Braskem SA

BOVESPA:BRKM5

Earnings Call Transcript 2018-Q3

[Operator]

I turn the floor over to Mr. Fernando Musa.

[Fernando Musa, executive]

Good afternoon everyone, and welcome. It is a pleasure to be here. As Francisco mentioned, it's a partnership that has lasted for 20 years with APIMEC. So we'd like to welcome not only you, gentlemen and ladies, present here, but also those following us up on -- via webcast.

We'll be showing a presentation, which will cover topics relative to the businesses, and we will break it down by geography: Brazil, U.S., Europe -- and Europe, then a broad overview of third quarter results. And then we'll touch upon 2 important topics for our business, which have shown important developments recently: compliance and Circular Economy, both very important topics for the industry as a whole and specifically, for Braskem. We were happy last week that we are in a good position in those. After, we will wrap-up with an outlook for the industry going forward, and then a Q&A session after that.

My colleagues will share the presentation with me. And we'll start with Marcelo Cerqueira, who will talk about the chemicals unit here in Brazil.

[Marcelo de Oliveira Cerqueira, executive]

Our raw material business -- we apologize, we're not getting sound here at the translation booth. 70% of [ the firm ] is allocated externally, 30% domestically. In our chemicals portfolio, we have about 40 products. We only show a few of them here on the slide. The most relevant, ethylene, which is used for the production of polyethylene and polystyrene; butadiene used for the production of synthetic rubber and also used in the household appliances industry; propylene for the production of propylene; acrylic acid, which will also be used for other products; and also propane oxide; also polyurethane for the production of foam; benzene used for nylon and also used for detergents and also for the production of polyethylene, along with ethane, which is another product which is quite important in our portfolio on top of another important range of products. In other words, it's a very diversified product portfolio. In other words, we supply different production chains in Brazil.

On the next slide, we have our average utilization rate. For the third quarter 2018, we had very good results. We reached 95% of utilization rate after 2 quarters. In other words, the first quarter in 2018 where we had a scheduled shutdown, starting with Río Grande do Sul. And then we had an event in Alagoas, which led to a drop in production for a certain period in the northeastern part of Brazil.

In the second quarter of this year, the impact came from a scheduled shutdown in Río Grande do Sul and also because of the truck drivers' strike. But in the third quarter, we resumed good levels of production, and we see already a difference in our numbers. In other words, production is at a normal level now. So year-on-year, we are slightly below year-to-date when compared to last year.

On the bottom part of the chart, we see our production volume, which follows the utilization rate. In other words, we saw a growth both abroad and domestically because of product availability. In the year-to-date number, volumes are very much in line, slightly above internally, showing the good level of health and the high level of consumption here in Brazil. And we have reduced the exports, of course, because of lower availability of products.

In terms of spreads, when we compare this quarter with the previous quarter, we see results coming from the spreads on propylene and butadiene; a very strong demand coming from Asia for those products, which are used for domestic appliances, so that affected our chemicals spreads. And we see the numbers going up throughout the quarter. So when we compare year-on-year, you see the effect of first quarter in 2017 where we saw a strong increase in the price of buta and, again, especially in Asia That did not occur now in the first quarter of 2018.

We continued to work closely with our clients to create value. We are able to create portfolios with great growth opportunities. I have 2 examples here on the next slide.

For hydrocarbon resins, one of its applications is an adhesive product. So clients who produce diapers now have an application to improve the sealing facility of diapers, so that's a very high added-value product. We have been introducing that type of product in trade fairs in Europe with very good results.

The other product, which is also part of our portfolio in [ personal care and cosmetics ], PIB, we have developed to replace castor oil. The idea is to provide stability through masterbach. So it is a very versatile product used throughout a very wide range of applications: lubricants, adhesives, packaging aggregates, so it reaches a very important segment in the industry and also adds important value to our portfolio.

Moving along the value-creation line, we are going to talk about our project for flexibility of raw materials. It started in November last year. The idea was to provide more flexibility to the Bahia cracker. Throughout the year, we consumed 13% of the polyethylene product -- sorry, for ethane, showing that, really, we are making the most of the project, and it is giving back what we expected in terms of returns. In other words, we use ethane as a more complex raw material when compared to naphtha.

In the bottom chart, we have the oil and natural gas production in Brazil. And there is an expectation of growth in production for gas and oil in Brazil, especially because of the pre-salt project. And the gas coming from the pre-salt levels, it is rich in raw materials we use for our crackers. So again, the outlook is very good in terms of opportunities for the chemical industry for the coming 10 years. The availability might increase twofold in the next 10 years.

I'll give the floor now back to [ Mr. Santana ] for him to follow up with the presentation.

[Unknown Executive]

Good afternoon to everyone. Now I'll be talking about our resins, the business here in Brazil: PE, PP, as you know, including PVC and also caustic soda.

Our production capacity, if you look to the left, in polyethylene, 3,055,000 tons a year and polypropylene, 1,850,000 tons. All these capacities are greater than the demand in the Brazilian market today, which allow us to cater to the demands of our Brazilian customers and also have a strategy for target markets, especially in South America, and to complement with the assets we have in Europe and U.S. and Mexico with the portfolio that we have from Brazil.

Our sales can basically -- 2/3, domestic market; 1/3 export. And for PE, PP and PVC sales, the food industry is the main destination, accounting for 23% of our sales; and then manufacturing industry, 13%; civil construction is very relevant for PVC with 11% of our sales. And then you can see that there is a very wide range of a variety of product.

When I start talking about polyethylene, 60% of the applications of PE are destinated for the packaging industry. So flexible and rigid packaging primarily and secondary, bags. So this is an industry that has a very fast response to improvements in economy on the whole. So whenever consumption goes up, packaging consumption goes up. And so every industry uses packaging and bag, so it has a high potential of leveraging the production of polyethylene whenever there is an economic -- the economy picks up.

And then for PP, there's also packaging. But when we talk about polypropylene, we are more really -- we have a significant share in more long-lasting goods or products, such as home appliances and automobiles.

For PVC then, this is very much related to civil construction in engineering. So in the last quarter, we already saw that there was a higher confidence. It's an industry that will recover as the economy picks up.

And soda, a product that, as part of the vinylic chain together with PVC, saw 100% of our sales are meant to the domestic market.

Now when we look on the next slide, Slide #11, you can see the evolution of demand of resins in the Brazilian market. And then you can see along quarters, Q3 is traditionally, because of the seasonality, it's the quarter with the highest demand in the year with a growth that is slightly above the average of the second half of the year because we had the truck drivers' strike, which really affected the results or our performance in May and June. But we have already overcome this problem year-to-date. For our first 9 years (sic) [ 9 months], the growth is 3%, so which is more or less in line with what we expect and the growth of the GDP, which is between 1% and 1.5%.

In terms of market share, the evolution of Braskem's market share is relatively stable. We're kind of flat along this year. We are around 67% of market share. Last year, in the same period, our market share was 69%. We already know -- and even though there are 3 percentage points less, we know that as capacity increases for the production of polyolefins in other regions, we know that there would be an increase in exports being sent to the Brazilian market. But even so, we see that Braskem sales have grown 3% in this period.

In terms of sales volume that you see in the lower part of the slide, you can see sales in the domestic market. They have grown 1%. And if we compare '18 to '17 in exports in 9 months, about 1 million tons. As Marcelo said, as we had a level of activity of production that was slightly lower in the first half of the year because of operational issues plus the reduction of production in May because of logistic constraints, so year-to-date numbers is 4% lower than the same period last year, combining here both sales to the domestic market and exports.

Now talking about profitability and the spreads that Marcelo mentioned. So here, we have the spreads. And basically, we measure the difference between the international reference price for our products minus the international reference price for our raw materials, which is, more or less, gives us an indication of the evolution of the profitability of our products.

