Elekeiroz S.A. Financial statements in accordance with the accounting practices in place in Brazil and the IFRS as of December 31 st, 2017

Transcription

1 Elekeiroz S.. Financial statements in accordance with the accounting practices in place in Brazil and the IFRS as of December 31 st, 2017

2 CNPJ / Public Company NIRE SUMMRIZED MINUTES OF THE BORD OF DIRECTORS MEETING HELD ON FEBRURY 6 th, 2018 DTE, TIME ND PLCE: On February 6 th, 8:30 am, at v. Paulista no. 1938, 20 th floor, Room 1, in São Paulo, São Paulo (Brazil). CHIRMN: Marcos ntonio De Marchi. QUORUM: ll elected members. DECISION MDE BY UNNIMOUS VOTE: Upon examination of the financial statements for the fiscal year ended on December 31 st, 2017, the Board of Directors decided, by unanimous vote and in compliance with the provisions of rticle 25, Paragraphs V and VI, of Instruction no. 480/09 from the CVM (Securities Commission), as amended, to declare that: a) they have reviewed and discussed and agree with the opinions set out in the report issued by BDO RCS uditores Independentes S/S, in their capacity as independent auditors, concerning the financial statements of December 31 st, 2017, which financial statements, in observance of Corporate Governance practices, have also been examined by PricewaterhouseCoopers uditores Independentes, in their capacity as independent auditors for the Conglomerate, and both such independent auditors have issued unqualified reports; and b) they have reviewed and discussed and agree with the financial statements for the fiscal year ended on December 31 st, CLOSING: There being no further business to transact and no one wishing to speak, the meeting was adjourned, and these minutes were drafted, read and approved, and then signed by all. São Paulo, São Paulo, February 6 th, (ss.) Marcos ntonio De Marchi, Chief Executive Officer; Elder ntonio Martini, and Ricardo Craveiro Massari, Directors. Marcos ntonio De Marchi Director of Investor Relations

3 Management Report Management Report Results for the 4th Quarter of 2017

4 Management Report Scenario Brazil s industrial production grew 2.5 percent for 2017 relative to 2016, after falling for three years in a row: -3.0 percent for 2014, -8.3 percent in 2015, and -6.4 percent in 2016, according to information from the IBGE (Brazilian Institute of Geography and Statistics). In the chemical industry, the apparent domestic consumption (DC) for 2017 increased by 6.0 percent by comparison to 2016, displaying continued improvement in demand, according to information from biquim (short in Portuguese for Brazilian Chemical Industry ssociation) The growth in consumption was mostly supplied by increased imports, which were up 21.1 percent, as well as a 1.8-percent rise in local production. Elekeiroz Operational Performance Shipping Shipping for the 4 th quarter was 9-percent higher than for the same period of last year, confirming a growth trend suggested in the previous few quarters. Sales of organic chemicals displayed a 23-percent increase in volume for the period, as a result of favorable market conditions and Elekeiroz s improved productivity. Inorganic chemicals, on the other hand, showed a slight, 1-percent decrease in shipping for that same period. The total shipping for the year gained 25 percent over 2016, with 31-percent growth in shipping of inorganic chemicals (responsible for 56% of all sales), and a 19-percent rise for organic chemicals (Graph 1). Graph 1 Shipping (1,000 tons) +25% % Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q Organic Chemicals, IM Org. Chem., DM Inorganic Chemicals Elekeiroz Financial Performance Net revenues kept the growth trend seen in the previous quarters, boosted by a short supply of inorganic chemicals, which resulted in better prices and more competitive organic chemicals. For the 4 th quarter of 2017, net revenues displayed a 40-percent hike relative to the same period of the previous year, from sales in both the domestic and export markets (up 38% and 80%, respectively). For 2017, net revenues increased by 27 percent, especially as sales in the domestic market grew 28 percent (Graph 2).

