Braskem S.A. (BAK) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Braskem Second Quarter of 2013 Earnings Conference Call. Today with us, we have Carlos Fadigas, CEO; Mario Da Silva, CFO; and Guilherme Mélega, IRO and Corporate Controlling. We would like to inform to you that this event is being recorded. [Operator Instructions] A simultaneous webcast may be accessed through Braskem ir website, www.braskem.com.br/ir. The slide presentation will 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 that the questions which will be answered during the Q&A session may be posted in [indiscernible] on the 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 all information currently available to the company. They involve risks, uncertainties and assumptions because they are related to future events and, therefore, depend on the circumstances that may or may not occur in the future. Investors should understand the general economic conditions, industry conditions and other operating factors could also affect the future results of Braskem and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Guilherme Mélega, IRO and Corporate Controlling Officer. Mr. Mélega, you may begin the conference. Guilherme A. Mélega: Good morning, ladies and gentlemen. Thank you for participating in another Braskem earnings conference call. Today, we will be commenting on our results for the second quarter and first half of 2013. First, we would like to remind you that we recently locked 11,638 20,007 [ph]. The results presented today reflect the adoption of International Financial Reporting Standards, IFRS. Note also that, as of the second quarter of 2012, the company began to recognize investments in jointly controlled companies using the APED [ph] method. Then no longer will they be on proportional consolidation. The company also currently has assets in the process of divestment, and therefore, the results are recognized as profit or loss from discontinued operations. Information to this presentation will be reviewed by independent external auditor. Let's go to the next slide, where we'll begin our comments. On Slide 3, we present the highlights of the second quarter of 2013. The average capacity utilization rate of crackers reached 94%, increasing 12 percentage points from the average rate in the first quarter of 2013, basically, from improvement in our operating efficiency and from the better performance of certain generation clients. Another positive factor was the reduction in the [indiscernible] that was announced by the federal government in early May. Current consumption of [indiscernible] totaled 1.4 million tons in the second quarter, increasing 10% from the previous quarter. Braskem sales followed the upward trend and reached 947,000 tons. ITDA [ph] Was approximately BRL 1.9 billion, a 12% increase from the first quarter, mainly due to the higher sales volume, operational efficiency improvement, the better spreads for [indiscernible] which followed international markets. In U.S. dollar, EBITDA was $506 million. In line with Braskem's strategy of pit stock diversification and ensuring we start [indiscernible] of the Mexico complex by mid 2015, construction continued to advance, reaching around 38% completion. The [indiscernible] market delivery of the first large pieces of equipment such as storage tanks for products and raw materials. Another highlight in late July was reached by the subsidiary Braskem data of the first installment of the project finance in the amount $1,484 million. This investment enabled the subsidiary to repay the divestments advanced by shareholders, which in the case of Braskem amounted to $649 million. In order to better reflect the impact of exchange variation and its results, and in compliance with accounting standards IAS 39 and CPC 38, Braskem decided to eliminate part of its dollar-denominated liabilities and hedge for its future exports. As a result, the exchange variation in such liabilities will be temporarily reported in the shareholders equity and taken to the income statement when such exports occur. The [indiscernible] recognition of the dollar's impact and liabilities in exports. In line with the commitment to maintaining its financial goal, Braskem's leverage, as measured by the net debt/EBITDA ratio, continued its downward trend, which due to improvement driven by EBITDA growth in the last 12 months and a reduction in net debt in U.S. dollar terms. Excluding some of the [indiscernible] the Mexico project, the leverage ratio in U.S. dollar stood at 3.01x, declining 10% in the first quarter of the year. Let's go now to Slide #4. This slide shows the performance of the Brazilian markets [indiscernible] in Braskem sales. In the second quarter of 2013, operant [ph] consumption after [indiscernible] reached 1.4 million tons, growing 10% on the previous quarter, which is explained by the restocking trend in the chain, the good performance of various sectors, such as heavy business, automotive and water supply, and the opportunistic entry of imported material. Braskem sales followed the total market in the year by 3%. However, the stronger market growth with [indiscernible] increase of imported material and operational problems at the PVC plant, lead to a decline in Braskem's market share, which stood at 66%. Compared to the second quarter of 2012, Brazilian demand grew by 26%, driven by the better performance of the domestic market, which was reflected by a 0 down in the local economy. In summary, Braskem's sales grew by 19%, reflecting its commitment to supply the local market. In the first 6 months of the year, [indiscernible] grew by 15%, while Braskem sales were at 14% higher, which reflects the stability in its market share, which stood at 68%. Let's go now to Slide 5. This slide describes the factors that influenced EBITDA in the second quarter of 2013 compared to the previous quarter. Braskem's consolidated EBITDA in the second quarter of the year was BRL 1,051 million, growing by 12%. This growth is mainly explained by the higher sales volume and better revenue spreads in the international market. It also can be highlighted with positive impact from the [indiscernible] reduction, [indiscernible] that was announced on May 3 and the company's continued effort to cut its fixed costs. These impacts were partially offset by the reduction in [indiscernible] petrochemical prices, which followed international market. Another important factor impacted EBITDA performance was the U.S. dollar depreciation in the period, which generated a positive impact of BRL 69 million, followed by a positive impact of BRL 333 million in our revenue and a negative impact of BRL 264 million in cost. Let's go to the next slide, please. Slide #6 presents the factors that influenced EBITDA in the first 6 months of 2013. Braskem's consolidated EBITDA reached approximately BRL 2 billion, growing by 22% on the first half of 2012. Excluding the positive nonrecurring impact of BRL 344 million [indiscernible] explained by the compensation issue with [indiscernible] property supply contract reduction, as well as the prepayments of installments under the [indiscernible] tax and [indiscernible] EBITDA in the first half of this year, increased by 55%. This recovery is mainly explained by the higher spread of [indiscernible], particularly in international market, which increased 21% and 9%, respectively, and by the higher sales volume of Braskem, especially in the domestic market. Another important factor was the appreciation in the average U.S. dollar