Braskem SA

BOVESPA:BRKM5

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and thank you for standing by. Welcome, everyone, to Braskem's Third Quarter 2022 Results Conference Call. With us today, we have Mr. Roberto Simoes, Braskem's CEO; Mr. Pedro Freitas, the company's CFO; and Ms. Rosana Avolio, IRO, Strategic Planning and Corporate Market Intelligence Director. This event is being recorded, and all participants are connected in listen-only mode during the company's remarks. [Operator Instructions]

This event is also being broadcast live via webcast and may be found at Braskem's website at www.braskem.com/ir, where the respective slide deck can also be found. Slide selection can be made by participants. The audio facility will be made available after the event is over. [Operator Instructions]

Before moving on, it's important to say that forward-looking statements made during this call concerning the company's business outlook as well as financial and operating targets and prospects are based on the company's assumptions and beliefs and also on information currently available to the company. Those forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they refer to future events and therefore, depend on circumstances that may or may not materialize. Investors and analysts should have in mind that macroeconomic conditions, industry conditions and other operating factors can also affect future results of the company and therefore, lead to results that will differ considerably from those expressed in these forward-looking statements.

I'll now turn the floor over to Ms. Rosana Avolio, Investor Relations, Strategic Planning and Corporate Market Intelligence Director, who will start the presentation. Please Ms. Avolio, you have the floor.

[Rosana Avolio, executive]

Good morning, ladies and gentlemen. Thank you for participating in Braskem's Conference Call. We will present today the results for the third quarter of 2022.

Let's go to Slide #3. I will make some comments about the company's main highlights for the quarter. The global scenario in the third quarter of '22 remained impacted by global macroeconomic uncertainties, geopolitical tensions and perspective on the performance of the world's major economies. These uncertainties directly influenced the global demand and consequently, the dynamics of the petrochemical industry.

Moving on to financial highlights. The company reported recurring EBITDA of $371 million. Additionally, cash generation in the quarter was BRL 889 million. Concerning return to shareholders, the return on cash flow was 31%.

Now going to our credit metrics. The corporate leverage remained low in the period, and we maintained strong liquidity position, enough to cover the debt maturities for the next 5 years. It's worth noting that the companies at profile continues to be very elongated, and the company continues to be -- to maintain its rated investment grade by S&P and Fitch ratings.

In the quarter, we have experienced significant advances in the ethane import Terminal Mexico. Braskem Idesa obtained its approval for the constitution of the joint venture with Advario from the Federal Economic Competition Commission of Mexico. The construction started in July '22, with physical progress of 22% by September '22. We would like to remind you that this terminal will have the capacity to import, on average, 80,000 barrels of ethane per year, providing conditions for Braskem Idesa to import all its raw material needs, besides allowing a study for expansion of about 20% of the polyethylene production capacity in Mexico.

Now moving on to the highlights of ESG agenda. We launched doing an energy and natural gas trading company that will help recent clients in the energy transition. In addition, we launched [optica], a business and innovation hub that will foster the emergence of new technologies in that sustainability and digital transformation. Finally, Braskem in United States signed a contract to purchase renewable energy for the new plant in West Virginia, starting its supply by the end of 2024.

Now moving on to social area. We advanced in the program of financial compensation and support to the reallocation in our lowest and ended the quarter with a proposal acceptance rate of 99.6%. In addition, the company implemented actions to support the needy population circular economy and environmental education and the communities surrounding its operations.

Let's now go to Slide 4. In the third quarter of '22, the current EBITDA was $371 million, 54% lower than the previous quarter and explained primarily by lower international resin spreads by the lower export volume of resins in Brazil, lower sales volumes of polypropylene in the United States and polyethylene in Mexico. In addition, in the quarter, we had the accounting effect of inventory realization in the net amount of $75 million. Excluding this inventory realization effect, recurring EBITDA was $448 million for the quarter. Considering the 9 months of '22, the company's accumulated recurring EBITDA was $2.92 million.

Now moving on to the next slide, we are going to hear about the highlights of each of the segments. On this slide, we present the main highlights of our operations in Brazil. In the third quarter of '22, the utilization rate of petrochemical plants in Brazil was 79%, 5 percentage points higher than the previous quarter, mainly due to the resumption of operations after its scheduled maintenance shutdown at the Rio Grande do Sul petrochemical plant. In the Brazilian market, resin sales in the quarter increased 2% in relation to the previous quarter due to higher availability of products and the higher demand in the period because of seasonality.

As far as in exports, they decreased by 18% due to fewer opportunities in the international market given the high inventory levels in the global chain. In this context, Brazil's recurring EBITDA in the third quarter '22 was $312 million.

The next slide, I'm going to talk about the geological event of Alagoas. The chart on the left shows the total amount of provisions for the geological event of Alagoas, which is BRL 13 billion, of which BRL 6.1 billion has already been disbursed.

Moving on to the chart in the middle, we can see the balance of provisions. The balance registered at the end of the third quarter of '22 was approximately BRL 7.2 billion. The chart on the right, we can see the disbursement schedule of the resources of the current balance, about 67% was registered in short term and 33% in the long term. It's important to mention that the company cannot rule out future developments related to the issue or its associated expenses and the costs to be incurred by Braskem may differ significantly from its estimates or accrued and provision amount.

Now moving on to the next slide. We keep on speaking about the geological event in Alagoas, and I'll make some comments on our progresses. First, in relation to reallocation and compensation, Braskem maintained its process of reallocation and financial compensation of families located in the neighborhood areas of risk areas in Maceio. All the proposals for financial compensation reached [ 18,259,000 ] in the end of '22, just focusing on the high maintenance of acceptance of proposals, which amounted to 99.6%.