And considering the polyolefins market in the U.S. with higher supply because shale gas in operation late in 2017 and in the early 2018, we have seen along quarters this year, if we look at the evolution at the first chart on the left-hand side, we see the evolution of spreads along the year from $736 in the first quarter to $537 in Q3. So this is a natural movement, and it's related to the cycles in our industry. If you monitor and if you follow our market indicators, you saw that along Q4, these numbers are now getting better.

In vinyls, on the other hand, or vinyl, on the spread here, we consider both PVC and soda, caustic soda, so there was a drop in the price of caustic soda because of lower demand. But even so, as we had better spread for PVC, we kept it at around -- we kept our year-to-date spreads at about 2%.

If on one hand, we have a flat market share, as I said in the previous slide, this is very much because Braskem has difficult market share in Brazil. We try to improve the quality of our market share in terms of qualification of our product innovation and launch of new products, which make us get closer to our customers and brand owners, the customers of our customers. And in this manner, we are able to increase and to have a closer relationship with these customers and make them loyal.

So I would like to highlight here the launch of Braskem Evance, which is an EVA, special EVA line focused in high performance, especially for applications such as the footwear industry. On the right-hand side, we have some important partners that we have that are using this family of products that we launched this year. And more recently, at the end of the second quarter, with the commercial launch in the third quarter, we launched the green EVA, similar to the green polyethylene based on sugarcane ethanol and then with an important appeal in terms of sustainability.

The first partnership of Braskem Evance I'm green, is a green line is with Allbirds, an American company, and it's very popular now especially in comfortable shoes, which is a type of shoe that have been growing fast. And they have just won an award last week, precisely because they launched a line of products using our raw material.

Another important launch are the PVC windows. So the evolution of the use of PVC in window frames is consolidating. We have been doing it for a long time. And so we wanted to have a lighter profile that will be more affordable, and therefore, expand the use of PVC profile in the construction market.

Now talking about results. Brazil's EBITDA accounts for 60% of the consolidated EBITDA of Braskem. And what we saw in the third quarter was a growth of 13% as compared to the second quarter this year. There was also a growth as compared to the first quarter, very much because of the recovery of sales volume that we have had as compared to the second quarter, and this offsets the reduction of spreads of resins. But we also saw, when Marcelo was talking, that we attained that also in chemical spreads.

If we look at year-to-date numbers, first 9 months of the year in EBITDA and operations, we are 27% below as compared to the same period last year, especially because if we compare the 2 9 months, on average, we had lower spreads and a production volume that was slightly lower, reflecting what Marcelo said because of the incident in our plant in Maceió because the plant of chlorine soda in the Northeast. So then further on, other events ended up compensating or making up for the problems we had in production.

And last and summarizing our operations in the Brazilian market, I think that the main thing, Braskem has 29 manufacturing plants and is the only integrated petrochemical industry with first and second generation. We do naphtha, propane and ethanol, and then we produce all chemical products and resins, including in the vinyl chain.

And we have a relevant market share, so a consolidated market share of 67% in the first 9 months of the 2018. And we have partnerships with our customers for innovation and development of customized products focusing specifically. And we also believe that we have a differentiated relationship with our customers. This manner, we can have prices that follow the quality of international markets, both here in Brazil as well as in other countries that are strategic for our exports such as, for example, Mercosur.

Our exports are optimized by our commercial presence outside Brazil. So the fact that we manufacture polypropylene in Europe with having local production, and that facilitates and adds value to our exports of polypropylene manufactured in Brazil that is exported to Europe, and the same applies to Mexico and the United States. And our scale in exports make it possible for us that, whenever necessary, to export whatever is not taken up by the demand in Brazil.

And as Marcelo said, our feedstock diversification is something that we've [ bet ] as a strategy, and we've been consolidating this diversification. So with naphtha accounting for slightly more than 82% of our raw materials; and then ethane, propane, refinery off-gas, propylene and ethanol, accounting for another 15% for products with renewable raw materials.

It's also important to highlight in many times, at first, you would think that, first, we also have a diversified base of naphtha suppliers. Petrobras today accounts for 43% of our naptha. 50% -- 57% of the naphtha that we buy is imported from more than 20 suppliers, international suppliers. So the international naphtha market is very liquid.

So now I'm going to turn it over to Fernando to talk about U.S. and Mexico -- rather Europe.

[Fernando Musa, executive]

Thank you. I'll be talking about both geographies, U.S. and Europe. Starting with the U.S. and Europe, it's basically a PP operation, 1.5 million tons production capacity in the U.S. and 625,000 tons in Europe. It's stock basis propylene bought from several suppliers in the market.

We also have a very important contract with the U.S. for propylene to supply. We buy it from a brand which processes gas and propane, turning it into propene. It's a long-term contract with an economic rationale linked to the price of propene, and it also adds a competitive edge to us in terms of demand.

Seasonally, both markets, the second quarter is usually more stronger or stronger. We have summer vacation right after that, so several clients build up inventories in the second quarter, then we see a drop of 5% in the third quarter when compared to the second quarter, which is quite common.

In the year-to-date, we have some stability of sales when we add together both regions in a year where expectations bend to stabilize both for Europe and for the U.S. The auto market had been growing strongly, but this year, we see those sales becoming flatter, leading to a more stabilized market.

As for the utilization rate on the same chart, operations have improved. We saw an improvement in the third quarter, reaching 87% when compared to 84% in the second quarter. But when compared to our historical levels, those utilization rate levels are lower. We have been facing some operating problems in some plants in the U.S. We had a very long shutdown in one of the plants, which lasted for more days than we expected. It was an impact.

And in Europe, the challenges faced by the petrochemical industry because of the low level of their rain river has impacted the availability of feedstock, especially for the plant in [ Fasten], which is located by the river. And it has impacted our production capacity, which impacted or affected that comparison year-to-date between quarters.

And when we compare also U.S. and Europe, we see a drop from 97% down to 87%. And then our teams have been working to overcome those challenges. And in the U.S., expectations are that we will resume historical levels in the coming months.

In Europe, that river issue has been a big challenge, and we don't have as of yet a clearer picture of what's happening in the near future going forward. So with that, the challenge to access feedstock will remain, not only for us, but for most producers located by the river.

From the sales standpoint, we saw a drop of 4% in year-to-date sales, in part due to a reduction in demand, in part due to production challenges, which led the accumulated number, the year-to-date 9 months to show a drop of around 7%, both in the U.S. and in Europe.

Now looking at the spreads on the next slide, the scenario is quite different between U.S. and Europe. In the U.S., we see an increase in spreads, which is a consistent increase quarter-on-quarter due to a relatively good demand, less robust than expected, but still at a good level and a good offer of propene, which has granted us a good level of competitiveness, especially with our propane-based contracts.

In Europe, the situation is quite different. We see a consistent decline quarter-on-quarter leading to a difference in year-to-date. We see the U.S., the 14% plus, and in Europe, we see a drop of 22%, as shown by both charts when we talk about year-to-date spread. The important message there is that despite the drop, we still have a very good level of profitability in Europe.

As we combine those factors, spread and volume results continue to remain strong. But when you look at the combined operations leading to a number of USD 182 million in the third quarter, 7% up from the previous quarter. And in the year-to-date numbers, we see a growth which is quite robust at 12% due to an increase or improvement in the operation's profitability level, especially in the U.S.

As for value creation on the next slide, we highlight 2 different projects, the most important of which is the construction of the new PP plant in the U.S. with a project of USD 675 million for a new plant, world-class plant, the largest plant in America with a capacity of 450,000 tons, with a start-up scheduled for 2020.

We already have USD 341 million invested. The engineering phase is practically over. The procurement phase for equipment and raw materials is well advanced. And it's only normal to be at this phase. We still need to procure some materials, and they are acquired now at this phase.