rate, which generated positive impact of BRL 348 million, with a positive revenue impact of BRL 1.5 billion and a negative cost impact of BRL 1.2 billion. Let's go now to Slide 7. Slide 7 covers the hedge accounting adopted by the company as of May 1 of 2013. Braskem's cash generation is heavily [indiscernible] reached almost 100% of its revenue directly hedged to the dollar and around 80% of its cost also [indiscernible]. Due to this exposure, the exchange variation impacts the accounting financial result of the company, as Braskem regularly exports all of its production. In aiming to better reflect the exchange variation in its results, the company decided to eliminate part of its dollar-denominated liabilities as a hedge for its future exports, in compliance with accounting standards IAS 39 and CPC 38. As a result, the exchange variation from these liabilities, which amounted to $6,767,000,000 will be temporarily recorded under shareholders equity and transferred to the income statement only when such exports occur, thus enabling the [indiscernible] the combination of the currency impact on liabilities and expense. In Q2 2013, the impact from the 10% U.S. dollar appreciation on the net exposure of its liability not [indiscernible] in its hedge had a negative impact on the financial results of BRL 126 million. If hedge accounting had not been adopted, the financial result would have been an expense of BRL 2.1 billion. Likewise, Braskem would have also registered net losses of BRL 1.1 million in the second quarter and BRL 855 million in the first 6 months [indiscernible]. Let's go to next slide, please. Slide 8 shows Braskem's debt. In June 30, 2013, Braskem's consolidated U.S. debt stood at $8.6 billion, down 5% from the balance in March 31. In Brazilian real, consolidated gross debt grew by 5% in the period. In both cases, consolidated gross debt was affected by the 10% appreciation in the U.S. dollar in the period. At the end of the period, 71% of gross debt was denominated in U.S. dollars. Meanwhile, the balance of cash and investments decreased by $38 million to $1.6 billion. In line with its strategy of liquidity in financial health, the company maintains 3 revolving standby credit facilities, which grew in the aggregate amount of BRL 600 million, in the amount of BRL 450 million, which did not create any restricted covenants [indiscernible] of the U.S. markets. [indiscernible] Braskem's consolidated net debt in U.S. dollar decreased by 5% to $7 billion. In Brazilian real, consolidated net debt grew by 4%. The percentage of net debt eliminated in U.S. dollar was 77%. Excluding from the amount the cash and resources invested in the Mexico project bridge loan, which totaled $649 million, and were reimbursed to Braskem upon withdrawal of the first installment of the project finance on July 24, the balance of net debt stood at BRL 6.4 billion. The EBITDA growth in the last 12 months of 4% to $2.1 billion combined with the reduction in net debt in U.S. dollar, led to a decrease from 2.62x to 3.30x in financial leverage, measured by the ratio of net-debt-to-EBITDA in U.S. dollar. Excluding the Mexico project from the [indiscernible], the leverage ratio stood at 3.01x, decreasing 10% from previous quarter. On June 30, 2013, the average debt term was around 15 years, and considering only the portion eliminated in U.S. dollar, the average debt term was 19 years. Only 7% of total debt matures in 2013, and Braskem's highly positive and sure that its cash and cash equivalents cover the payment of obligations maturing over the next 22 months. If you consider the standby credit facility as well, this coverage increases to 31 months. Let's go to the next slide, please. Slide 9 shows CapEx in the first 6 months of 2013. Maintaining its commitment to make investments which return above the cost of capital, Braskem made operational investments totaling BRL 1.1 billion. Of this amount, 47% or BRL 493 million was allocated to the project in Mexico. The investment represents the resumption of investments via equity, which aim to balance the project's financing structure, 70% debt and 30% equity, as well as the anticipation of certain investments due to the progress made in construction. The company also invested BRL 486 million in maintenance in order to keep its assets [ph] operating at high levels of operating efficiency and reliability. For 2013, Braskem's total investment is estimated at BRL 2.2 billion, which 70% allocated to maintenance. Let's go to Slide 10, please. Slide 10 covers the global scenario in the petrochemical industry. Despite the recovery [indiscernible] in the first half of the year, the short-term outlook remains marked by caution. The main factors are related to the higher availability of products [indiscernible] and the capacity utilization rates to schedule and unscheduled maintenance shutdowns in the second quarter and the level of growth in Chinese demand. However, the economic situation in developing countries, of the United States and Japan should be a positive leverage of this [indiscernible]. For the year, as a whole, the outlook continues to call for higher average spreads than those registered in 2012. For the mid to long term, spreads are expected to continue increasing gradually, reflecting bellwether demand. Uncertainties regarding the startup of new projects in Asia, in the Middle East that could impact the global supply and demand balance also can be highlighted, leading to a stronger recovery in the profitability of international petrochemical industry. Newly updated projects announced in the United States should begin to come online as of 2017. However, this capacity is not expected to change the pricing dynamics of the global petrochemical market, which will continue to use naphtha as its main feedstock. In the Brazilian market, the expectation is that the measures adopted by the Brazilian government to boost the competitiveness of the industry as a continued improvement in household income could have a positive impact on demand and its local chemicals and plastics chain. Let's go to the last slide, please. This last slide represent the main areas management is currently focusing on. In line with its strategy to strengthen its business and boost its competitiveness, Braskem remains committed to supplying the local market and continues to invest in innovation, developing new applications in supporting the industry's growth. However, the global scenario remains challenging, which reinforces the need for industry policy that is more comprehensive and continues to boost the competitiveness, not only in petrochemical industry and plastics chain, therefore, encouraging the investments in this sector. In this context, Braskem has invested in projects to diversify its pit stock matrix and improve its competitiveness in the global cost curve by building the integrated petrochemical complex in Mexico for the production of polyethylene in advancing the engine installers [ph] for [indiscernible] petrochemical complex in Rio de Janeiro. The company also remains focused on the partnerships with clients with consequent resumption of its market share gains, the continuous pursuit of operating efficiency by increasing its capacity utilization rate and value added from new capacity added in the Brazilian market. And all those without losing sight of increasing the company's financial health and cost discipline in a scenario marked by global crisis. That concludes today's presentation. So let's go now to the question-and-answer session.