In terms of closure and monitoring of wells. By the end of October '22, out of 35 mining fronts, 9 belong to the San Filling Group, out of which 9, 4 have ongoing filling; three, at advanced stages of filling. Now in relation to the other 26 other fronts, the actions of closing and monitoring of South wells are following the schedule approved by ANM, the National Mining Agency.

Finally, also make some comments about social and urban as well as environmental measures. The activities of these front are concentrated on urban mobility, social compensation and actions in unoccupied areas. For this specific area, I would like to highlight the following points. The hiring of a specialized consulting firm to evaluate and monitor the execution of the environmental plan and the integrated action plan in accordance with -- which was established in our social environmental agreement. We started 2 projects related to urban mobility out of a total of 11 actions. There was 64% progress in the [evolution] process at the Mutange Hillside area. And finally, we've signed and confirmed the term of agreement for the adoption of requalification and indemnification for the [region flex size.]

Now let's move on to the next slide. This slide will present the main highlights of operations in the United States and Europe. In the third quarter of '22, the utilization rate of the polypropylene plants in the U.S.A. was 74%, 7 percentage points lower than in the second quarter of '22. This reduction is explained by lower demand in the region and shorter unscheduled stops.

In Europe, the utilization rate decreased by 1 percentage point compared to the previous quarter, due to lower availability of raw material, which was caused by operational problems of local suppliers and also to the lower demand in the period.

Now speaking of commercial performance in the United States, the sales volume for the quarter was 381,000 tons, which represents a reduction of 19% over the previous quarter. In Europe, sales volumes in the third quarter of '22 was 128,000 tons with an increase of 8% when compared to the previous quarter. In this segment, recurring EBITDA in the third quarter was $62 million.

Now going to the next slide, I will address the highlights of the operations in Mexico. In Mexico, the utilization rate in the third quarter of '22 was 76%, 9 percentage points higher than in the second quarter of '22 due to higher ethane supply by PEMEX and also ethane imported through fast track.

Concerning sales, there was a reduction of 5% over the second quarter '22 due to rebuilding of inventory levels at Braskem Idesa. Recurring EBITDA for the segment in the third quarter of '22 was $14 million.

Now let's go to the next slide, where we'll address the ethane terminal in Mexico. The beginning of the construction of the ethane import terminal in Mexico was one of the major highlights of the quarter for the Mexico operation. The terminal team in Quimica Puerto Mexico is the joint venture between Braskem and Advario, with each partner holding 50% of the company's shares. Its raw material supply capacity for the terminal will be approximately 80,000 barrels of ethane per day, which represents 120% of Braskem Idesa current raw material needs.

The CapEx of the project is estimated about $400 million. And the expectation is that the beginning of the terminal operations will be the second half of 2024. The physical progress of the project at the end of September '22 was 22%. Finally, it's worth pointing out that in the addendum signed with PEMEX in 2021, Braskem Idesa has the right of reference to purchase all the ethane that PEMEX has available and not used in its own production process until 2045.

Now going to the next slide, we are going to address the company's cash generation in the quarter. In the quarter, the company had cash generation amounting to BRL 889 million. Excluding the payments related to Alagoas geological event in the quarter, the company had a recurring cash generation of BRL 1.557 billion.

The main impacts were recurring EBITDA for the quarter and the positive variation in working capital due to reduction in accounts receivables caused by lower sales volume and lower price references in the international market and also by the reduction in inventory levels due to lower price references in the international market.

Now let's go to the next slide. At the end of the third quarter '22, the company maintained a very long debt profile with a strong liquidity position and most of its debt maturing after 2030. The average debt term was around 13 years, and the company's current liquidity level guarantees the coverage of debt maturities in the next 63 months, without considering the available international removing credit line in the amount of $1 billion maturing until 2026.

Let's move on to the next slide, where we'll talk about company's credit metrics. Aligned with the dynamics observed in the previous quarter, Braskem maintained its solid credit metrics and corporate leverage remained low in the third quarter and closed at 1.55x. It's worth pointing out that the aim is to maintain a robust cash position with a very long debt profile, and that we are committed to efficient capital allocation and the maintenance of our investment grade rating.

Moving on to the next slide. Let's talk about our ESG agenda. Braskem held the second additional ESG day, a meeting with the financial market to share the advances of our commitment to sustainable development. During the event, we reinforced our commitment to strengthening Braskem's role in the carbon neutral on circular economy and shared Braskem's advances in the pillars of actions, which include eliminating plastic waste and fighting climate change. All the initiatives are part of the company's growth avenues for the future. The presentation on the video of the completed event can be accessed on Braskem Investor Relations website.

Moving on to the next slide now. During the quarter, Braskem [Alemanha], an electric energy and natural gas trading company, [indiscernible] was owned with a portfolio of BRL 3 billion and whose aim is to leverage business opportunities through the collaborative creation of competitive solutions that can accelerate the sustainable energy transition of the company and the industry at large. The company has also launched Sustainea joint venture formed between Braskem and Sojitz for the development of biogas technology based through plans with the reduction of carbon footprint in its production process.

As a reference, in 2021 based on external consultancies, the global market of [ bio, MNT ] represented $26.3 billion. We have also launched [Okta], which is a business an innovation hub that will foster the emergence and development of new technologies focused on sustainability and digital transformation.

Now moving on to the next slide. Here, I would like to highlight some initiatives carried out by Braskem in order to contribute to the pillar of human rights and social responsibility. To support low-income population, Braskem, in partnership with [NGO Asanda Cidadania], has contributed with the nations of base [indiscernible]. In addition, Braskem and will donate another BRL 5 million to the same campaign.

