Braskem S.A. (BAK) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary reveals several concerns: high cash consumption, weak resin volumes, and challenges in Europe. The Q&A section adds more uncertainty, with management unable to confirm restructuring plans or contract signings, and projecting a subdued petrochemical cycle. While there are some positive long-term projects like Transform Rio and PRESIQ, immediate financial health appears strained, and market sentiment is likely negative. The company's market cap suggests moderate volatility, leading to a prediction of a negative stock price movement of -2% to -8% over the next two weeks.

Key Financial Performance

Consolidated recurring EBITDA $150 million, 104% higher than the second quarter of 2025. This increase was driven by prioritization of higher value-added sales, prioritization of supply to the Brazilian market, lower inventory effect in the United States, and implementation of resilience plan initiatives, including cost reductions.

Operating cash flow Operating cash consumption of approximately $62 million, despite better EBITDA recorded in the quarter. This was impacted by higher seasonal disbursement of operating investments, including scheduled stoppages in Rio de Janeiro and Mexico, and higher half-yearly interest payments on debt securities.

Cash position Approximately $1.3 billion at the end of the quarter, sufficient to cover debt maturities over the next 27 months. Total liquidity, including a $1 billion international standby revolving credit line, was approximately $2.3 billion.

Brazil segment recurring EBITDA $205 million, higher than the previous quarter. This increase was due to prioritization of higher value-added sales, implementation of a commercial strategy to supply the Brazilian market, and resilience program initiatives.

Green ethylene plant utilization rate 40%, 31 percentage points lower than the previous quarter. This was impacted by measures to optimize stock levels as part of the resilience program.

United States and Europe segment results Continued at negative levels due to weakened demand, pressured spreads, and higher shipping expenses. These effects were partially offset by lower inventory effect of feedstock acquired in previous periods in the United States.

Mexico segment recurring EBITDA Negative $37 million, impacted by higher idle expenses due to scheduled stoppages and lower provisions for fine receivable for delays in the construction of the ethane import terminal.

Corporate leverage Approximately 14.7x at the end of the third quarter of 2025, mainly due to lower EBITDA over the last 12 months.

Cash consumption Approximately BRL 2.2 billion, impacted by disbursements in Alagoas, higher seasonal disbursement of operating investments, and higher half-yearly interest payments on debt securities.

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Operating Highlights

Green Ethylene Plant Utilization: The utilization rate of the green ethylene plant was 40%, 31 percentage points lower than the previous quarter, due to measures to optimize stock levels as part of the resilience program.

Braskem GreenCo: Braskem GreenCo, created in 2023, focuses on accelerating the production of new bioproducts and managing green ethylene assets in Rio Grande do Sul.

Brazilian Market Strategy: The company prioritized sales with higher added value and implemented a commercial strategy to supply the Brazilian market, increasing recurring EBITDA to $205 million.

Mexico Ethane Supply: The start of ethane supplies from Terminal Química Puerto México in September 2025 reduced reliance on the Fast Track solution, ensuring access to 100% of feedstock at lower logistics costs.

Resilience Program: Implemented 79 global action plans with over 700 initiatives, targeting $400 million in EBITDA and $500 million in cash generation for 2025.

Operational Cash Flow: Despite better EBITDA, the company had an operating cash consumption of $62 million, impacted by seasonal disbursements and maintenance stoppages.

Transform Rio Project: Approved expansion of the Rio de Janeiro plant to add 220,000 tonnes/year of ethylene capacity, with an estimated investment of BRL 4.2 billion, conditional on funding and a Petrobras contract.

PVC Operations Transformation: Hibernated the chlorine-soda plant in Alagoas to import EDC, making PVC production more competitive and sustainable.

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Risk or Challenges

Prolonged Downward Cycle in Petrochemical Industry: The industry is facing a prolonged downward cycle, with lower utilization rates at petrochemical plants in Brazil, the United States, and Europe. This is due to scheduled maintenance stoppages, demand levels, and international market spreads, which negatively impact profitability.

Global Macroeconomic Challenges: Moderate growth, accelerated inflation, high interest rates, and geopolitical and trade tensions are creating a volatile scenario. This has led to lower industrial activity, reduced resin processing, and a downturn in demand, especially in Brazil and Europe.

Excess Installed Capacity and Weak Demand: International petrochemical spreads remain at historically low levels due to excess installed capacity and weakened demand, putting negative pressure on sector profitability globally.

Lower Resin Sales in Brazil: Resin sales in Brazil have decreased due to higher polyethylene imports and lower demand for polypropylene, despite efforts to prioritize higher value-added sales.

Weakened Demand in the United States and Europe: Lower industrial activity in Europe and weakened demand in the United States have resulted in negative segment results, pressured spreads, and higher shipping expenses.

Mexico Segment Challenges: The first general maintenance stoppage since the plant's start-up and lower ethane supply from PEMEX have led to lower utilization rates and polyethylene sales, resulting in negative EBITDA for the segment.

Alagoas Geological Event: The company faces significant financial obligations related to the geological event in Alagoas, with a total provision of BRL 18.1 billion, of which BRL 13.6 billion has already been disbursed. This includes a recent agreement with the state of Alagoas for BRL 1.2 billion.

High Corporate Leverage: Corporate leverage stands at approximately 14.7x, driven by lower EBITDA over the last 12 months, creating financial strain.

Challenging Global Petrochemical Outlook: The global petrochemical industry is expected to remain structurally challenging until at least 2030, with excess supply, moderate demand growth, and low operating rates.

Impact of Chinese and Middle Eastern Expansions: Significant expansions in ethylene, propylene, and polypropylene production in China and the Middle East are expected to exacerbate global supply-demand imbalances, further pressuring margins.