[Operator Instructions] Frank McGann from Bank of America Merrill Lynch.

Just two quick questions if I might. One is, looking at the demand in the quarter and the stronger trends that you were seeing, part of it was destocking, and I know that's probably hard to determine how much is restocking of -- from your customers, as well as versus what is the underlying growth in the market itself. But I was just wondering what your thoughts on that and how you see trend continuing into the third quarter. And perhaps if you have any visibility on client demand in the fourth quarter. And then the second question, which is completely separate, in terms of the hedge accounting in Slide 7, just to understand a little bit better how this will work as we go out over the next couple of years and even longer term, 5 or 10 years. You have no accounting flow in 2014 and '15. And I was just -- and then you start to have the accounting flow after that. And I was wondering, that means there's no impact in terms of profitability. It's all essentially gain, because you recognize none of the losses in 2014 and 2015. And then in 2016 and beyond, the extent to which you would have had additional earnings because of movement in currency that would be related to exports and the change in the real versus the dollar, now that disappears. And so there would be essentially reduced income later on potentially, but there'll be no effect in 2014 and '15? And it's not a very clear question, but just how you see this affecting income flows over the next 3 to 5 years would be helpful. Carlos José Fadigas De Souza Filho: This is Carlos Fadigas. I'll start with your second question, and then address the first one. First of all, the hedge accounting will only affect the financial expense. It has no effect at all in the overall company income, so because it's related to the liability we have in U.S. dollars. So basically, what we've done, as you know, we have to publish our results in Brazilian reals. Our accounting books have to be in Brazilian reals, although 90-plus percent of everything we do is dollar-related. But we are hedged partly in Brazil, so we have to have our books in Brazilian reals. So basically, the $6.8 billion that we have in U.S. dollars, we have up to now, prior to hedge accounting, we had to convert that to Brazilian reals every single quarter. And every time the Brazilian real would go up and down, that would generate huge profits and losses, depending whether the debt was translated into less or more Brazilian reals. What didn't make sense to me, to be honest with you, simply because these are long-term debts, more than 10-year average life, but every single quarter, we had in our income statement these huge gains and losses, all of them showing up at the income -- at the financial expense line. It tends to show huge losses in the Brazilian real, but weaker, and therefore, the debt would make it into more reals and the reverse in the other case. What you're going to see in '14 and '15 is that we will have virtually no impact of that translation in the financial expenses. So we had -- we have aligned the financial expenses through account for this monetary variation. And this will tend to be close to 0 in '15 -- in '14 and '15. And we spread out this effect starting in '16, because in the short-term, we have cash in U.S. dollars. So it's more of a technical term -- technical issue. But what is going to happen is that you will not see the effect of this monetary variation in the income statement of the company, and it continues to show -- and it was showing up before in the financial expenses. Beginning 2016, what you're going to see is the effect of the monetary variation over the debt that will somehow mature in that specific year. So instead of having every single quarter, $6.8 billion being translated to Brazilian reals, you're going to have 0 in '14, 0 in '15, and then 1/9 of this value, roughly $800 million, per year from '16 to 2024. So you're going to start having again this monetary variation in the line of financial expense, but they're going to be much smaller because we're going to be accounting for the monetary variation of the debt maturity in that specific year. And that should be going back to the rationale behind it, it's much more reasonable. I don't have to keep track of monetary variation every quarter of a debt that we will do 10 years from now. So when it's due, the portion that its due in that specific year, that's the idea behind this accounting principle. Then when it comes due, you recognize these variations at that specific year. Because it's more technical, I'm not sure if I was able to answer your question. Do you have any additional point in this specific topic?