Regarding private total investments, during the quarter, there was [indiscernible] Mexico encouraging recycling and promoting environmental education. 143 tons of classic waste were collected, benefiting 7,000 people. In Brazil, another addition of plastic tracking to place on environmental education in the community surrounding Braskem operations. More than 18.5 tons of plastic waste were correctly disposed, benefiting about 4,400 people.

In the project [indiscernible] of [indiscernible], Braskem is part of a joint initiative that developed an innovative technique to speed up the restoration of orals using plastic. In addition, training environmental agents in the region. This project also included a cleaning task force to raise awareness of the population about correct disposal of plastics.

Now let's go into the next slide. On this slide, we talk about the petrochemical scenario of polyethylene and polypropylene in 2022. Lower global demand for resins coupled with higher inflation globally and high inventory levels in the global chain resulted in lower spreads during the third quarter of 2022. According to the latest external consultants projections, the expectations of that polyethylene and polypropylene spreads are to remain pressured throughout the fourth quarter '22 due to lower global demand associated with the inventory of good capacity of this product.

Moving on to the next slide, I'll present the company's short-term outlook. So Brazil, there is a reduction in ethylene production. The commercial side, we expect to reduce sales volumes of resins and the main chemicals due to lower demand in the estimated period. Now concerning brands, external consulting companies expect a drop in special resins and basic chemicals due to lower global demand.

In the United States, both utilization rate and sales volumes are expected to remain at similar levels to those of the third quarter '22. The spreads of PP propane in the U.S. are expected to decrease. However, at levels above the recent historical average. Finally, in relation to Mexico, there is an expectation of increase in production volumes because there is an expected increase in total supply of raw material. In this situation, the expectations have an increase in sales volumes of fee due to greater product availability.

Now going to the next slide, I would like to remind you our main goals for '22, a product and broken into our strategic pillars. Starting with productivity and competitiveness. Our focus will be on capturing value with the transformation initiatives, achieving a recurring earnings of $302 million per year for '22.

Moving on to sustainability. Our focus is on intensifying actions in recycling, expansion of renewables and reduction of carbon emissions. As to diversification, there are 2 relevant projects in terms of diversification and also growth. The construction of the ethane import terminal in Mexico in addition to definition of a partner, both of them already concluded and also the progress with the feasibility studies to test jointly with SCG Chemicals and the construction of a new green ethane plant in Thailand.

As to people, governance and reputation, we will continue to focus on evolving on all fronts related to the geological event in Alagoas. Finally, in our capital allocation pillar, will be focused on returning value to shareholders in addition to maintaining our investment-grade rating according to the rating agencies.

With that, we conclude the presentation of Braskem's third quarter earnings for the year 2022. Thank you very much for your attention. We are now going to move on for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Pedro Soares from BTG Pactual.

[Pedro Soares, analyst]

I have 2 questions, actually. The first one about the spread issue. Rosana was quite clear in terms of the expectations of the company and also talking about the further deterioration. If you could perhaps expand your horizon through 2023, mainly? Do you expect this final stretch for 2022 would be getting closer to the valley as opposed to the peak? Or if next year, we would see further deterioration vis-à-vis what we've seen in the second half of this year? So if you could put those results into context.

And if we would be expecting an EBITDA below USD 2 billion. In other words, we would be phasing it down cycle going forward. If you could comment on that, I'd appreciate it. And also a second question about CapEx. The company has been going through a more controlled phase in terms of capital allocation. But with this deteriorating scenario, if you would foresee additional reduction in the short term or not, if you have got that all under control?

[Pedro van Langendonck Teixeira de Freitas, executive]

Pedro, this is Pedro Freitas speaking. It's nice talking to you. So as for the spread issue this year and next year, part of the reason that the spread in this year is dropping, and we've been talking about this since last year, we had an expectation of a down trend and spread levels.

But there are 3 main drivers, some nonrecurring events, which happened last year. And also from the point of view of demand this year, we had lower demand than expected because of the lockdowns in China. And on the offer side, my third driver, this year, we had new capacity coming in, which was expected. So this down cycle was somewhat expected as well. So this new capacity coming in is unfolding now, especially in China.

For 2023, there is some more new capacity to kick in. On the demand side, we expect to see a growth in demand across the world below historical levels, of course, because of some events. But based on macroeconomic news, global-wise, when we look at polyethylene next year, we see a growth in supply more than the growth in demand, not the tune of this year, but higher.

But '24, we see a reverse in that trend because investments for 2025 are not being made now, things that should be under construction now are not. So looking at those numbers coming from an external consultancy firm. We have this outlook that 2023 will still see more capacity kicking in, but then we'll see a reverse spell for polyethylene, which suffered, if I may, more than other products.

But right now, we see a spread moving sideways I'm getting some feedback here from my voice. Hang on a second, please. So despite this perspective, pointing to Q4 -- for Q3, we saw, as I said, a sideway in the incomes expressed. So for the short run Q4 -- so new capacity coming in and a higher capacity for 2024.

As for capital allocation, when we have clear results, that expanding our portfolio a bit more the also we are able to reduce investments very much in line with the cycle momentum. So that review is happening right now. We had announced early in the year, USD 1.2 billion in investments for the year. The expectation that we have now is about USD 1 billion. We have reduced that number within the portfolio by USD 200 million in terms of CapEx without major impacts on the operations because demand is lower, so we do not need to have plants working at full steam, right? We not need to have operational level to the max.

So we analyzing that on a case-by-case basis, of course. And we have these expectations that we will reduce CapEx for the year to the tune of USD 200 million, give or take. And for next year, CapEx level is expected to be lower as well.

Now on the same token, we will prioritize safety. So investments on safety will be preserved. And of course, this prioritization effort is very intense because we are focused also on our growth strategy, especially around recycling and renewables. So we're trying to strike that balance right now.

