition in the first quarter of the year was as you said it was not a much so it didn’t change much. We didn’t see the change in the competition landscape I would say. What has happened is that Braskem naturally is keeping track very closely of its market share position and the market share of Braskem is — we see that is a consequence of how aggressive we want to play in terms of margins in Brazil in terms of price in Brazil and so on. So, throughout the year of 2011 we have (hold) our price policy and commercial policy of realigning prices in Brazil’s international price, and actually can be more or less aggressive on that. As a consequence of how aggressive we are, the numbers of market share can go up and down. We felt we wanted to recuperate some market share and that’s how we move it from 65% to 68% of market share. So therefore, it’s a consequence of our commercial strategy outstate in a certain way. Having said that, we do believe that, although competition will not change in terms of how fast it is, I think, it will improve in terms of price point. With the solution of the tax credits driven to imports and that has been sober at least in one state of Brazil. I’m not sure how familiar you are with that, but several Brazilian states have been given tax incentives to imports and we found two solutions to that. In April, one of these states the one that has the most efficient port and accounts for roughly half of the imports have decided to stop providing incentives to imports that the State of Santa Catarina, so that’s one of the solutions. The second one is that the Brazilian Senate has passed the resolution that says starting in January 2013 other states won’t be able to give incentives the way they are giving right now. So, I think competition will remain a tough one especially in the current economic environment with the developed economies not growing as fast as they should and some of them in recession. But I think that the price point at which this competition will happen, I think it will improve in Brazil as some importers won’t have going forward the nice 9% tax discount, tax benefit, that they had so far. So, I think, that’s the good news in terms of competition in level of import. I will answer you third question and Marcela Andrade will address the CapEx question you have asked. In terms of supply agreement in the U.S. it worked fine exactly when we signed the acquisition of the assets from Sunoco. We bought three plants from Sunoco. We paid $350 million and we include this penalty of $430 million if they at any point shutdown the refineries supplying one of our three plant. So, that’s what is raised already in our books for the first quarter. So, there is no additional payments to be made by Sunoco to Braskem going forward and we do believe that this number more than properly cover for what we thought at that would end up resulting in the plant shutdown. Right now we are trying – as we have – I’ve mentioned before we are trying to work with the best of both scenarios receiving the penalty fee from Sunoco and at the same time keep the plants running and we are quite confident we are going to be able to do that.

Marcela Aparecida Drehmer Andrade – CFO and IRO: Okay, Frank, regarding CapEx. What we had is some concentration in the first quarter and also in the second quarter probably because we have finalized the two plants the Butadiene 1 and the PVC. PVC we will start up the plant this month and Butadiene on July, so we will see some concentration in the first half of this year and then slowdown in the second semester. So, we still have the same expectation regarding CapEx which is R$1.7 billion for the full year.

Current Level of Spreads

Paula Kovarsky – Itau BBA: Two questions here. The first one is a little bit more general. Fadigas, could you just share with us a little bit of your views looking at spreads in the next couple of quarters? I mean, we’ve observed some easing of oil prices in the absence of May news coming from the Middle East, which probably allowed the market to realize that 125 was probably too much for the current level of global economy, but what we have been observing is that resin prices started to go down as well, same for co-products. So, what’s your view in terms of current level of spreads? Shall we expect them to compress, is this a sustainable level, how do we see this evolving until the end of the year, assuming oil prices stay more or less where they are? Then the second question is a little bit more specific regarding the benefit of the Reintegra, which was approximately 50 million in this quarter, is this the level of recurring benefits of Reintegra that we should assume going forward or how long will you be getting those benefits, just if you could give us a little bit of color on how to forecast that going forward?