Yes, I mean, it's clear. I just -- what's not clear to me is why there's no effect in 2014 and '15. Is it just the decision made because your debt is due longer term or... Carlos José Fadigas De Souza Filho: It was an analysis made by the management in alignment with the external auditors to understand what was the best flow that would reflect the future flow of exports that are being somehow hedged by these debts in dollars. In '14, and '15, for sure, there are going to be a lot of exports, but these -- we had a cash portion that would compensate for the debt, maturing debt, in those initial years, and that's why we spread it out starting in '16. Again, it could have been done differently. It wouldn't make much difference in terms of income statement. We could have spread out the debt in 10 years rather than 9, starting in '15 rather than in '16, but we came to an agreement with the auditors that, that would reflect pretty much -- that would better reflect the future flow of debt we have maturing. And the 2 initial years were excluded also because we also had, on top of the debt, on the other side, we also had cash in U.S. dollars that would compensate for the debt. So that was roughly the rationale behind it. Okay? Going back to -- it's not an easy topic. It's a very technical one. We are doing our best to explain, but what I'd like to say is that I do believe that the Braskem income statement would be showing a much more accurate end result of the company instead of accounting for these huge monetary variations. I actually considered, we thought about having our books in U.S. dollars, that would also have reflected the performance of the company, but it's a legal thing. I mean, we are headquartered here, we're paying income taxes here and so on. We have to have our books in Brazilian real. So we have a business in dollar, books in reals and we're doing our best to explain the company performance to the market. But anyway, regarding restocking. It was a strong quarter, 1.4 million tons of resin in PPE and PVC bought by the market. It was a good quarter. Two effects, just going back, two effects that we had, we had the end of the tax -- the Brazilian ports -- the Brazilian states that would give tax incentives to imports, we had that happening in both '11 and '12. We managed to finish that it in December, but it was even kind of a waiver until April. So in April, we saw a lot of imports and debt accounts on the number of demand, because we really can't separate how much the customers are buying from how much we are processing. So as we said, there's a restocking embedded in this number. Same thing happened with our sales in June. The euro would keep raising prices in Brazilian reals because, exchange rate, the Brazilian reals was losing value, and therefore, to keep the parity, would keep raising in Brazilian -- the price in Brazilian reals. So we also bought in advance, so some of the demand from the third quarter was already showing up in the second quarter as a prebought resin for the third quarter. What I can tell you is that people in Brazil, because the summer is at the end of the year, the stronger quarter is the third one. [indiscernible] in some years has an additional demand of roughly 5% to 10% more volume than the second one. We have a year -- it's hard for me to tell, but we may have a year where the flat demand between second and third. We don't know yet, but that would reflect the fact that some of the demand, as I said, of the third quarter was already reflected in the second quarter numbers, as they prebought. For the whole year, we review our forecast, for how much it's worth, and it's been hard to forecast in Brazil, but anyway, we had a 5% figure. We are now thinking something between 7% and 8%, maybe 8%, after this very strong first quarter. I don't know if I've answered your question.

Yes, it was very helpful. So April was very strong because of the end of the -- of those tax benefits. And then it sounds like you saw a fairly sharp drop-off in May, but that came back in June as a result of essentially prebuying ahead of what was expected to be higher prices in the third quarter. Is that fair to say? Carlos José Fadigas De Souza Filho: Exactly. Exactly that.