[Operator]

Our next question comes from Bruno Montanari from Morgan Stanley.

[Bruno Montanari, analyst]

A follow-up to Pedro's question about the spread. It's part of the cyclic nature of the industry, but perhaps the size of the drop was higher than expected. So in addition to CapEx, what other measures can the company take or is taken right now on the side of expenses and costs to be able to offset those negative numbers in the company's operating margins? And whether if you could perhaps manage more working capital going forward after several quarters last year where we were consuming that we saw a better cash generation flow?

And also, how can that evolution of the spreads of the cash generation effect the dividend payout discussions? Apparently, there is less room to higher payouts. And then last question, if I may? If you could please comment on the material fact released on Novonor Corporation or partnership, so perhaps the potential sale of their stake in the company? Has anything happened on that front? Have you been meeting with them? So any news on that front would be very welcome.

[Pedro van Langendonck Teixeira de Freitas, executive]

As you said, the magnitude, the speed of the drop in spreads was slightly higher than expected or above what we expected. Basically, I would say for 2 reasons. The lockdowns in China were one of the reasons early in the year, nobody would imagine that things would play out that way. And even last year, when we were working on our projections, nobody thought about that scenario to have that level of lockdowns in China, so widespread and for so long. And of course, that has an impact on demand that led to that drop in spreads. That's one of the main reasons.

A secondary driver was the war in Ukraine and the subsequent increase in the cost of energy in Europe. Of course, that also led to a drop in spread because of the cost of gas, an impact on feedstock once again. So that's a fact.

When we look at the working capital, which was a comment that you made just now, when we have a drop in prices, it is only normal to see that happening. When spreads go up, you have an increase in prices, then we increase the value of what we have in terms of accounts receivable or in other words, credit that we provide our clients, our inventory levels also go up. So you have more working capital being consumed when feedstock prices go down, we have the opposite effect. We have more working capital freed up were so this offset or even a hedge, if I may, it's something we see happening quite often in our industry.

As to what else we're doing. To your point, I mentioned CapEx, we are reviewing our fixed cost line the hiring of new personnel is going now through a much more rigid approval process than in the past. We have been looking at all fixed expenses and also variable expenses from S&A to try and identify where we can have savings. We are revisiting contracts with suppliers as well we are looking at how we can reduce output. We are also trying to optimize or looking at our asset portfolio and assess our assets to see if it would make sense for us to simply shut down one of our lines, right, and see what would happen or anticipate or pull back dates on some scheduled maintenance stops, anything we can do to fine-tune our costs.

When we see the effect of that and other costs, that may be favorable, right? And part of that repercussion will be seen in the inventory safety levels, right, and producing less my inventory security level might also drop. So we are revisiting all of that, including the purchase of inputs for our production. So that's a deep dive done by assets, by purchase by procurement, taking into account a lower level production scenario.

And as for fixed costs and SG&A, also a very strict discipline in terms of hiring, approving and so on. We have become extra strict in that regard. As for the working capital front, there's also a concentrated action in place to review payment terms maybe trying to extend payment terms with suppliers.

If you look at our payment terms, you'll see that as a rule, it is quite good, but we're always going back trying to find other opportunities in that respect, working with clients as well. And as I said, once again, our safety inventory levels also being looked into. So we are working across the board, to your point.

As for the dividend payout question, we have consolidated our results at BRL 1.4 billion in the year. You know our dividend payout policy. We're going to pay the regulatory minimum level, 25%. We have to wait for the final quarter results. I cannot predict what's going to happen given that foreign exchange variation has an important effect on our results. In this quarter, that variation was negative to the tune of BRL 1 billion. So depending on the foreign exchange variation, it may have either a positive or a negative effect in the bottom line. So we'll be paying at least a minimum 25%.

And then as every year, we see what we can do in addition to that, always with an eye to our dividend payout policy. It is a forward-looking policy. As you know, if something changes in the market, if the economy picks up faster than expected or if we have an external event that would improve the overall scenario, all of that will be factored in as we work on our dividend payout moves.

I think it's worth mentioning that our dividend payout policy always looks at our leverage level and looks ahead to be able to strike a balance especially when we have different cycles beginning or starting, but our policy has proven to be very robust to face market volatilities.

And lastly, as to your question about the material fact, which we published last week, we received this letter from Novonor. And as everyone knows, the divestment process has been going on for some time now. And the interaction they're having with potential buyers seems to have moved forward. That's what we can assume from that letter that they sent when they informed us that in the coming weeks, they might coming direct contact with us or other potential interested parties.

If that happens, well, Braskem has not taken part in that process directly, so we have not been negotiating that specific point. So if that happens at Braskem, we will be -- have direct interaction as the due diligence process starts. So that's what we have in this letter. So what this means is brace yourselves, be ready because we're going to need your support very, very soon.

So what are we doing now? We are updating and reviewing the information around due diligence processes so that we can be ready. We are, of course, very much concerned with the confidentiality level of that kind of information because we'll be talking about more detailed information if we reach that stage. For now, we haven't started the due diligence process, but we do believe this is going to happen very soon. That's what we have so far.

[Operator]

The next question comes from Leonardo Marcondes of Bank of America.

[Leonardo Marcondes, analyst]

Trying to quantify spreads for 2023. I would like to understand if you were seeing something along the lines of what we observed for the second part of this year? Or do you expect to have narrow spreads for next year?

Now trying to understand when are we going to see the bottom of the cycle because spreads would probably pick up again by 2024? So I would like to know what are the main drivers in your perspective? Will it be increase of demand, reduce capacity, where would you really expect to see that coming from?