And in terms of construction, we have about 1/4 of the project finalized. There is a picture of the project in the bottom of the slide. You see both reactors and the gas base already installed as well. It's difficult to tell the picture -- by the picture, but it's very, very high. It's one of the tallest towers in the region. When you look around the other plants, you don't see anything like it.

On the right-hand side, we talk about product development. The market for PP when used in refrigerated environments always presented a challenge of combining both chemical and physical properties of the product. Some classic materials are able to deliver this resistance to colder temperatures; in other words, they maintain the transparency level.

We have launched this year a resin for that market of refrigerated products, and we see a picture there. On the right-hand side, we see the traditional product, which is opaque. And with the new resin, 6810, which have the same characteristics of the product on the right, but it also ensures a very good transparency level, which is quite important for some segments, such as ice cream, for example, and other frozen products. Customers like to visualize the product inside the packaging. So that was a very important launch in terms of creating value and outstanding partnership with some of our clients.

So in summary, on the next slide, for our operations in U.S. and Europe, we are today the largest PP producer in the U.S., 5 operating plants in 5 different sites, 1 under construction. We have 2 PP plants in Germany. We have 1 product line, which is specialized in PP. There's another one called UTEC, which is a specialty application for high added-value applications. We have built a plant in Texas, [ cona racha ], as a complement to one of our plants in Bahia, which also produces the same kind of product.

We have leveraged our international presence. As of late, our presence in the U.S., our presence in Europe and Mexico, all of that together has allowed us to have a much stronger commercial operation all around, not only around locally produced PP products but also in selling products coming from Brazil, from Mexico. And with the start-up of the new plant in the U.S., in 2020, we will also be able to sell PP coming from the U.S. That gives us an ability to get closer to our clients, which is way ahead of the pack, way ahead of our current position.

And in terms of feedstock, as I mentioned, we buy also ethane to produce products which both PP and ethylene. But we have a very diversified supplier base, both in the U.S. and Europe, diversified not only in terms of supply but in contracting modes, pricing, which allows us to be very flexible when we negotiate those products.

As for Mexico, on the next slide, our -- we started commissioning in late 2015. And we could do everything related to the cracker essential but with no polyethylene in the first half of 2016. Today, our production capacity is 1,050,000 in both high- and low-density polyethylene in Mexico. It's a very competitive plant. It was the first plant in the new wave and mentioned by polyethylene projects built in America, which has the benefit of shale gas because it's indexed to the U.S. prices.

Operation rate this year has been suffering with operational challenges that we are dealing with. This is public information that the supply part of our deficiency has started importing ethane coming from the U.S. where our logistic operation, similar to what we've been doing with ethane going to Bahia, as Marcelo mentioned.

The utilization rate in the third quarter, there was a slight recovery and then a drop to 72%. And it's important to highlight that in the second quarter, we had a downtime to correct some construction problems that we identified along 2016 and in early 2017. And this downtime corrected all the problems. And so the cost of the downtime was taken on by the EPC group, and this led to a drop in production in 2Q.

And then there was a recovering of marginal production, which made it possible to keep the margins of sales in the domestic market and a slight increase of exports from Mexico in the third quarter compared to the second quarter. In year-to-date numbers, we can see very clearly our strategy of favoring our relationship with the domestic market as part of the philosophy of the project of creating value for the Mexican economy and creating a close relationship to assure flexibility in supply and adding our sales in the local market by 2%. And we have also reduced exports in order to deal with the drop in production because of the drop in operation rates.

In terms of spreads, in North America, along the same idea that's mentioned, and here, we are talking about polyethylene and ethane, then you can see that in the first half of the year, it was quite strong with the last polyethylene plant still in the shared process in U.S. In Q3, practically all plants that were built in the U.S. are already in normal operations. So we see the drop of the spreads going on along the year, significant drop of 20% of the spreads in that combination of more polyethylene that was available and also because all plants were fully operational and leading -- thus affecting the price of ethane growing from $250 per ton to almost $450 per ton. But today, it's gone back to $230 to $240 per ton, as the new plants were absorbed by the market.

In spite of the drop along the year, if we compare the 9 months, the first 9 months of this year and last year, we can see a reduction of spreads and a growth of 6%, very much because of the polyethylene prices. And in year-to-year comparison, there is an average maintenance in the cost of raw materials.

Now if we go to EBITDA, we can see a drop in the third quarter, which is a result of the tighter spreads. I mentioned a drop of 20% of the reference spread and here, the drop of 12% with the EBITDA. And because we had favorable local sales and if we compare year-to-year, there's a slight increase of 4% for our operation in Mexico, which is about $470 million, which is very, very good profitability, 50% EBITDA margin over revenues.

So our Mexico project, summarizing, is the largest industrial private investment ever in Mexico with more than $5.2 billion invested. We have created 26,000 jobs during the construction and 3,000 new jobs created in Mexico after our start-up. One of the main drivers for the Mexican government in the past to accept the project was a replacement of imports, which has been going on, and with an impact in the trade balance with $1.5 billion to $2 billion a year.

And this project was -- everything was built with great concern in terms of sustainability, in terms of being ecological or eco-friendly, preservation of the local flora. So we created even a small museum in the community. And because it is a project in a community that needed to evolve in terms of the human development index, so we also invested in our relationship with communities, trying to provide benefits to them and, at the same time, having the benefit of using them as labor.

It is an integrated gas plant, projected global scale, the largest polyethylene manufacturer in Mexico. It's a joint venture. So there's Idesa involved, which is a player that has more than 50 years operating in the Mexican petrochemical industry, and they are very good. And it has been added great value in terms of good governance and good interaction with the local market.

The ethylene supply agreement is a long time -- long-term, rather, agreement for the supply. It's international. There's more than 30 parties. By contract, it assures the delivery of volume for 100% of the unit's production capacity. And as I said, unfortunately, there were operational challenges and difficulties in terms of importing ethane to meet the clauses of the contract, although this is not what we expected. The contract stipulates quite strong clauses. The take-or-pay for Braskem, in case Braskem does not meet the volume that has been agreed, and this clause has been accounted for and paid for PEMEX because they are not delivering the volumes that were contracted.

Another important highlight is that the project was done according to project finance with $3.2 billion, with a consortium of 17 banks, including many multilateral funding agencies, such as IFC, IDB, EDC, BNDES and Bancomext.

Now I am going to turn it to Pedro, who is going to talk about the consolidated results for Braskem.

[Pedro van Langendonck Teixeira de Freitas, executive]

Good afternoon. So on the third quarter, we had good results in terms of EBITDA, USD 909 million, 4% up from second quarter, 5% of increase when compared to the same quarter of last year. In year-to-date, we saw a drop of 12% in EBITDA. It was an expected drop.

As you will remember, in the first half of last year, especially the first 2 months of last year, we had spreads which were exceptionally good for benzene and butadiene. We had an atypical market situation, which led to a very high spread, which did not happen this year. Most of that drop comes from that fact. The second effect was that at last year, we sold our chemical distribution unit. And this year, we did not sell it again. If you also -- that capital gain does not show in our numbers this year, of course.

So when we compare the evolution quarter-on-quarter, we can identify an effect, which was mentioned before by Marcelo. The effect coming from a lower production in the first half of the year because of operating problems, which affected the whole half of the year, something which did not happen in the third quarter of this year.

As for CapEx investment, below the estimated amount for the year. The main operating expense was the scheduled shutdown for the cracker in Río Grande do Sul. And in terms of strategic investment, we have the U.S. project. It was mentioned by Fernando before. And expectations for the year, we won't, we won't meet the CapEx number, for the last quarter is usually the stronger in terms of investment. So we will get close to the forecast of the year but not really meet that forecast.

As for cash generation, we had a very strong cash generation this year. The year-to-date number is quite strong. But when we compare to the first 9 years (sic) [ 9 months ] of last year, we can see that the cash generation more than doubled when compared to last year.