Mr. Luis Carvalli [ph] from [indiscernible] would like to make a question.

I have 2 questions here. The first one is, could you give us an update on the Mexican project? When are you going to be able to access, say, new installments from what you got in the second quarter? So just to have in our numbers here. And the second point is, do you think that the 94% that your reached in crackers utilization rate is sustainable going forward? Or is it something that we should see, let's say, coming back to the 90s or low 90s? Carlos José Fadigas De Souza Filho: Starting with the Mexican project, it's under construction, as I said. We've crossed the 40% -- the number we showed was 38% at the end of June. Naturally, 1 month has gone by, and we are above 40% at this point. We are on track to start operations in mid-'15. It's really June, the target, June, the term from June to July. It's hard to say the exact day, but that's the forecast. So we expect to start selling revenue in the second half of 2015. There's a ramp up, naturally. It's a complex with capacity of 1,050,000 tons of polyethylene in 3 lines: 2 high-density lines, 1 transitional low-density line. But naturally, you don't turn it on and start producing at the rate of 1,050,000 per year. So there is a ramp up. We don't know exactly how this ramp up will be. We're going to try to ramp it up as fast as we can. But yet, second half of 2015, that's when we plan on accessing the market and have the plant running. Regarding the 94% for the crackers we have in Brazil, that was the best performance in 4 years. Net with that, our permanent goal is to have these crackers run, let's say, as high as we can. It was benefited by the new tax regime in Brazil that we call HAGE [ph], the special regime for the chemical industry, that reduced taxes on our raw materials. Net with that added to the competitiveness of the whole system, the crackers and the polyethylene, polypropylene and PVC lines. In the past, we have cut production in the crackers, because we did not have competitiveness to sell, let's say, the last pound of resin to export it to Asia or to Europe. And we find pockets going back where had operating rates of 88%, 90%, 92% because of that. So that's something that is for the time being sold as one that we have with special tax regime. But on the other side, a lot of things have come together for us to run at 94%. So it was a especially good cracker. I'll be a little bit more conservative. I think, something between 90% and 94% to be more feasible to the third quarter. We are going to stop for planned maintenance, our cracker in Brazil. The maintenance stoppage will start at the last day of September. So it's going to have a very low impact, virtually no impact in the third quarter, but that's something that will show up the fourth quarter. So I'll say more between 90% and 94%. You can be sure we're going to be trying to beat 94%, but these are big crackers, very complex. Supply of [indiscernible] was a problem. And we are going to try to run them as high as we can, but in terms of what to expect, I think somewhere between the two points would be reasonable.

Just going back to the first question. You mentioned -- you already probably mentioned that you already have access to the first installment, which is $1.5 billion. And you have access to $650 million. When are you going to be able to access the next installment that you're going to access? And for me, any updates in that would be useful also. Carlos José Fadigas De Souza Filho: Okay, okay. Basically, the project finance package for the Mexican project is $3.2 billion. So that's the whole package. The Braskem subsidiary, which happens to be called Braskem-Idesa, the name of the 2 parent companies, they will get this loan as they viewed the petrochemical complex, in a rate of 70-30. Meaning that every time they need money, they will go back to the banks to get 70% of what they need, and 30% will come from equity from the 2 shareholders, Braskem and Idesa, which is worth $1.5 billion, because it took us a while to get the first disbursement. And not to stop the project, the 2 shareholders have advanced money to the subsidiary. Now that it has had access to the debt, it has repaid some of the advances that we made. Basically, the rate at which we disburse these loans is every quarter -- once every quarter. So the next one would be close to the end of the year, around October. So from now on, it's, let's say, business as usual. If they need money every quarter, they'll go to the bank and to the shareholders and get the money they need for the next 90 days of construction. And that's we're going to reach the full amount at the end of the project in mid '15. Regarding divestments, during this call in Portuguese, we had about 2 hours ago, I'd mentioned that with the change in the Brazilian economic environment and also the political environment, we've seen less appetite from external investors to buy us in the real [ph], and pointed our distributor of chemical products -- the names of potential buyers for these assets were from outside Brazil. We had a few buyers from Brazil, but the main buyers were from outside. And I've seen, they've reduced the appetite to that in Brazil. They're all kind of sitting on the sidelines waiting to see what is going to happen next year, what is going happen to the currency, to GDP, to the political situation and so on. And the way they have to express their concern is through more conservative price. So -- and naturally we don't want to sell the asset at the wrong environment, and naturally, for sure mark it the wrong price. That's why we may still consider, but I see it's less likely at this point [indiscernible]. We have also other assets that are not part of the core business of Braskem. Around logistics, terminals and warehousing for one. And around what is the activities of the plant. I mean water treatment, in some case, waste treatment and so on. And we're analyzing these other alternatives. We don't have anything concrete at this point. But we may -- we're going to keep pursuing these alternatives. We may, actually, now we do that with less priority once performance on EBITDA has improved, once the economic environment has -- at least the tax environment, I should say, to the chemical industry has improved. So it is on the list. It has probably moved down the list of priorities, a little bit at this point.