Lower Oil Prices: Lower oil prices, driven by trade tensions and increased production, have reduced resin prices and impacted the competitiveness of gas-based producers like Mexico.

Prolonged Downward Cycle in Spreads: Petrochemical spreads are expected to remain below historical averages until the end of the decade, with only modest recovery anticipated after 2029.

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Guidance & Outlook

Revenue Expectations: The company anticipates a prolonged downward cycle in the petrochemical industry until at least 2030, with a modest recovery expected after 2029. This is due to structural excess supply and moderate demand growth, which will keep international spreads below historical averages.

Margin Projections: Margins are expected to remain under pressure due to weakened global demand, lower oil prices, and excess installed capacity in the petrochemical industry. The company is implementing resilience measures to mitigate these impacts.

Capital Expenditures: Braskem plans to invest BRL 4.2 billion to expand the Rio de Janeiro plant's capacity by 220,000 tonnes per year of ethylene and polyethylene by the end of 2028. This project is conditional on obtaining funding and a long-term supply contract with Petrobras.

Market Trends: The global petrochemical industry is expected to face challenges due to China's significant expansions in ethylene and propylene production, as well as similar movements in the Middle East. Trade tensions and protectionist policies are also expected to impact global supply chains and competitiveness.

Business Segment Performance: The company expects continued challenges in its Mexico segment due to reliance on imported ethane and higher logistics costs. However, the start of ethane supplies from the Terminal Química Puerto México is expected to reduce costs and improve reliability. In Brazil, the company is focusing on optimizing naphtha-based production and increasing the competitiveness of its PVC operations by importing EDC.

Strategic Plans: Braskem is implementing a global resilience and transformation program with 79 action plans and over 700 initiatives aimed at generating $400 million in EBITDA and $500 million in cash generation in 2025. Key projects include the Transforma Alagoas initiative to enhance PVC competitiveness and the Transforma Sul initiative to import LPG for feedstock, potentially increasing profitability by $110 per tonne.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:When will a decision be made regarding Braskem's restructuring and does the company consider injecting equity now that the Alagoas case seems to be completed?

A:The decision on restructuring is still subject to the completion of diagnostics and necessary adaptations by the company's Board. No options are discarded or confirmed at this moment.

Q:What were the main economic drivers for weak resin volumes this quarter and what can be expected for the upcoming quarters?

A:The weak resin volumes were influenced by seasonality and a drop in demand linked to the Brazilian GDP. A 4% drop in demand is expected in the coming months, followed by a 3% recovery next year, driven by the sanitation law.

Q:What is the timeline and expected impact of the Transform Rio project on EBITDA, and how will it be funded?

A:The engineering phase of the project will persist until the end of 2028 or early 2029, with an expected additional EBITDA of just under $200 million per year. Initial funding will come from existing resources, with additional funds to be raised later.

Q:What is the update on the PRESIQ program and its potential impact?

A:The PRESIQ program is awaiting Senate approval and could be signed by the end of the year. It is expected to have an impact on 2026 results, with Braskem potentially receiving 50% of the BRL 3 billion annual industry grant.

Q:What are the details of the Alagoas agreement, including the payment schedule and flexibility?

A:The BRL 1.2 billion agreement will be paid over 10 years, with initial installments respecting Braskem's financial condition. BRL 139 million has already been paid.

Q:What is non-negotiable for Braskem in a potential change of control scenario?

A:The company prioritizes its transformation plan, migration to gas, focus on competitive assets, and green agenda. Any new shareholder would need to align with these priorities.

Q:What is the status of hibernation of capacity in Europe and Asia, and how does it compare to past scenarios?

A:Rationalization has been slower than projected. Europe faces significant challenges due to high energy costs and lack of feedstocks, leading to potential deindustrialization.

Q:What is the normalized EBITDA capacity for Braskem Idesa with the ethane terminal in operation, and how will it contribute to reducing consolidated leverage?

A:The focus is on achieving an operation rate above 90%. Braskem Idesa's contribution will come through dividend payments as the capital structure becomes more balanced.

Q:What is the impact of China's capacity expansion on the market?

A:China is expected to add 20-30 million tonnes of capacity over the next five years, leading to self-sufficiency and potential net exports of polyethylene, extending the downward cycle.

Q:Has Braskem signed a long-term contract with Petrobras for ethane supply for the Transform Rio project?

A:The terms have been approved but the contract has not yet been signed. Negotiations are ongoing.

Q:What factors contributed to the sequential improvement of margins in Brazil, and is further improvement likely?

A:The improvement was due to higher value-added grades, cost reductions, and inventory optimization. Further improvement is expected through continued resiliency measures.

Q:Why does Braskem believe the petrochemical cycle will remain below historical levels for the next five years?

A:Weakened demand since 2019, China's capacity expansion, and oversupply are key factors. Rationalization in Europe and South Korea may provide some support, but the cycle is expected to remain subdued.

Q:What are the expected impacts of the chlor-alkali transformation in Alagoas?

A:The transformation will make the PVC plant more competitive by replacing non-competitive EDC production with imported EDC. This will allow the plant to operate at maximum capacity and improve results.

Q:What is the timeline for the sale of Novonor shares and potential change of control?

A:Braskem is not a party to the negotiations and has no information on the timeline or progress of the sale.

Q:What are the expected impacts of the PRESIQ program on Braskem's financials?

A:The program is expected to add $280-$300 million to EBITDA in 2026, with Braskem potentially receiving 50% of the BRL 3 billion annual industry grant.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct timeline for the sale of Novonor shares and the potential change of control, citing lack of involvement in the negotiations. Additionally, they did not provide a clear timeline for the signing of the ethane supply contract with Petrobras for the Transform Rio project.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

BAK Transcript

Braskem S.A. (BAK) Q3 2025 Earnings Call Transcript

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