I have already mentioned the EBITDA, the variation in EBITDA, which was not favorable to the company. But the working capital for the company last year -- actually, when we talk about feedstock suppliers, that led to a reduction in cash generation. We had more cash allocated to the working capital. And this year, the situation is different. We have a positive effect coming from the working capital. All the other numbers are in line with our historic levels and with our expectations, leading to, as I said, an exceptionally strong cash generation.

As for indebtedness, we have a long debt. Today, we have a debt coverage of about 30 months. So our cash today is more than enough to cover for the next 2 years. On top of that cash, we also have access to a credit line in standby, if you will, of another USD 1 billion. And we have been working around refinancing and extending that term, and we're also looking at the cost of that. So we're comparing costs and term. And because of that, we work around our perpetual bond, and we redeem around BRL 700 million -- $700 million, sorry, in September, which led to a reduction in the cost of debt.

We have maintained a strong cash position at USD 1.5 billion. And lastly, as for the debt leverage, it's under control. You can see a slight drop from 1.9x net debt over EBITDA down to 1.8x by the drop in EBITDA, as we saw, which happened in the year-to-date, last 12 months basis. As I mentioned, that has been dropping at a faster pace than that of the cash generation pace. And then we see a drop in the leverage level.

As for our rating, we have maintained the same rating according to Fitch and S&P. Last week, Fitch reaffirmed Braskem's rating.

I'll give the floor now back to Fernando, who will be talking about governance and compliance.

[Fernando Musa, executive]

As I mentioned before, this is a priority topic for Braskem. We have invested heavily both in everyday operations and in the interface with the board. I mean, here we have a chart that shows the evolution of a series of elements, a series of components of our governance and compliance project, which points, in our view, help improve our governance, help improve our ability to manage compliance.

Starting with the number of independent board members. Before, we had 2 independent members in the board. Today, we have 8, including the Chairman of the Board. The Chairman of the Board is an independent member.

We created a compliance committee, which was contemplated in the bylaws and which reports directly to the board. We also have a Chief Compliance Officer, responsible for the compliance area, of course, and who also reports directly to that compliance committee I just mentioned. So there's a very strong link in terms of reporting, direct report with the board.

The compliance department, which before reports into the legal department; today, it is totally independent. We have invested also in a series of processes and activities relative to compliance, which led to a need to increase the team. We moved from 8 members in Brazil to a team of 35 around the world. Most of the team is located in Brazil, but we have compliance structures in the U.S., Mexico and Europe to track compliance activities.

We also have an ethics channel, which was managed internally before, now it is outsourced. It's managed by a specialized company that entailed a series of improvements in terms of capturing claims and complaints that will ensure that anonymity is maintained throughout the process. And also, we have put together an internal audit department with a functional report to the CCO but also to the compliance committee. And a series of studies have been conducted, which have helped us identify a series of possible improvements, which are now being implemented.

In terms of processes and policies, we also see a very strong development. In the past, we used to have a code of conduct, which governed and listed and instructed members how to behave, how to work. And the process we've been going through has led to an important investment in terms of spelling out all those policies and in actually re-reviewing the code of conduct. We have a code of conduct for third parties, outsourced contractors, a series of guidelines, series of policies, policies that have to be approved by the board and a guideline has to be approved by the company's management.

So we have a very high level of oversight now, not only of where, but of how to implement those guidelines and policies. They have been surveyed, implemented and executed with a very robust effort of communication across the world. So all units are able to incorporate those policies with e-learning, trainings, on-site trainings across all levels of the company from the board down to the operating team.

And also a significant improvement in our interface with third-party contractors. In terms of third-party risk management, contracts which now include anticorruption provision, so all those efforts have been put in place as we seek better governance for the company, as we seek more transparency in our relationships with all our stakeholders, suppliers, community, investors but mainly, as we seek to ensure ethical behavior across the company.

It's very, as I said, significant investment, but which has helped the company improve its processes, has helped us understand our challenges around the world.

Another important point I'd like to highlight, I'd now give the floor back over to Edison. He's leading this topic within Braskem to share with you our initiative around Circular Economy. Braskem is one of the largest plastic producers in the world. And you have been seeing in headlines across the world how plastic has been in constant presence in the media because of pollution and waste. And Braskem has decided to make its positioning more explicit in terms of plastic waste, in terms of Circular Economy, we've been working around that.

And I'd like to ask Edison to touch on that subject. Please, Edison, you have the floor.

[Edison Terra Filho, executive]

I would like to start remembering everyone, what we call, the belief and the purpose of Braskem. So the belief that plastic is very good and helps people in having a better life. We believe that plastic and chemistry make life better, and the purpose is to improve people's lives by creating sustainable chemistry and plastic solutions.

So when we talk about Circular Economy, so we have the typical linear thing: we produce, use and dispose in a chain where we produce, use and reuse. So we want to reuse products in some way, either through recycling or using it for energy production. There are many different alternatives. I think that undoubtedly, we are absolutely sure of this benefit that plastic has provided to society. And today, plastic is a fundamental solution for us to improve and increase the availability of food to avoid loss in the production of food. So the world wastes 1/3 of the food it produces. Without plastic, this number would be even greater. With plastic, we are able to reduce that number.

Just as an illustration of this 1/3 of food that is produced and wasted accounts for 7% of the greenhouse effect gases that are annually produced in the world. So in terms of plastics playing a key role in food chain availability, also in availability of water and sanitation; water is always present. Also in terms of hygiene and hospital security or safety. So I could go on and on for a long time. So the plastic is very successful in its uses, and it has a growing use.

There is a problem that is becoming clearer and clearer. It's that we need to think about what happens after consumption, what we need to do with residues so that we can responsibly deal with the management of waste and to avoid that plastic is disposed in an inappropriate way in the environment.

So we have 3 main objectives. Number one is to communicate what we have already been doing for a while. I think Braskem, ever since its creation, has been supporting cooperatives of garbage collection, recyclable collection. And so we support the scrappers, as I said. And we want to work more and more with renewables and sources. We made official the creation of another department, focusing on the development of mechanical recycling solutions. So the main objective is to communicate what we do.

Number two, we need to make explicit our intention of accelerating what we are already doing. I'll try to share with you what we've been doing.

The last and third objective is to make an invitation to our customers and the customers of our customers and brand owners for research organizations, academia and society as a whole to join Braskem and other petrochemical companies in this effort because I think that this is a solution that will demand the effort of many different stakeholders in society so that we can reach our objective.

So in a nutshell, we have listed 8 global initiatives that Braskem is already involved in, but we are -- we will we doing more intensely from now on. Number one, we want to have partnerships with clients to develop products which can favor recycling and reuse of plastic packaging, and we want to do it with our clients and with other partners. So the petrochemical industry has been working for a long time in order to have more efficient packaging solutions. So in terms of [ cheese ], plastics, thickness of film, what we have today compared to what we used to have 6, 8 or 10 years, well, it's completely different in terms of mechanical properties for the same packaging. We have a much smaller use of material. Sometimes, the reduction is 10%, 20%, almost as much as 40% reduction in the weight of packaging.

We want to continue investing in renewable origin resins. We want to develop and support new technologies and types of recycling. So as part of the recycle program, there's a significant number of initiatives that we have worked on to close the cycle of certain products. And it's joint work with our customers, with recyclers, with the companies that collect the waste, the recyclable waste. And so the idea is to reinforce the work, also bringing our technology development capacity.

So there is a team focusing on finding alternatives and new technologies to improve mechanical recycling to enable chemical recycling when I transform a waste in raw materials to make new chemical products or new resins; to find ways, for example, to improve the washing of waste to remove odor in doing recycling and so on and so forth.