Mr. Fernando Ceres [ph] from Geben [ph] would like to make a question.

I had, of course, just a big question regarding the energy reporting mix, Carlos. I was wondering if you expect to see a net impact in case the reformation is approved or witness an increasing competition? Carlos José Fadigas De Souza Filho: If I understood correctly, you want me to comment on the competitive environment inside Mexico, once we have the plant running?

Yes. And well, as you know, the President [indiscernible] is proposing an energy reform next week. So I was wondering if you have measured some of the effect that these reforms will have [indiscernible], so I don't know if you could -- if you see an increasing competition or probably equal benefit like old sales of the -- of your project? Carlos José Fadigas De Souza Filho: Okay. Now I've got it. Well, first of all, we've been keeping track of the efforts to reform of President Pena Nieto. I think he's very consistent to everything he said during his campaign. And if I may add to that, I think that it may become a very positive factor for Mexico. As you may now, we have a model in review where, following international companies -- countries to participate in the exploration and production of oil in Brazil. In some of the fields, the national company, Petrobras, has to be the operator of the oil field. So I think what you've been hearing from the Enrique Peña Nieto, from the President, on this reform, is similar to that [indiscernible]. Naturally, Pemex will remain the take-on [ph], through the take-on [ph] company, but private capital will be welcome in the exploration production eventually in partnership with Pemex. I think it's good for the future of production supply of both gas and oil. I also think that it may be very positive for the Mexican economy, as we do see dependence on Pemex alone. And I think it's positive for the petrochemical environment as well. I mean, the ethylene XXI, if I may say, it has been one first step in the direction of welcoming more private capital into strategic areas, or so-called strategic areas. So in essence and to finalize my answer, I think that the project and the idea of having maximum visibility in this quarter are in perfect alignment with the idea of more private capital. I think that the more private capital would help the petrochemical sector by adding both gas and oil availability in the future. I do hope that it helps the Mexican economy in that regard, on the demand side, as would benefit as well. I do not see that creating additional competition for the ethylene XXI project at this point. As far as we know most of the butane available is being -- will be used by this project. In addition, ethane will go to projects in other resins as well. There's demand for ethane for production of ethylene upside for NG, for EDC and so on. So I think it would keep improving the performance of the petrochemical sector but in other resins, but it's positive to everyone.

Mr. Gustavo Gattass from BTG Pactual would like to make a question.

I had a couple of questions here. I just wanted first to touch on -- or do a follow-up here on the question that Frank asked, with regards to the hedge accounting. Just follow up with a possibility and see if I understood this well. But you've denominated a number of contracts that are basing the hedge accounting now, they have theoretical dates of amortization. What I just wanted to understand was in the event that, let's say, you have a bond denominated for $150 million for, I don't know, 2022. In the event that you decide to prepay, would you effectively have the acceleration on the given year? Or are you allowed to just move things around to try to keep these things scheduled? That's the first thing I just wanted to understand with regards to the mechanics here, and how we should forecast the story. And the second part of my question, still on accounting sides of things. There's a mention in your press release that you had a lower situation or a lower level of expenses on the sales side because of improvement and the quality of credit concession. I just want to understand how relevant that was for the quarter, just try to have a feel for how that impacted results? And lastly, you guys had a major improvement in working capital. I just wanted to understand if there's something here that is not necessarily cyclical, it's something that's more structural that you think you can hold at a higher level, so that we might expect working capital to be more supportive throughout the rest of the year. Carlos José Fadigas De Souza Filho: Let me take your -- a minute here before answering your questions. You mentioned something I should have mentioned in the beginning of the call. We had in the first call with Mario Augusto da Silva, who's the CFO. I should have welcomed him at the beginning of the call, so I take this moment to do that. Mario joined us -- joined Braskem 10 years ago, actually 12 years ago, in 2001. He participated in the, let's say, creation of Braskem and he put several companies together in August 2002 to create Braskem. From Braskem, he moved on to become the CFO of several companies at the other branch group. I include the Braskem in [indiscernible] and the Braskem Latin America, which gives him some knowledge of, let's say, a neighbor industry, the oil and gas industry. And also his experience in Latin America will help us with the presence we are developing in Latin America. As you already know, Marcela Drehmer has taken the position as the CFO of the holding company of the other branch group. And because of that position, she will become a board member of Braskem. So she managed to move from a team to somehow become my boss as a board member. So I now have to treat her better. But we have Mario here with us back to Braskem. And he -- I'm going to take your question to have him answering your question on hedge accounting. But before that, the sales on expense, the provisions for credit for bad debts, for receivables that we can collect from the customers, and we have a provision actually like any other company, is the sub item of these sales expense. So bad debt is an expense, say it in that regard from the company perspective. And then we have better provisions, the overall, let's say, expense in sales is reduced. That's why we try to say in the financial release. And I think we're going to work better on how we write it the next time to make it clear. Then the results to our working capital. We've had at least 2 facts helped us particularly in that quarter that may not be the permanent trend. One came from the fact that the situation of exchange rate allowed us, just because of in reals, the payables in U.S. dollars becomes better, it helps us, and also the fact that we are running our cracker at a higher, which helps us as well. [indiscernible] from one quarter to another as we also decide how much naturally you want to finance, whether we want to discount the receivables or not. So this is an active management from the side of the financial area. But you have a number that you could complete and around levels you know. We may have one quarter like this one when we have improvement; we may have a quarter where we end up investing more money in working capital, more money trapped in working capital. But that's what's behind the -- what you call the improvement in working capital, that's because we increase our payables, the translation of our payables in U.S. dollars to Brazilian reals because of exchange rate. I'll pass to Mario Augusto to try to handle hedge accounting in English and explain to you how we are going to account the whole thing.

