Braskem reports 57% decline in Q2 net earnings to 420 million reais due to one-off gain in 2010; net revenues up 34% to 8.37B reais on acquisitions

SAO PAOLO , August 11, 2011 (press release) – HIGHLIGHTS:
- Braskem recorded consolidated net revenue of R$8.4 billion in the second quarter, for growth of 13% from 1Q11 and 24% from 2Q10.
- As of June 2011, the Camaçari complex was back to normal capacity utilization rates.
- Synergies from the Quattor acquisition amounted to R$163 million in 1H11. For 2011, synergies to be captured are estimated at R$377 million on an annual and recurring basis.
- Braskem's net debt/EBITDA ratio maintained its downward trend to reaching 2.30x in the quarter compared to 2.37x in 1Q11. When compared to the same quarter of last year, when the ratio was 2.84x, the reduction stood at 19%.
- Braskem issued US$500 million in 30-year bond due in July 2041, with yield of 7.25% p.a. and coupon of 7.125% p.a., accessing a market tapped by few Brazilian companies. The proceeds will be used to prepay short- and medium-term debt, aligned with Company’s strategy to restructure its debt profile.
- On July 27, Braskem announced the acquisition of the polypropylene business of Dow Chemical for US$323 million, becoming the leading PP producer in the United States. The business consists of 4 plants, 2 located in the United States and 2 in Europe with total capacity of 1,050 ktons/year. This acquisition represents another important step towards the Company’s international expansion strategy. The acquisition barely changes Braskem capital structure, which from the base date of June 30, 2011, would present a net debt/EBITDA ratio of approximately 2.4x.

EXECUTIVE SUMMARY:
Braskem maintained its cash generation capacity and delivered record EBITDA of R$1,152 million. EBITDA margin excluding naphtha/condensate/oil resales (“ex-resales”) stood at 16.1%. The moderate recovery in sales volume and the improvement in prices partially offset the higher raw material prices and stronger BRL. Capacity utilization rate at crackers showed signs of recovery, after the power blackout which affected all states located in the Northeast region, reaching an average of 83%. The disruption which occurred this past February impacted the Company’s regional production until May.

In the first six months of the year, the Company recorded EBITDA of R$2,084 million, with growth of 7% from 1H10. EBITDA margin excluding naphtha/condensate/oil resales was 14.9% in the period.

The Brazilian scenario in 1H11 presented moderated growth and Real appreciation. Global demand also showed signs of slowdown, impacted by (i) the lower industrial activity in developed countries; (ii) the new monetary tightening measures implemented by the Chinese government; (iii) the uncertainties concerning the fiscal crisis in eurozone countries; and (iv) the geopolitical tension that continues to impact North Africa and the Middle East. In addition, the recent downgrade by Standard and Poor’s (“S&P”) on U.S. sovereign rating added uncertaintly to the recovery ability of developed economies, thus negatively affecting global outlook.

Meanwhile, the petrochemical industry worldwide was marked by (i) the volatility in raw material prices; (ii) the greater availability of products, despite the operational problems and scheduled maintenance shutdowns in some regions; and (iii) the continued depreciation of the U.S. dollar against major world currencies. Resins, basic petrochemical and naphtha
prices increased by 5%, 12% and 9% from the prior quarter, respectively. The prices in the international market, which began to decrease at the end of 2Q11, has reversed this trend and, in July, the resins prices have risen by around 3% to 5% in the month.

On June 30, 2011, Braskem’s net debt stood at R$9.7 billion, in line with 1Q11. The higher EBITDA (last 12 months: R$ 4.2 billion) and exposure of 69% net debt to U.S. dollar led to a decline in financial leverage, as measured by the ratio of net debt to EBITDA, from 2.37 times in the first quarter to 2.30 times in the second quarter, in line with the Company’s objective of maintaining its leverage at current levels and its investmentgrade rating. In relation to 2Q10, when the Company registered leverage of 2.84 times, net debt declined by 19%.

Synergies from the acquisition of Quattor assets totaled R$88 million in annual and recurring EBITDA in 2Q11, with this figure totaling R$163 million in 1H11. The main gains were on the industrial and logistics fronts and resulted mainly from: (i) the better operational efficiency, especially the optimization of the production of products at crackers such as gasoline and butadiene, and the reduction in the number of grades; (ii) the renegotiation of contracts; and (iii) the better integration of planning for the 1st and 2nd generation operations.

Braskem posted net income of R$420 million, with growth of 38% when compared to 1Q11, reflecting the higher gross income in the quarter. In the first six months, net income was R$730 million. The short-term outlook shows recovery in the petrochemical industry profitability, mainly due to limited supply. The risk to this scenario lies in the fact that worsening of the economical situation in developed countries may impact global demand, currently supported by emerging market countries. Besides that, additional U.S. dollar depreciation and political turmoil in the Middle East region, which have been countinuously adding volatility to commodities prices, may also affect this recovery. In the medium to long run, the outlook for the petrochemical industry remains positive.

Industry Intelligence Editor’s Note: In an omitted table, the company reported Q2 net earnigns ot 420 million reais. For the same period a year ago, the company reported net earnings of 978 million reais.

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