Education programs, Braskem has had a project with [ Educator] for a while, so it goes to the effort of changing and improving our behavior as consumers. So assessments of the plastic life cycle, we have been doing it at our many initiatives, and we want to compare different materials. We want to see which are the most appropriate, not just in terms of waste generation, but also in terms of energy consumption, water consumption, O2 generation, looking at the whole life cycle of products to support the measurement of communication, of recycling and recovery indicators for plastic packaging materials. This is important, and we may advance in measuring so that we may effectively see how effective the actions that we are taking on.

And the last 2 points, point 7 and 8 are more related to the issue of solving the liability. 1 to 6 are related towards really changing a linear economy and making it into a Circular Economy to provide solutions in terms of the definition of waste. And 7 and 8 are more related to our liability, especially the issue of waste in the sea or in the ocean. So we want to have partnerships and to understand, prevent and solve the debris problem in the ocean. So we have already published a document, which is in our website.

So I want to talk about that scenario and how we are seeing the evolution of our business over the next few months or next year. I am going to share with you a vision of our industry. And so the indicators that are most widely used in the petrochemical industry, so our scenario is slightly better than this because of our spreads, but this is the scenario that is consensus in the industry. So as you can see for 2019, a slight reduction in the spread for chemical, and this is related to supply and demand and new production capacity that will start, some in U.S. and some in Asia. Polyethylene as has been mentioned, so new volumes. That will be part of our production capacity in the U.S. So IHF will affect a little bit of the spreads, especially in the first half of last -- next year. And so we are expecting an impact next year.

In terms of polypropylene in the different regions, especially in Euro, in the U.S., it's quite positive. And in vinyl, a stability as compared to this year. All these numbers, all these markets are suffering the impact of the dynamics of the dispute, the commercial dispute between the U.S. and China. So what we see that is going on today, there is a market expectation that this will go on for a few months. It's a rearrangement of global production chain. So people who used to buy from China and U.S. today, they are seeking new markets. So demand is still there, offer is still there. So supply is still there, but we'll still be seeing the impact of this rearrangement in the near future.

I would like to make a comment about that, which is the difference in this rearrangement of chemicals and resins and finished products. In the short term, resin flow will change, and it can rearrange itself quite easily. So instead of going from U.S. to China, it will come from Europe, Asia, Americas and go into China. And then the Americas, that will go the different regions. We are already dealing with this impact in our everyday business.

And there's a second impact, which tariffs are also impacting finished products and the transmission of production into a product that is sold in the U.S. and manufactured in China such as hairdryers, toys and so on and so forth. The movement of the production location is not as fast as moving the destination of a flow. Certainly, that is very easy to do in our industry. It's very traceable.

The second effect, we're still trying to understand, so the industry and the many countries. And we will see this unfolding over the next 1 year or 2 years as companies start to reorganize their production chain. And thus may be very positive for our presence in U.S., for example, if more products will be -- will start to be manufactured in U.S., especially in durable goods that will be made in U.S., demand will grow for us. But this impact will require some more time for the industry to understand and for the many companies to understand what will happen.

And in some cases, we will benefit from that. And it might create some challenges in other regions. Well, in any way, Braskem's strategy or the strategy that we have had for many years, for more than 10 years, if I'm not mistaken, in terms of going international and having geographical diversification, creates a scenario that makes it possible for us to navigate well in this environment. So, for example, with the Chinese market, there's some sort of limitation in terms of whatever is produced in the U.S., we can understand what is produced in Brazil and Mexico. So within the arrangement of the global flows, we can allocate or reallocate our production. And this is very -- helps us a lot to reduce impact because we can adapt our commerce flows and adapt it to the new reality.

Still about supply and demand cycle. I mentioned the issue about chemicals and polyethylene, polypropylene. We have seen a growth of the U.S. in its local demand, a growth in economy, which is good. And in vinyls, there's not so much investment here. But we're seeing it will continue positive.

Another element affecting the 4 segments that you can see here is Brazilian demand. So the expectation of recovery, that the Brazilian economy will continue its recovery. So we're hoping or expecting 3% or 4% growth in Brazil. And we think that we will have a positive growth rate here in Brazil, which is also positive for Braskem's performance. Now Braskem will talk about our priorities in the future.

[Unknown Executive]

In closing, I'll be touching upon our priorities. On the final slide, a broad overview of our strategy. We have 4 main priorities, which summarize what we're doing in terms of operations and strategy.

Starting with productivity and competitiveness. We're talking about our global industry increasingly integrated with trade flows, as we just heard, in terms of the tariff dispute between the U.S. and China. All that impacts our local industry. Also a very volatile industry in terms of feedstock prices. And so for us, to maintain our success best, we need to continue to invest in terms of increasing productivity and competitiveness. And we are doing that across all our businesses, processes, product development, financial operations management, commercial operations management. So it is a continuous search for higher productivity and higher competitiveness, so that we continue and remain as a global player in this market.

Our ambition under the same topic is to be a first quartile operator. In other words, that Braskem in all its operations, we want to remain, as I said, one of the main players in the world. And that, of course, entails a continued effort in terms of benchmarking, comparing what we do, once again trying to find the right level of investment to maintain Braskem at the top of the productivity and competitiveness ladder.

Number two, given the impact of #2 in our capacity to produce, in our capacity to be or to remain competitive in terms of costs, we have also worked around diversifying feedstock. As it was mentioned before, we have a series of initiatives, which we'll continue to explore around feedstock. We have been making investment decisions in the past, which have led our feedstock base to be very diversified. We have reached a balance between liquid base and gas base as we also create a flexibility of around 20%.

What do I mean? We want to be able to run 40-60 naphtha-gas or 60-40, either through physical investments or through an improved capacity in terms of managing our industrial plant. In other words, optimizing our operations on an everyday basis or having contracts with our suppliers, which are more flexible, which allow us to create this fluctuation, if you will, as market conditions evolve.

The third pillar, geographic diversification. We started that in Mexico and the first acquisition in the U.S., a second acquisition in the U.S. after that and then Europe. And now, we are building a new PP plant in the U.S. So we continue to try and diversify commercially, geographically.

And we also want to reinforce our presence in Asia. Our first steps only, but we have added personnel in that market to be able to better access that market. And again, it is a continuous search for projects that will enhance our diversification, both in terms of production basis and in terms of commercial capacity across the globe.

We want to be competitive. We want to be able to send our products around the world, including an increasing number of geographies. This will, of course, benefit our businesses quickly.

And lastly, we need also to always have an eye on reputation and governance, to strengthen the company's image. We have been making the recognition. Our main ambition is to be recognized by the industry, by our partners, by our investors, recognized as a company which has a positive impact, both locally and globally, because we have innovative, ethical and sustainable way of managing. of doing things. As it was mentioned, the Circular Economy project is a very important pillar of that. All of that combined will lead us to be in the first quartile as a petrochemical operator.

We also plan to have -- plan to expand our capacity considerably in the next few years to allow us to have an EBITDA of operations outside Brazil that contributes more than 50%, which will allow us to be seen as a truly international company.

So that's the summary of our strategy and our numbers of our -- for the third quarter. I think we can wrap it up here, and we can start the Q&A session.

All right. Very good. We will now take some questions. But I'd like to ask you to please to ask the questions using the mic. [Operator Instructions] So let's start the questions and comments. Thank you. Now you have the floor, use the mic.

[Unknown Analyst]

My first question is for contracts. The contract with Petrobras matures at the end of 2020. I'd like to know if there is anything new on that front. And a second question actually with PEMEX in Mexico. We heard that there could be some renegotiation. Is this going to happen? Or is there any intention of searching for an independent distributor? So what kind of dynamic can we expect? And also a question about the flexibilization of the cracker. There, we have a growing demand for ethane and a decreasing demand for naphtha. How do you see that playing out going forward? How do you see the market working around naphtha and ethane going forward?