Thank you for the introduction. It's really not an easy task to explain the accounting in English, but let's give a try. It's a pleasure talking to you again and to continue the relationship that we have at the oil and gas industry. Let me go straight to the question. In the case that we prepay a debt, for instance, that is maturing in 2022, what we define, the moment that we will flow the exchange valuation to the net income of the company, it's going to be the exports, right? So in the case we prepay a debt that is allocated to hedge the exports, we have the option to put another debt as the hedge of the same export. So the trigger of bringing in the exchange rate variation to the financial expense -- or to the financial result of the company, is the moment when the export is realized. Carlos José Fadigas De Souza Filho: And the size. Just to add to that, what's also important is to say that this hedge accounting will not constrain any export from Braskem and will not constrain any other decision whether to prepay a debt or roll a debt. So it still keeps pure flexibility in both exports and debt management. And on top of that, we have, what I believe to be a better way of showing the Braskem net results.

Mr. [indiscernible] from Citibank would like to make a question.

I just had a question on your international business. I saw that margins have constrained a little bit in the past quarter and, really, in the past year. So I just wanted to see what your future outlook is. And, particularly, because of what you guys mentioned in the Brazilian call, that you plan on experiencing [indiscernible] To your immediate outlook, and also how that impacts your growth outlook. And the second question is just a follow-up on the maintenance stop in September. Do you have any idea how long you expect the stoppage to last? Carlos José Fadigas De Souza Filho: Fernando, I got the second question. I understand the first question's about international presence of business of Braskem. Could you go through that again, please?

Sure. The margins over the past year has really compressed. I think most of it because of the rise of gas prices in the U.S. So what I wanted to understand is what's your outlook as far as margins in the international segment for the remainder of the year. And also, you mentioned on the Portuguese call that you're planning on expansion, and particularly in North America. So I just wanted to understand how this rise in prices and constrained margins impact your growth outlook in North America? Carlos José Fadigas De Souza Filho: Okay. Okay, much clear, thank you. So let's start with this question. We saw -- we had a tough year in both '11 and '12, with lower margins and, therefore, less profitability. The spread internationally improved this year. I would say, Fernando, that I believe that compression in margins, and that's my interpretation, has more to do with the demand side of the question than the supply side of the equation. We had a very tough economic environment in Europe. We had a lot of uncertainties regarding the pace of growth in China. For instance, one year ago, when we were talking about the second quarter of '12, it was a very tough quarter because of these things. So the gas side of the equation, the supply side, the P produces based on gas, yet sell at the same price we are selling and keep the margin to themselves. That may become a major factor in '18, when we're going to have more supply of polyethylene coming from cheap gas. Right now, we have better margins than we had last year and even better margin than we had at the end of '11. I believe we're going to have similar margins going forward, as we have a more normal situation on the demand side. More stable Europe, it's not that they're growing, but at least they're not going to disappear, the euro will not disappear, and that's going to have a major recession [ph] in Europe. In China, people seem to become more comfortable with the new pace of growth of China of 7.5%. And most of all, U.S. seemed to have a pretty solid -- its not a big economic growth, but a pretty solid economic growth. So because of that and because we do not have any major capacity addition over the next years, I do -- my outlook, as I said, going forward for spread, we should have spreads similar to what we have right now. I think there is -- it can go up and down, but I think it's less likely to go down, and so stability seems to be the case. In terms of expansion, we have a very strong presence in polypropylene in the U.S. We are the largest producer of polypropylene in the U.S. You know Braskem business model. We are strong in Brazil in polyethylene, polypropylene and PVC. And In the U.S., we have only one of these resins. So develop at a certain point a stronger presence in polyethylene is something that we are considering. We're going to have 1 million tons of polyethylene coming from Mexico, and Mexico is still North America. But at that point, you're going to have then 2.5 million tons -- 1 million of P -- 1.5 million tons of PP. That's what we have right now in PP capacity in the U. S. And because the gas is available, and we've seen, actually, not only the competitiveness of the gas but also reassurance of the availability of the gas long-term. These 2 factors that we're going to have -- likely to have a lot of gas available and competitive, it's a very strong incentive to consider something around the polyethylene space. And then you're going to be on the right side of the equation with the gas-based ethylene and polyethylene business, enjoying the kind of margin that the North American producers have right now. Anyone producing polyethylene from gas maybe enjoying a margin in excess of $800 per ton. So that's what's behind our growth ambitions or desire in the U.S. First of all, complement the portfolio, replicate the business model similar to the one we have here. We do have a lot of PP customers right now that would like to buy PE from us in North America. And also the economic side of it, or let's say, the raw material side of it has also to do with the availability of shale gas, and therefore, a lot of ethane. Going back to your question on maintenance. The Brazilian -- the cracker in Bahia in the city of Camacari is roughly 1.2 million tons of ethane capacity. The Phase I cracker is actually 2 lines, 1 was started up in '78, 1978, and the other one in 1992. But we're going to stop one of that. So we're going to have half of the capacity, either for the maintenance, for 40 days. So that's probably the numbers to help you calculate. You're going to roughly half of this 1.2 million tons ethylene cracker stopping for roughly 40 days for maintenance. This maintenance happens once every 6 years, and it's time to stop one of the 2 lines in Bahia.