[Rosana Avolio, executive]

Thank you very much for the question. Concerning spreads for 2023, we are still running internal discussions because of all the uncertainties in the macro perspective. But relying on our external consulting companies, it seems to -- we are expecting greater demand. So PVC, PP, PE is estimated based on the history to have an increase. So there is an impact of global demand, not developing so much and the demand for petrochemical products really growing slowly, It was 1.3% or 1.5% kind of ratio here.

So considering all that situation, we expect to have spreads similar to what would be the low cycle spreads. So this is a general comment, of course, and I'll go back again into diversification. Why have we invested on diversification? It brings positive effect. That's why we invested for the past 10 years. So basic petrochemical products have some resilient spreads. In the U.S. spreads, the average has been higher than the average of the industry. So diversification shows that spread, yes, the lowest of cycles, but some of the spreads are still sustained and above the average of the industry. And this result from our process of resilience.

Now speaking of upsides, when we analyze the foundations of petrochemical industry, everything has changed in terms of offering. There has been a substantial change, as Pedro pointed out in previous question, there has been a change in the perspective of growth of global demand. So the upside results from the scenario in Europe, political tensions, but also the policy of restrictions in China. And China, of course, makes a very important role in the plastic consumption in the world. So if China opens the market again, go back to that narrative that we consider to be more appropriate for upcoming years, which is a spread above the industry levels.

[Operator]

The next question comes from Vicente Falanga from Bradesco BBI.

[Vicente Falanga Neto, analyst]

I have 3 quick questions. First, the prices of ethane, they have changed since the end of September, like 30% over till now. Can you capture the benefit of it on the fourth quarter, especially in Mexico? Do you have any estimate of impact? Secondly, concerning the export of resins and considering Brazil and Mexico, last time I checked, Mexico exported to Europe as well. So how badly are being affected by the slowdown in China and in Europe? And when do you expect the international global chain to [RLAM] that level again? And finally, as we have seen a price adjustment to freight costs, do you expect to keep running on U.S. pricing? Or do you plan to change -- do you expect to change the indexation?

[Pedro van Langendonck Teixeira de Freitas, executive]

Okay. As for ethane, it dropped at normal levels. Our cycle from when we buy the feedstock because we calculate the cost based on the average. At the end of the day, we have -- we're talking about a moving average for costs. So in Mexico, that effect is felt in 2 months. So we expect to see that benefit of the drop in ethane cost in the last quarter of the year.

Now we need also to assess the spread. We also had a difference in the polyethylene price, as you mentioned, because of the lower availability of the product across the world. And of course, we have this -- all those effects on global demand. So basically, when we look at those specific effects coming from ethane, the answer is, the effects will be seen in the final quarter of the year.

As for exports in Mexico, we continue to export to Europe. We sell to the U.S., too, but Mexico is very competitive. So they are able to allocate products across any region. For right now, they have excess offerings in the U.S. given all the investments that were made. So right now, to sell in the U.S. is not a priority because it's not very attractive. It's better for us to sell elsewhere in Europe, for example, or in the Central America and South America regions. That continues to be our focus. And the main one, of course, across the Americas, minus the U.S. Then to your question about the indexing metrics. We see no change in that because those indexes are given by the region that exports the most.

So the ones who export the most resins polyethylene and PVC come from the U.S. So the American prices are the index and polypropylene coming from Asia as a different indicator. So those indicators will not change because within our commercial policy in terms of pricing, that's what basis our numbers. That's what we see happening in real-life commercial flows. And that's what we continue to use going forward.

[Operator]

Our next question comes from Luiz Carvalho of UBS.

[Luiz Carvalho, analyst]

I'd like to go back to some points that you've discussed, but maybe take a different side of them. You have broken down results by region, which is great, so Brazil, Mexico, U.S. and Europe. And in this level of spread, what attracted my attention is that the only region that has really maintained cash generation was Brazil. Could you please tell us about competitiveness levels in all the 3 regions where we are represented? Mexico, it involved $40 million, something like that.

There was a second question about dividends. We can see some of the companies changing somewhat the policies. Petrobras has done that has gained more visibility of basing dividend distribution based on cash generation. So my question is, would it make sense to come up with any changes along these lines, considering that you now have control, leverage, very long-term debt profile, many projects? So would it make sense to base your dividend distribution on cash generation?

And thirdly, concerning sales, you were talking about that in the upcoming weeks. I would like to know based on the contact you have with Novonor, because there was an attempt of follow on at the beginning of the year. And apparently, there was a demand for one specific price close to BRL 40, BRL 42. And now the numbers seem to be very far from that. So how does it all indirect going into a well structured, let's say, conversation, trying to get to appropriate share prices earning, of course, consider that the Novonor creditors would also have a say in the process?

[Pedro van Langendonck Teixeira de Freitas, executive]

Well, as to cash generation, you did mention that -- well, there was also came out above average for the cycle. When we look into the details of why that happened in the U.S. and in Brazil, in Brazil, we have the basic chemical products. So the effect on basic chemicals bring to Brazil is unique to this country. That's one of the positive effects that we saw for Brazil.

Also, as Brazil is larger in terms of volume, so most of the working capital that we used was allocated in Brazil, of course. When we look at those 2 components, they can explain that point that you have raised. So that's the reason why, in summary.

Once again, looking ahead, looking forward, we do believe that, that ratio, EBITDA, cash generation should not present such a mismatch across different regions. But we'll have to wait and see.

When we talk about the dividend payout and what we see other companies doing using cash flow levels, that's a topic that Braskem is considering adopting in our dividend payout policy. But what we're living through now is a good explanation of why we haven't done it yet. Ours is a cyclical industry with significant speed, historically speaking. So when we look at those factors, we are also concerned about preserving our investment grade, we do not want to push it and commit to a dividend policy that will lead to a mandatory payout at a relevant level when we are in a down cycle. So to strike that balance within our policy is something we are trying to do. And the acid test right now will help us find that balancing point.