[Edson Nobre, executive]

So I'll start and then Marcelo might complement if he wants -- wishes to do so. In terms of the naphtha contract with Petrobras, as you said, it'll mature by the end of 2020, the naphtha contract with Petrobras. We are midway through it now. It's a 5-year contract. The negotiations for the renewal of that contract is something that, in our view, will happen next year. We won't wait until the very last minute to do that. Today, though, it is not a priority for us now. We think we can wait for next year to address that issue. That's when we'll start the negotiations with Petrobras next year. As for the Mexico question, PEMEX has been facing operating challenges, as I mentioned. We have a contract, which is quite well structured. And as [ HIPAA ] said, this has helped the company maintain its normal flow. We have been having a very good, open dialogue with them in terms of what they need to do to improve their operating rate across the whole system. They have their production system, the extraction, the exploration system, the transportation system. So it's a combination of systems that need investment. The good news is that they realized that in the short term, that would not be possible. So they started to import feedstock from the U.S., and they're trying to work around more structural solutions, both regarding their assets and also regarding the importation of ethane. As for renegotiation, as I said, we have a very strong contract. We know about the contract, the obligations. The ballast for the contract finance was the main element that drove the investment decision. Our intention is to collaborate with PEMEX. We want to operate the plant at full steam. So we continue to talk with them in trying to find the best ways to do that. So they need to find a solution in terms of importation of imports which will be more structured. That will create or create an opportunity for us to do the import because imported reduce resins. If they have some kind of problem issue, it could be an opportunity to operate at a higher level for those plants. After some time, we can exceed the number of production, but we won't knock on their door to renegotiate. The contract is ongoing. It's valid. There'll be a new President in the country. And we have heard from the new administration that they're looking into all contracts, not only ours, but all contracts that were signed for the past few years. So our focus will be to look for the best economic rationale. Just as it happens with all long-term contracts, there will be times where it will favor us. Other times, it will favor PEMEX. When ethane reaches the level of 450, it was good for them. So the challenge lies rather on their operating capacity than on the contract economic rationale. So we need to wait for the new administration to take office, and then we'll be talking to them following that rationale, but we have a very strong economic contract with them. As for naphtha and ethane and the plant of Camaçari, the logic behind the investment is to create flexibility. As Marcelo mentioned, 13% of the ethane was produced because the rationale that we have become more competitive because of that. As time goes by, that might change in this particular industry. The concept, as I said, is to create a better balance across everything we do, including naphtha and other feedstock and flexibility. So the Camaçari project falls under the flexibility umbrella. We can run the company for 3%, 4%, 5% with 0 ethane. If it was put together, it was built to be flexible. That's the rationale behind it for us, flexibility. And the mid- to long-run view is to reach a balance for the whole system, have naphtha, have to give or take, gas or other feedstock always following along that flexibility [ confidence ]. We won't stop processing naphtha, right? Yes. We do not see naphtha as the only possible feedstock to produce those products. Naphtha will remain as a competitive feedstock as it has been for some time.

[Fernando Musa, executive]

Just complementing as Edson mentioned, naphtha is quite free in the market, and ethane is a raw material that started navigating in 2018. So the markets of naphtha and ethane are liquid. So we want to have competitiveness. That's what we seek.

[Unknown Analyst]

I am from Banco Santander. So going back to Mexico and talking about the contract. You said that Braskem is seeking alternatives. And so what would be the additional investment to increase capacity? We have seen a drop in Q3. How is the fourth quarter going? So I would like to ask a question regarding Brazil. There is a new government -- new President-elect. How can that affect structurally your business looking in the long term in terms of imports and the flow of goods to Brazil, thinking of China? And then last, after the growth of the U.S. that is going on, which would be the potential sources for you to seek organic or inorganic growth?

[Edson Nobre, executive]

As I said, PEMEX is already importing ethane and trying to change that into something more structural. They have adapted a few systems to create the capacity to import. As they advance the investment, there may be an opportunity to use more of that structure that would be potentially built even by third parties, and then we might operate without making any investment. So we are looking at the alternatives. We have the know-how of how to do it, how to deal with ethane from what we learned in Bahia. We already have the logistic know-how of how to do that. So we are following up what PEMEX is doing and assessing the alternatives. Our preference is that a system be built by third parties that could facilitate it. Today, there is an existing structure for the export of ethane in U.S. by companies. And ideally, the same thing should happen in Mexico. With a new government -- in a previous reform, there was a natural evolution. With a new government, we need to see whether PEMEX is going to build that structure, if they are going to have a third party building it. And then, depending on what happens, we will assess whether there is any possibility for us to make any sort of investment there. But our priority is to discuss with PEMEX the contract and the deliveries that they are mandated to make according to contract clauses. So we are going to go to them and say, "Well, you have an obligation. What are you doing to deliver it? What has been contracted for supply of raw materials?" And the fourth quarter is slightly better, but we still have a lot of volatility. Sometimes, they deliver 100% of the contracted amount. Sometimes, it's 70%. On average, it's slightly better than it used to be, but it's something that we still need to follow up on an everyday basis. I'm going to skip your question about tariffs. Afterwards, we can go back to that, and I'll talk about potential projects for the propane plant in U.S. The teams of the many different businesses in the many different regions have been developing many opportunities and ideas. Today, we have a quite interesting portfolio of investment with relevant impact in productivity, with a slight increase in capacity. The lines are getting slightly more productive. We have structures to reduce bottlenecks except for the U.S., where the priority with a new plant, we don't need to reduce bottlenecks anymore. And we have a few projects in new plants, either in partnership with some other company or our own projects. There's nothing that we would communicate this time, but we have a project pipeline. And we are working. And as they evolve, we discuss with the board in order to come to a decision. And whenever we reach a decision, we will report back to the market. The issue of tariff is quite complex because the logic is the logic of an ecosystem. So as I was talking about China and U.S., the U.S. has taken a position of raising their tariffs, and the new government in Brazil is lowering tariffs. But it is important to understand that everything has consequences that we need to understand so that the ecosystem may work. In the past, there were situations in the past and not just Brazil, other countries, too, when lowering tariffs was a good idea because this provides more income available to consumers, as prices go down without understanding. That's not quite like that, that things work. And if there is not a transition process where other costs associated to the operation of the country also get more competitive and therefore, permits tariffs to be more adequate. And lastly, in our case, it's important to remember that although resin tariffs is 14% in practice, in real life, it's much smaller and much closer to the tariffs that we see around the world, which is around 6.5% because of the set of agreements that Brazil has that end up impacting our industry slightly different from other regions. So the -- apparent that there is a big discrepancy in practice in Mercosur, in Argentina, many products from Colombia that end up causing an impact on the market significantly. And other countries, too, send lots of products to Brazil, and it creates a challenge. So I think that there is a logic for the tariff. It's a tool that is used by all countries. And in the case of the U.S. and China, they're raising their tariffs. So let's see what the government will do so that we can understand. So it's a change of the ecosystem as a whole. It may have a positive impact. Just to qualify the issue of the ecosystem. I think that it's no secret that the Brazil's tax burden is one of the most complicated in the world. Of our tax contingencies in the balance sheet, almost all of them are in Brazil. In Mexico, there's none, neither in the U.S. or Europe. The number of people that we have here to deal with tax affairs is completely different from what we have abroad. I was talking to Marcelo about gas in Brazil. There's something that is not -- there is no incentive to efficiency in the industry. Brazil has some structural issues in other areas that affect the competitiveness of Brazilian industry. And as Fernando said, we need to look at the system as a whole and adding in terms of costs. Number one, the chemical industry in Brazil is very important. Every developed country has a strong industry. On the other hand, the regulation model that we have in Brazil imposes cost to the industry but also logistic issues. Today, it's very difficult to invest in infrastructure imports in Brazil. And so we need to have competitive energy, gas imports, so that we may effectively compete in the global market with import tariffs that are comparable to other countries in the world. I think this is important. And we need to keep alert to what will happen from now on. There are many situations today in which customers have alternatives. Many customers export and we have in Manaus the duty-free zone, that has products directing production to the Brazilian market. And as Pedro said, we need to look at the system as a whole because just as there is [ prenegotiation ] and then there are some states that offer benefits in local states, products for imported products, and it mitigates slightly this difference. So there are many variables that should be considered and addressed thinking of the whole. As a reminder, you can send me your questions through the web. In the meantime, we're going to answer some other questions.