[indiscernible] from Credit Suisse would like to make a question.

Two questions. One is, can you please discuss in a little more detail what you are seeing more recently in terms of imported products into Brazil, especially in light of the FX movements after the quarter end? Carlos José Fadigas De Souza Filho: Salina [ph], as I mentioned, we had this increase in imports in April, some of that in May but mainly in April. What is happening at the current from the second to third quarter and in July is that, FX exchange rate keeps going up. The customers know we're going to have to move price in reals up to keep in line with international prices. And because of that, because we do that at a certain pace, it's not automatic. It's not a formula in U.S. dollars. So it's really a price in Brazilian reals that we have to adjust monthly, sometimes every 2 weeks. And because we have a pace to move the price up, for certain periods of time, our price is a little bit below parity, as we are still working to adjust the price. And that's probably the main factor behind lower imports. We don't have the precise number. It becomes available over time. And we don't have yet any hard data for July, so it's more of a perception. It's still in the first days of August, so it's still perception. But we do believe that imports will go down, especially because Braskem's prices are more, let's say, competitive, not just, say, cheaper than imported products as we work to pass the exchange rate variation into our Brazilian price.

Okay, that's helpful. And my second question is about the rating agencies. Can you update us on your latest conversations with them? And is there anything specific that they expect from you for the rest of the year, maybe in terms of additional debt paydown or leverage levels?

This is Mario speaking. As you have heard, S&P has just reaffirmed our rating and stable outlook. In terms of the leverage, you can see that we have a very good reduction in the leverage of the company. If you consider right now we are excluding project finance from Mexico, we have a net debt to EBITDA of 3.01x. We expect, down the road, to continue to reduce debt and have a number by the end of the year below 3. Okay? Rating agencies, we're working with them. The other 2 that have negative outlook with Braskem, I think we had [indiscernible], at the beginning of the question, we had very strong results in the first semester. And with that, we expect that we're establishing conversations with the rating agencies, and we have to target to remove the negative outlook that we have, both from the Moody's and Fitch.

I will turn over the conference call for closing remarks. Carlos José Fadigas De Souza Filho: So I'd like to thank you all for participating in the call and for the interest in discussing with us Braskem's second quarter results. We remain focused on improving market share, to run the crackers as fast, as high as we can, work on the, let's say, the tax environment in Brazil to reduce taxes in our raw material and increase the competitiveness of both the petrochemical and the plastics segment in Brazil. As we do that, we also work on our growth strategy. We are at the peak of the construction of our Mexico project. We are working very hard with Petrobras to make the complex project something viable and real. And we explore opportunities also in other geographies, and other areas, like the U.S. as an example. So again, thank you all for participating. We meet again at the third quarter conference call and I wish you all a good weekend. Especially for those in the Northern Hemisphere, I hope you enjoy the summer. Thank you.

Thank you. This concludes today's Braskem Earnings Conference Call. You may disconnect your lines at this time.