In our case, it is more difficult than for other companies, which are dependent on a single product, if you have an iron or oil, then you depend on a single variable. In our case, we have multiple products, several different feedstocks it's different for us to identify all the parameters to put together a whole policy. That's why it takes a bit more time for us to do that than others.

As for sales, as I mentioned, we do not take part in the decision-making process or in the sales and price discussions. We know about price a little while because during the follow-on in January, we had access to the book. So we knew the prices which were offered in the book. So we had a reference, right? Nothing came out of that, but we had access to that. So we knew that price played a major role. But that price sensitivity still holds as far as we know, conditions are in terms are the same. And Petrobras' outlook is still the same. So we have no reason to believe that the price sensitivity has dropped. We believe it has been the same.

If you look at the newspaper headlines, we do not know what the basis are for those headlines. But there is an expectation that prices will be at a level, which is pre-January, but we do not know whether or not that is true. In a nutshell, we have no reason to believe that, that sensitivity to pricing has decreased. But again, we have no access to that information. What's being negotiated, what's being discussed, what's on the table?

[Operator]

The next question comes from Gabriel Barra, Citibank.

[Gabriel Coelho Barra, analyst]

Can you hear me all right?

[Rosana Avolio, executive]

Yes.

[Gabriel Coelho Barra, analyst]

Most of the discussions have already been made, but I would like to make some follow-ups and maybe some new side of it. If we can talk about the change in the President in Brazil and all the differences that we have observed in terms of input rates and everything, can you tell us your perspective on it for the upcoming year? Will there be any potential changes or impacts for the company?

Secondly, if you could tell us more about Alagoas? In this quarter, there was a small amount in your provisions according to the balance. Now there is still a potential point for discussion and increases. What are, let's say, the sensitive points of this discussion, so that we can understand really what it means for the company in the future?

And something with Novo Mercado, we started this discussion and then no longer it was addressed. So what is the current status? Do you still expect changes into Novo Mercado? And what kind of discussions are you having with Petrobras? Is this still an open discussion to migrate? So these were my points.

[Pedro van Langendonck Teixeira de Freitas, executive]

Well, Gabriel, thank you for your questions. As to the change in administration government, we can -- but it all under the same umbrella of industrial policy. We do not know what the new administration will be doing in terms of industrial policies. We're still waiting to see what's going to happen. Of course, actions which were taken this year in terms of import fees and taxes, we believe that the should be linked to a reduction in the so-called Brazil cost, but we need to wait and see what the next government will do.

But our focus will remain on the fact that any change on industrial policy or any change on this long-standing framework should be linked to a reduction in the so-called Brazil cost. And that's where our focus will be. But it's still early to know. We do not know what the new government will do in terms of concrete measures.

As for Alagoas, within our provision for Q3, slightly over BRL 7 billion. When we split that, we have the reallocation compensation. We are looking to complete the proposal submission process until the end of the year. That's our goal. We'll try to reach that goal to the end of the year to avoid extending that to next year, but we are well advanced in that process.

As for payments, we make the proposal. The proposal is analyzed and then we get a feedback. There is an acceptance of that, a formalization process, and then we make the payment. So the process takes about 2 to 3 months, on average. So that this imbursement today at BRL 2.4 billion, 1/3 of the provision, give or take, this should go on until early next year for most of that to be really disbursed.

As for the salt hubs, at BRL 1.5 billion, we are moving forward quickly. 2 of the 9 cavities, which we intend on feeling with sand are well advanced. We are discussing with the regulating agencies about shutting down those units. A fourth unit is already being studied and the remaining ones are in the pipeline. It's a multi-annual program. It's not going to be solved next year, just so you know.

As we move into social environmental measures, there is a series of actions being implemented, as I said, is a multiyear program. It's not focused on the short run. So other additional measures are ongoing, such as demolition, 64% of that work of those houses and areas, properties being addressed. So today or in the short run, rather, I mean, for the next 12 months, we should be working over BRL 5 billion of those BRL 7.2 billion.

What do we have in terms of topics that might lead to future liabilities? We have ongoing negotiations with some public agencies with other demand relative to the same case. We have advanced in terms of negotiations. We cannot, today, quantify the final number. We have been making provisions for that as discussions move forward. We had an adjustment just now in provisions in the second quarter, which was slightly higher than expected, exactly because we had advanced in those discussions.

So that's -- it has been a productive process at the end of the day, this discussion with the public agencies. We have been making partial provisions as we move forward. Like I just said, but it's difficult for us to state firmly or quantify an amount at the end of the day. But I'd say there is nothing today that would point to something very material or very relevant in terms of amount, nothing pointing to that, that level of impact. When we look at the total of BRL 13 billion, which is a total amount for the provision, right? We're talking about much less significant amounts when compared to the BRL 13 billion.

And lastly, as the question about the Novo Mercado, the migration to the Novo Mercado, as per our strategy, Petrobras and Novonor, the strategy was to sell preferred shares and then the sale of common shares as the sale of preferred shares did not happen because of market conditions. That process came to a halt. Today, we actually made a proposal to have a Braskem in the Novo Mercado, but we know that there were discussions between Petrobras and Novonor about that potential new shareholders agreement, but the process did not move forward that process for selling preferred chest. The dialogue was interrupted.

So maybe something is happening between Petrobras and Novonor, but we are not privy to that, right? So we believe things have come to a standstill. And with this new advancement from Novonor, their move to divest apparently. Petrobras has a tag along, right, and also a right of preference. So if Novonor moves forward, Petrobras will need to assess their rights to decide what to do going forward.