[Vinicius Tsubone, analyst]

I am Vinicius from HSBC. Which synergy do you see for a possible integration?

[Unknown Executive]

I am going to answer your question just in theoretical approach because a possible transaction is being conducted by our controlling shareholder and the participation in the company's management is just in terms of supporting the due diligence in terms of obtaining information. So I will say what I would do if I were buying the sale? I think that, and there are some significant opportunities of synergies that go along the line of continuing some actions that Braskem has taken, and they have created value. As we acquire polypropylene plants in U.S. and Europe and integrated them in our management model, we could start some actions that were important. And Brazil is structurally an importer of polypropylene and then Europe imports polypropylene. We manufacture a range of products that is wide in Europe because when we bought the plants, the previous owner was operating in a number of segments and needed the product. As we learned to manage the system, we started getting some of the products that aren't sold in Europe and then were no longer manufactured in Europe and are exclusively manufactured in Brazil. They are products with a slightly higher value-added than some of the things we used to see in Brazil. So it improves exports from Brazil. It goes to market that we are already serving in Europe and frees up space in the plants in Europe for us to manufacture products that are more competitive for that specific asset. So as we manage the network as a whole, we create the cycle of opportunity, maximizing assets and optimizing both as there are many flows of resin going to different regions. There are many different uses in managing the network as a whole and making use of its synergies. So you're doing synergies, so part of the synergies here. Obviously, in a transaction such as this, there was a simplification of overhead, which would make the greater complexity of the combination. It's not just take all administration from one or another, but we don't need the sum of both because there are many synergies. There are some opportunities in the logistics management and raw material management. So you move more things. There will be synergies. The use of ships, of train cars, so the logistics system in Europe. So there are many different operational synergies. Lastly, there would be a long list for me to go through. There is a set of synergies, which is a combination of the capacities of the 2 companies that although we look at a list of players of the chemical and petrochemical market, maybe Lyondell is the most similar to Braskem in terms of product portfolio and also in terms of geographical presence. At the same time, there's a lot of complementation. They are not in South America. We are in Mexico. They are in Mexico and the U.S. So it's a relatively manufacturing operation in Europe. That's us. They have a bigger manufacturing in Europe. So we will complement each other. And we have another -- a new PP plant in Europe when we look at the system as a whole. So today for Braskem to build a new PP plant in Europe might not be the best opportunity. But as a whole, it might start making sense. So Braskem did not build the [ PP age ] to have access to propane. So with the combined -- the new combined company, should they build a new plant in Europe and the U.S. to improve supply? Maybe you could combine the 2 together. There are many possible strategic options. And in our industry, scale makes a difference. So the combination could provide access to new opportunities, and this is a simplified list only. It's just from the top of my head, thinking of what I would do if I were there and I were buying LyondellBasell.

[Unknown Attendee]

My name is [ Rogeri ]. I'm an investor. So one, the question is about the new terms for the New York Stock Exchange.

[Operator]

I'm sorry, but the sound from the question's mic is impossible to understand. Let's go to the answer then.

[Unknown Executive]

So the first thing to mention is that Braskem has already published the necessary documents early in the year, and what we're doing now is working around our internal controls. We had a term, which was extended this week, a deadline. We did not conclude all the ongoing work. So we asked for an extension. What I can tell you is that the team has been working hard and focused to finish that as soon as possible. The scope changes with time. So as new headlines emerge or new facts emerge, we need to check and see if it's all according to plan. So it's a bit of a moving dynamic, if you will. With what we have today, that additional deadline is in line with our expectations. But of course, there's always a certain level of uncertainty because of this moving quality of the project. But in terms of results, numbers, we are not concerned about that. It is rather a workaround internal consult as I said and meeting the deadline.

[Operator]

[Operator Instructions] [ Mr. Hap Fialano ] from UBS has a question.

[Unknown Analyst]

I have 2 questions. The first one about the deal with Lyondell again. What are the main hurdles for that deal? Is Mexico involved? Is Petrobras involved? What are the main hurdles for closing that deal? The second question has to do with the EBITDA generation outside of Brazil. Your guidance is to generate around 50% EBITDA abroad. So my question is how do you plan on reaching that number, and when?

[Unknown Executive]

I'll start with the second question first. It's not a guidance. It's rather an ambition, a wish that we have. And there is no defined deadline for that. We want to work towards generating EBITDA abroad at a level above 50% in the mid- to the long run. Just as we talk about the balance for feedstock with a flexibility range of around 20%, we also talk rather about a mid- to long-term ambition than a guidance. There is no defined specified deadline, as I said, for that. As for the deal with LyondellBasell, my ability to answer your question is quite limited. As I said, the role of the management has been to support the diligence process. We have not participated in any conversations between the management of Lyondell about the deal specifically. We are not active participants in drafting contract. I wouldn't even know if they're already talking about writing contract. In my view, what I can tell you is that we are close to the end of a deal. We have already answered a significant amount of questions coming from the controlling shareholder. But as I like to say, it's only final when the contract is signed. And our expectations now are that as shareholders are in negotiations with possible buyers, other questions might emerge. So it's an open process. I wouldn't know if there are any hurdles as you mentioned. Your question talked about hurdles. It is a very complex deal, which involves 2 different geographies, which are unknown to Lyondell, mainly Brazil and Mexico, with all the idiosyncrasies involving those geographies, both countries going through government transitions, very complex. We're talking about a very big company such as Braskem, different countries, different geographies. So to me, we are all within the expected process for such a huge deal. Once again, given the specificities of our structures and also due to the participation of Petrobras, though I do believe that Lyondell is [ pressing ] the same thing with Petrobras. But again, I'd like to insist, this is just off the top of my head. I'm not a participant in that process. If I were the CEO of Lyondell, I'd also be talking with Petrobras. That's what I would imagine. He's an intelligent man, and he's probably doing that, talking to other stakeholders. If there are hurdles, as you mentioned, I don't know. I wouldn't know. The 20-F issue might be relevant, yes. But I wouldn't know how that would fit in this specific deal. We'd have to ask Lyondell directly actually.

[Andre Hachem, analyst]

This is Andre from Itaú. It's another question about the trend of a closed economy. You have the green polystyrene made of ethane. Has it become more viable in terms of price? Do you think there is any more space for this product in the future? And there was a problem with supply recently. And the last question is you're quite good at cash. So what is your cash projection? The CapEx from now on is quite okay. How do you imagine that you're going to manage your cash and the payout of dividends?