Carlos Fadigas – CEO: Interesting question, the first one, the second one is a more specific, but let me start with what’s the spreads. I’ll address that in two different pieces, first of all international spreads and then the Braskem margin in Brazil as saw – to mention what we saw this year up to now, we saw spreads recovering from the level they were in December and January, and they were at the very low levels in some markets, so we saw negative margins, prices of polymers trading below price of the monomer would doesn’t make any sense. We saw that during a certain period of time that December and January were very tough months and that’s why as you remember we have anticipated a maintenance stoppage in our cracker unit by year through December because it did – the investment scenario in December was a very tough one. Margins improved throughout the first quarter of the year. We saw February a better month than January and therefore — and also in March we had a better month. In April things stabilized in the much better margin level than they were before. Going forward Paula, first of all I have to say that the levels in March and April they are much better than what we had in December, but not yet at the level that we believe the industry should be trading in the medium term. So, there is still some improvement to happen on the margin. We have as you said we have seen the sharp reduction in price of oil, a sharp reduction in price of naphtha it’s now operating around $900,000 per ton naphtha. Right now the resins and the co-products are having declines in price they are smaller than the decline in raw material indicating that we should have better margins. I’m skeptical about the fact that this will stay this way and the fact that the raw material is going down as a consequence of an economic environment that is not a favorable one and in these conditions, although raw material declining sharper – faster at least than the final product. In this scenarios typically the margins don’t increase they actually get reduced. So, it start from here need to make sure – forecast exactly what’s going to happen, but I think that for the next month we’re going to have similar margins than what we had in March and April. I don’t think it will better although right now mathematically we are better. I don’t think that we will be much better. I do expect that we have positive news in the second half of the year, not only the volume side, but also on the spread side as we see improvement in the economic environment. Right now, I’m conservative about that. Bringing all the information and bringing these spreads to Brazil, I think that you’re going to benefit from two different things in Brazil. Regardless of what’s happened outside the country international spreads, we’re going to have two benefits in Brazil. The first one is exchange rate. We had an average exchange rate of R$1.77 in the first part of the year. It’s hard to say if the exchange rate was still, say around R$1.95 what it is right now, but at least it’s reasonable to expect it’s going to stay above on average, above R$1.77. So we’re going to have a better exchange rate in that translation to better results to Braskem. I do hope it stabilize somewhere around R$1.90 to R$2 per dollar. On top of that, we also have the benefit that we no longer have imports from Santa Catarina being benefited from the tax rebates the tax incentives that were being provided originally. Naturally the other states as fuel providing the same types of credits, but Santa Catarina was a critical one and that’s why we rush it to strike some (pattern) of alignment with the State of Santa Catarina in a sense that we have to actually strengthen the Brazilian industry and the plastic converters that operating in the State Santa Catarina instead of just being or subsidizing imports. So, when you combine the effect of the Santa Catarina effective there no longer in terms of providing imports with the exchange rate. I do hope we’re going to have better margins in Brazil, ideally on top of stable margins externally. Moving to your second question…

Paula Kovarsky – Itau BBA: The quick follow up on that one as you mentioned in the previous answer that at the end of the day regaining market share is a function of margins, right. So, in terms of the premium between domestic and international prices how do we compare say third and fourth quarter 2011 with first quarter 2012 and do you perhaps see a risk in that front?

Carlos Fadigas – CEO: First I have to share with you the fact that it is not really easy to choose that. The prices in Brazilian reais at the beginning of the month and see throughout the month huge movements both in terms of international prices and exchange rates. So, what I am trying to say is that it’s not really a hard science, it is not really hard mathematics it is more an exercise job (receiving) perception because it is moving target in a certain ways. So, for instance, in the first quarter of the year what we had was prices increasing externally (indiscernible) that leaving us with price difference between Brazil and its external markets lower than we expected because the price certainly moving up quickly better than we moved our prices and therefore the difference – the translation of this international price to the Brazilian reais were different than we originally expected. Right now you are seeing the opposite. Exchange rate went up throughout the months of April and May, while external prices are coming down. So, a quick (indiscernible) on the fact that it’s not really just the mathematician and it’s easy to set the price and mathematically you know the difference between your prices, your international prices it is a moving target. Having said that, when I compare the price of the first quarter with the price of the two previous quarters, I’d say the difference – I would say the translation of international price to the Brazil, prices were not that different from what they were before. But I think that the market had seen the fact that first of all, no longer do you have the constant flow of imports coming to the country at the current price because of the tax incentives. A lot of discussions were held in the first quarter of the year about the extension of this benefit and so on, and that created an environment in which an alignment with the local producer became irrelevant again. So that has helped. Naturally, we did our piece here in terms of accepting the whole market, regaining and strengthening relationship with them, and the fact that the price externally moved up faster and we ended up with price that were not as high as it could have been, has helped as well. So, it’s always a balance between what we call service margin and market share. So, this margin was slightly lower than it was in previous quarter, also because of the speed of the price change externally, but it was not the only factor, other factors played a role as well, like the extinction or the forecasted extinction of the tax benefit. I hope it has provided more color on that. Your second question is a more objective one, R$50 million of Reintegra in the first quarter of the year is somehow a good indication of the level of Reintegra we should be having at the next quarters. Next, with the functional of the level of exports, we don’t see a lot of change in the level of exports going from one party to another one. Therefore, integra should be pretty much the same. What the industry is working right now is – the industry is in discussions with the government specifically with the Minister of Development and Ministry of Finance because integra’s forecasted to end at the end 2012 and we don’t believe it’s the appropriate thing to do. The government has the space to keep providing centers to the industry they have the financial capacity to do so, and the industry still needs that very much and we are working as hard as we can to show the government keeping integra in 2013 would be a wise thing to do to the benefit of the Brazilian industry.