[Gabriel Coelho Barra, analyst]

Okay. One follow-up, if I may? You talked about Petrobras, any offer made for Novonor? Petrobras has a right to receive the same terms, correct?

[Pedro van Langendonck Teixeira de Freitas, executive]

Yes, this would be the tag-along, right, not only Petrobras, but all Braskem's shareholders when a change in control happens. So that's a given. And the right of preference, which is the following: Petrobras may offer the same value, the same terms same conditions of the contract to Novonor. And so Novonor could buy it or Petrobras could buy Novonor, right, if it was in their best interest.

[Operator]

The next question, in English, comes from Matias Vammalle of BlueBay Asset Management.

[Matías Vammalle, analyst]

Hopefully, you can hear me all right. Just a few questions from my side. The first one is, I see that both at Braskem, but also at the Braskem Idesa, the Mexican operation level, there has been a positive release of working capital and Braskem, it seems to be related to inventories in the Mexican operations, it seems to be related to accounts receivables. And given the positive and sizable impact that these had on the overall cash flows, on the free cash flow of both entities, if you could comment a little bit what was the driver behind that? And whether you think this would be reversed in the coming quarter?

And then also wondering if you had any contact with the rating agencies to keep them informed and discuss whether the current environment would have any implications on the ratings of either Braskem or Braskem Idesa?

[Pedro van Langendonck Teixeira de Freitas, executive]

Matias, I'll take the question. It's nice talking to you. Matias asked about the working capital. Just to be sure, I'm going to translate his questions. The working capital in Brazil happened based on inventory. And in Mexico, it was based on accounts receivable. And the question is, what were the drivers for that to happen? And if we see in the coming quarter, you could see a reversal of that?

The main driver, Matias was a drop in prices. In the case of Brazil, the drop in naphtha and oil prices led to a lower inventory value. We also had some effect coming from a reduction in product prices, so that also affected accounts receivable in Brazil. We also saw a drop there in Brazil accounts receivable. And in Mexico, the same, a drop in polyethylene, when you talk about Mexico, led to a reduction in accounts receivable. So basically, the main reason was this drop in price.

We also had a slow reduction in the sales volume in some points, especially in exports leaving Brazil, which also led to a reduction in accounts receivable. Looking at the price trend, what we see happen in October, November and as we look to the next quarter, we do not see a reversal of that trend in that short term. But again, it will depend on oil prices and also on prices of products.

As I mentioned earlier, we are closely monitoring our assets, our inventory levels, not only of finished products, feedstocks but other inputs as well. So this optimization process will help us maintain our position in working capital. That's what we believe.

There is a point which is in our release we did not really highlight during the presentation, but I'll take the opportunity does not have a direct link with working capital, but there's an accounting adjustment, which has no cash effect, but it is pricing in EBITDA of negative BRL 75 billion. The EBITDA that we reported is there, but it would have been USD 77 billion (sic) [ USD 77 million ] higher, if we had not made the inventory adjustment, the value of the inventory. So we did a test on September 30, the finished products inventory, what was the market price for that? And then we made a provision, which has already been reverted in October vis-à-vis the market value of our inventory. So that USD 77 million, which negatively impacted our EBITDA in September, reverses in October, right, just to be sure. That's a noncash amount that affects the results the results of the third quarter negatively, and then it is reverted in the fourth quarter.

As for the rating or credit rating, we talk with credit agencies on a constant basis. In the past few days, we were in contact with them. We did not sense any concern on their side. We have a very transparent relationship with them. So they know our cash situation, our financial position, our long debt profile is something they look at from a very positive light.

And if you look at our cash position, as we close the quarter, it is a cash position which is higher than usual for the company, USD 2.2 billion in cash, plus USD 1 billion that we have available. So it is a cash situation or a position, which is quite comfortable in terms of net availability of over USD 3 billion to face potential uncertainties. So all of that combined impacts our credit rating, of course, rating until recently we had a negative bias and now we have a stable bias across the 3 rating agencies.

So we want to maintain our investment grade, and they do understand our intention of maintaining that investment grade, and that's key for our financial management and our business strategy as well as we move forward.

[Matías Vammalle, analyst]

I was wondering -- I don't know if I can squeeze one more question. You did mention at some point that the CapEx for this year was being revised by about $200 million at the Braskem level, and that you were also thinking of lower CapEx next year. I was wondering if you can give us a bit more -- if you have a bit more visibility into next year, but also if you could comment [Audio Gap] of CapEx plans, given that they have a big project currently undergoing?

[Pedro van Langendonck Teixeira de Freitas, executive]

The part of your question was cut, if you could repeat the last bit, please.

[Matías Vammalle, analyst]

Yes. Sorry. Basically, with regards to capital expenditures, I think on the Braskem side, you mentioned that this year's, fiscal '22, was expected to be $200 million lower and also a bit lower for next year, but if you have a bit of visibility or if you can give us some sort of a frame as to how much lower will be next year? And also thinking about your Mexican operations given that there's a big project in Mexico, do you have any flexibility on delaying or postponing some of the CapEx?

[Pedro van Langendonck Teixeira de Freitas, executive]

Thank. Okay. I'll take that, Matias. Matias has asked about CapEx, the review of $200 million approximately, that's clear. The question is if for year, what do we expect? We are now still defining, we do not have a number to announce for next year, but it is a definition process, a revision process to have a smaller portfolio. So we're talking about a reduction relative to what we will complete this year actually.

This is part of what we have always done looking at the cycle, cash generation, leverage level and CapEx. Our CapEx is also more cyclic-driven, right? When we have shorter cycles, and that's what we do. If we look at historical levels, a CapEx of 60% of EBITDA or something like that.