[Unknown Executive]

So it's a complex question. Three people will answer it. So beginning with the issue of renewables, I think there's a difference that is important for us to make clear. One thing is the cost of ethanol-based ethane. They are structurally different costs. Ethane, naphtha-based ethane versus ethanol-based ethane have different drivers, although we know naphtha in ethanol, we're already talking to each other in the fuel markets. They had some relationship. What we see ethanol ends up being less correlated to the foreign exchange rates. It's more priced in BRL than naphtha. So from time to time, there may be variations in relative cost of production of ethanol-based ethane. And structurally speaking, on the whole, naphtha-based ethane is slightly cheaper. But there are times when -- for example, when the BRL-USD FX rate is BRL 4 per dollar, the cost is almost equivalent. What defines the pricing of green polystyrene is not that. So green polystyrene today is a niche product, and it competes with the other renewable source resins. And if we are to compare the pricing of green polystyrene versus the other resins, it's the most competitive resin available. What we say to our customers is that if they cannot see any value, if they've not captured value in using green polystyrene or if they have an internal indicator or some internally of risk-weighting sustainability, which is important, so it doesn't make sense for them migrating from naphtha polystyrene to green polystyrene. So it's detached from cost. It's related to the value. And so the issue of raw material, what I mentioned here about the ultra-deepwater oil is related to the shortage of ethane and propane domestically in Brazil. Brazil -- before the ultra-deep oil, Brazil used to be very deep -- poor in these raw materials. As the ultra-deepwater oil came and became more available structurally, this issue is being resolved. Specifically, we have some shortages in refineries where this raw material is extracted from gas. So we should bring the raw material from the U.S., bringing raw material from the U.S. at a limited volume. So there is a logistic -- a limited volume complementing the specific failure that we have because of Petrobras. But structurally speaking, as we have more oil coming from ultra-deepwater, we think that supply will be at a good level. So this decision combines the future prospect of investments. And so as Fernando mentioned earlier on, the maturity of these projects as compared -- being in just dividends by the company. But we have approved -- what our board, rather, approved is a clearer policy in terms of which are the parameters for us to define the volumes that the company may get at. So there's a legal limit of 25% of net profit, of net income. And according -- when we analyze the dividend, we are going to look prospectively into the future to see what we have in the future. And according to these projections, the average should not exceed 2.5x. So we think it is natural that we pay out dividends. So as we said, there's nothing at the advanced stage of maturity. We don't have any major projects. We have solid projects that are at the point of being approved, and on the other side, we have strong cash generation. So naturally, something will happen. But this will be decided further on as we define the budget and we know what will come in the future. Considering we're running late, we'll open for another question from the audience, live audience and another question from the web.

[Operator]

Mr. Pedro Medeiros from Citibank would like to ask a question.

[Pedro Medeiros, analyst]

I have 2 questions. One is slightly more strategic. I would like to hear your opinions as to the expansion of capacity and the possibilities for expanding capacity. When do you think the time will come for you to start considering investment in new polyethylene capacities, new PE capacities? And the second question is looking more the trend of performance in 2018. We discussed a long time about supply of raw materials. But in 2018, you have demonstrated significant reduction as compared to the historic average in terms of naphtha provided by Petrobras in Brazil. Could you comment whether there is any target, any level of equilibrium or how much you could process of imported naphtha? And the last question, looking into the 2 next quarters to understand, and you've addressed this in the presentation, is there any plan of scheduled downtime that is relevant in the next 2 quarters that we should take into account?

[Unknown Executive]

As to the capacity expansion for PE. Okay, among our assets in Brazil, we have at least 3 alternatives to expand capacity in those assets. Capacity expansion projects usually have a good level of profitability provided we have feedstock and demand. And so there is a possibility. When we have that, we have a good possibility to expand our Duque de Caxias asset, both for the cracker and for the PE plant. Unfortunately, what we had as a scenario for the past few years, starting in 2013, '14, '15 and '16, we saw a drop in market demand in Brazil and that delayed possible decisions. But all the projects are ready. It's only a matter of having availability of feedstock. Some of the more smaller projects, it would be a matter of simply redirecting projects towards our PE plant. For the Duque de Caxias plant, we have to solve a raw material issue as well. Today, we have about 1/3 of our PE production -- from 1/3 to 40% of our PE production is exported. So we have no problems in meeting a strategic market demand, both in Brazil and abroad, markets that we could meet a quick service from Brazil, especially in Latin America. Just a brief follow-up in terms of feedstock, naphtha specifically. As Edson mentioned when he made his presentation, we've been expanding our supplier portfolio globally. And with that, some opportunities have emerged that have shown us that we can better use better negotiating conditions to import. So we saw opportunities, and we ended up importing more naphtha than buying from Petrobras. In terms of bringing naphtha to Brazil, we have a limitation because of logistics issues. We depend on Petrobras' infrastructure to bring that naphtha in on top of what we already bring in, about 57%. But there is room for us with that. And from a certain point on, we would need to assess cost. It would be an economic decision at the end. In terms of scheduled shutdowns, the third question, we do have a scheduled shutdown at one of our plants in Bahia. That's for next year. And then for 2020, we have a scheduled shutdown for BP, a BP plant -- I'm sorry, 2021 as well. There was a change in the Brazilian legislation, which allows us to conduct an internal study that will allow us to extend the campaign to another 8 years to 9 years. So that's something we're going to be doing throughout the next 5 years. We have already started, and we should have a potential extension on a field campaign.

[Unknown Attendee]

My name is [ Berijan Asuvar ]. I'm an investor. I'd like to, first of all, congratulate you on the results, on holding this type of event. I'd like to ask you to please talk a little bit about social projects that you support vis-à-vis the Tax Incentive Act. Are we using them, those tax benefits? Are we using that to the full extent that we can?

[Unknown Executive]

Okay. That issue around relationships with society and communities, that's a priority for us. And it is in line with our intention of being good corporate citizens. We invest a lot of effort in social projects. We do use incentive laws, but we invest a lot more than we benefit from the law. Now all initiatives are geared towards needs that we identify from the standpoint of the communities located around our industrial plants and then we focus our energy also on priority topics, for example, the cooperative of residue scrapers that we do across Brazil. So yesterday, by the way, we had a meeting to discuss the topic, and we are now going through a moment where we will fine-tune the way we approach that. We are conducting a very detailed study of the surroundings of our plant, including socioeconomic indicators, human-developed indexes. We have hired survey companies to try and identify demands coming from those communities. And the idea is to work closer with those communities in a more efficient way. So to answer your question, it's a combination of incentives and investments. But it's always more on our side to invest more than we benefit. But given the size of the company, it is a relevant amount of investment, but the impact is quite -- also quite significant. Another component we have, we discussed yesterday coincidentally, is to try and find a balance in terms of allocating efforts both in Brazil and in other geographies where we operate. Of course, the priority would fall in Mexico given that Europe and U.S. are geographies where we have a higher level of development. And so instruments such as those, of course, they are used, but they're used differently in those more developed societies. So we have a sack of effort that in Brazil alone, the private social investment has impacted over 180,000 people either directly or indirectly. People who were touched by those projects, they include the revamping of an elderly home to reforestation, environmental education program, revamping our public schools. So it's a series of activities that we execute. I could add we also sponsor Brazilians who are athletes, and this sponsorship will continue throughout the current Olympics cycle. We have a partnership in the U.S. with the Philadelphia Eagles around sustainability initiatives. We also support a recycling project inside the Philadelphia Eagles stadium; initiatives that we also have in place in Brazil in terms of recycling.

So now our questions-and-answer session has ended. And now, we go to the next phase with the delivery of the 20-year frequency seal that APIMEX offers to all companies that have consecutively -- that consecutively makes the effort and do their best to publish their practices and also in order to encourage them to continue, and we hope that you get to 30 years. So I am going to turn to give you the seal.

And now for the closing remarks. I would like to thank you for your presence. The partnership with APIMEX is an initiative that is very important to have this dialogue with the market with a community of investors, so that you understand better Braskem, but also for us to understand your expectations. Your questions also direct the way we communicate with you, and we learn a lot here. So it's a day-to-day dialogue that our Investor Relations team has with all investors, and we try to incorporate this in our communications with you.

And just in closing, in addition to thank, I would like to reinforce or to stress our strategy that has been quite successful in meeting our customer needs, in operating our plants with safety, within the concept of sustainability that have enabled the reduction of our indebtedness level and that puts Braskem today at a condition both in terms of its presence and globally, and in many geographies where we operate, in a position of highlight with a portfolio pipeline of new projects that we are working on. And over the next few years, we hope to mature in order to start an opportunity to continue to create value to all our shareholders.

So once again, thank you very much for your presence, and see you next time when we publish the results for the year of 2018 in the beginning of next year. Thank you very much.