As for Mexico, the construction of the terminal is a priority because at the end of the day, this will provide us with a stable operating capacity for the future. So delaying the terminal is not something we are considering right now. What we're doing is the following: we have brought in a partner Advario a Dutch company, part of a German group, a global leader in midstream logistics industry for liquids and gas. And we brought them in Advario will -- the total investment is $400 million, 400, and 1/2 of that will be -- no, just -- let me take a step back.

Out of the $400 million, we are now trying to find external funding in the -- for at least 60% of that amount to be a long-term financing for 60% at the very least, 60% of $400 million. And the balance would come from a joint venture, 50-50. So the equity coming in from Braskem would be to the tune of USD 80 million, part of it this year within our portfolio, but with complements throughout another 2 years.

So if you look at the annual effort, it's not very material. It is restrict to Braskem Idesa. Braskem Corporate is not part of that in terms of investments for that project. So that's how we have designed it. So it's a nonrecourse ideally, right? So coming from the 2 partners. But again, we do not see an interesting alternative to delay that investment right now.

[Operator]

[Operator Instructions] There is one question coming from Barbara Halberstadt of JPMorgan.

[Barbara Virginia Halberstadt, analyst]

I think we've already discussed most of the questions that are had in mind, but I would like to have a follow-up concerning the funding of the Mexico CapEx. It is to have a project financing. So do you already have discussions going on with potential banks to carry on this transaction? Is everything already in progress? So please, if you could please give us some more color on the topic, I would appreciate that? Secondly, concerning cash generation, have you monetized any tax credits? Do you still have them available to monetize in the last quarter or the future quarter of '23? Or have you already geared down?

[Pedro van Langendonck Teixeira de Freitas, executive]

So the Mexico financing line is moving forward. We are trying to find that funding. We are already in negotiations with counterparts, banks and other institutions and we hope to finalize that in the coming months. So there is a very high level of interest. And we are now in the process of choosing right, of bidding to define how that funding will unfold.

As we have a utility quality to it, we meet the terminal to work full steam. We have a very interesting level of return, very stable, and that generates a very large interest in terms of financing that investment. That's a very solid investment and higher because of the critical role it plays for the operation of the complex as a whole.

As for monetizing credits, we didn't have anything above normal that PIS/COFINS that we had is now over. It has all been monetized. And what we have now in terms of variation in terms of taxes and tax credits is the normal variation that we usually see. Nothing atypical on that front, and we do not expect to have anything like that going forward.

[Barbara Virginia Halberstadt, analyst]

You have allocated capital and liquidity, and you said about maintaining liquidity and robust better. But with the price of bonds in the market, is there any intention, idea? Have you been analyzing, making an additional purchase and using this cash to rebuy anything?

[Pedro van Langendonck Teixeira de Freitas, executive]

Barbara, we are always looking at those opportunities. As I mentioned before, we'll increase our cash level because of that uncertainty linked to the nature of the cycle. If the overall scenario improves to a higher level than we had anticipated, then we will look alternatives of repurchasing as we did before, and we did something like that this year. But it will depend on the scenario, the overall scenario, as is, we are waiting to see what's happening and then we'll make a decision. Right now, the focus has been on preserving our liquidity before we make a final decision.

[Operator]

With that, we close the Q&A session. I would like now like to hand it over to Roberto Simoes, CEO of Braskem, for his closing remarks.

[Roberto Lopes Simoes, executive]

Good afternoon, everyone. Thank you so much for being with us. Pedro and Rosana have covered your main observations and comments and questions. We are aware of the challenges and uncertainties at the macroeconomic level, especially as we go through very important geopolitical events in China, Ukraine. And of course, those have impacts on what we do in our operations.

It's important for us to remind ourselves of our strengths, our strategies which have adopted for the past decades to face challenges such as those we have ahead of us now. From the point of view of competitiveness and productivity, it's always nice to remember as we are a global company leader in Americas and with strong assets all of them well positioned and within the global cost curve, when compared with other players.

And from the point of view of finance, you know this, you monitor this situation very closely. Our credit profile is quite robust, and we apply a very strong discipline in capital allocation. And we in a very strong liquidity position and with long-term debt only. When we think about investments and looking ahead, in the short run for 2023, we have just completed an analysis for the past 6 months of how we see the petrochemical industry, especially in the main markets by 2030 and where we would like Braskem to be in 2030, not only where we should be investing, but also where we should perhaps reduce investments. As Pedro mentioned, perhaps reduce production or even shut down some of our industrial operations.

That exercise, which was shared with you and the main shareholders, we are now looking, trying to defined across what we feel we want and desire and demand on plastic consumers of the projects that we have in our pipeline both in renewables and in recyclables and biopolymers. The discipline we will have, as we define early next year, our strategic plan for the next 3 years, which of those projects, the ones which are public and the ones which are not yet public, which should we encourage, which should we keep on hold and which we should perhaps discontinue, especially being very pragmatic because of the moment we're going through now in 2022 and as we look for trends for 2023. We have engaged many people inside the company to do that exercise and also involve the Board and will be made that public in January and February next year.

So lastly, it's important to say that within this strategic guideline, diversification and a broad portfolio of products and the use of different feedstocks and working with several suppliers and working with different countries where we have assets, all of that speak to our strong ability to mitigate risks, overcome adversities and, of course, capture new value generation opportunities as we optimize our assets.

Having said that, thank you very much for your participation, and this completes our conference call. And I'll see you next year -- early next year when we meet again to announce our results for the year 2022. Thank you, and have a nice day, everyone.

[Operator]

The conference call is closed now. Thank you all very much for your participation. Have a great day. Thank you. Thank you for using Chorus Call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]