5 Management Report Graph 2 Net Revenues (R$ million) +27% % Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q Domestic Market International Market Gross profit for the 4 th quarter was 1-percent higher than that achieved for the previous three-month period, thus remaining on the growth trajectory that began in late 2016 (Graph 3). Graph 3 Gross Profit (R$ million) +284% +259% Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q

6 Management Report Non-Recurring Events: In 2017 we had one non-recurring event, which was the recognition of a tax credit arising from a final judgment unfavorable to the Company in the month of December. We should point out that several non-recurring events affected the Company s 2016 performance, as shown in detail below (Table 1). Table 1 Non-Recurring Events For 2016: (R$ million) Provision for temporary shut-down costs of phthalic anhydride and plasticizer lines in Camaçari -8.2 Q1 Recognition of gain through advantageous purchase of 50% of Nexoleum s assets 5.0 Q2 & Q3 Impairment of assets Q4 Reversal of PER/PCS assets Q4 De-recognition of Camaçari phthalic anhydride and plasticizer assets Q4 Provisions for Camaçari phthalic anhydride and plasticizer plant shut-down Q4 Complement to PD Q4 Layoff compensation packages restructuring plan -5.8 Q4 Complement to provision for contingencies -3.8 Q4 Provision for restructuring -2.4 Q4 De-recognition of property, plant and equipment items -0.6 Q4 Ratification of and adjustments to tax credits -0.7 Q4 Total for 2016: For 2017: Recognition of a tax credit arising from the final, non-appealable judgment favoring the Company in a lawsuit concerning applicability of the INSS tax to Break/Meal Hours 7.7 Q4

7 Management Report We achieved a significant recovery in our EBITD for 2017 a function of larger volumes and improved margins, combined with efforts towards optimizing the supply chain and reducing costs and expenses. EBITD reached R$32.2 million for the 4 th quarter, and R$87.8 million for the full year, corresponding to 9.0 percent of the net revenues. The recurring EBITD for 2017 amounted to R$80.1 million (Graph 4). Graph 4 Recurring EBITD (R$ million) % Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q For the 4 th quarter, the Company reported a net profit of R$24.3 million. For the full year, the net profit totaled R$47.7 million (Table 2). Table 2 Financial Highlights R$ million 4 th Quarter Full Year Variance Variance Net Revenues % % Domestic Market % % International Market % % Cost of Sales % % Gross Profit % % Profit Margin 18.1% 7.1% 15.7% 5.2% Operating Profit (Loss) Net Profit (Loss) Recurring Net Profit (Loss) EBITD EBITD Margin 12.4% -26.6% 9.0% -7.3% Recurring EBITD % Recurring EBITD Margin 9.5% 2.7% 8.2% 0.1% Investments Investments reached R$26.6 million and were applied towards sustaining the operations.

8 Management Report Highlights of the Year wards & Recognition: Elekeiroz was honored at the 7 th Brazilian Congress on Industry Innovation, an initiative by the CNI (National Industry Council), Sebrae (short for Brazilian Micro and Small Enterprise Support Service), and the MEI (Business Mobilization for Innovation), as a company of value for our development project for butyric acid, a product used in the flavor, fragrance and animal nutrition industries that was previously available exclusively through import. Following development in 2016, Elekeiroz started to regularly make and sell butyric acid out of our Camaçari assets. Recognized as Distinguished Supplier of Raw Materials at Evonik s sustainability workshop. Recognized for the word done at Elekeiroz for excellence in logistics and supply chain management, as announced by the IMM (Material Movement and Storage Institute). lmaco (short for Latin merican Composites ssociation) 2017 Top of Mind wards: Elekeiroz ranked second in the polyester resin supplier category. Independent uditors BDO RCS uditores Independentes S/S provided exclusively independent auditing services to the Company in the year 2017 (CVM Instruction no. 381/03). Closing Message and cknowledgements The year 2017 saw us achieve a significant recovery by combining larger volumes, a marked operational performance, and reductions in costs and expenses. We would like to thank our employees for their commitment, our shareholders for their support, our suppliers for their partnership spirit, and our customers for the trust they have put in us. Management

9 ELEKEIROZ S.. Public Company CNPJ: / udit and Risk Management Committee s Opinion The udit and Risk Management Committee, exercising its duties, has proceeded with its review of the financial statements for the fiscal year ending on December 31 st, 2017 and, considering the information provided by (i) Management at Elekeiroz S.. (the Company ), (ii) Deloitte Touche Tohmatsu Consultores Ltda., as internal auditors, (iii) BDO RCS uditores Independentes S/S, as independent auditors, and (iv) PricewaterhouseCoopers uditores Independentes, as independent auditors for the Conglomerate, having due regard for its duties and the limitations arising out of the scope of its responsibilities, hereby issues the opinion that said financial statements as of December 31 st, 2017 do appropriately reflect, in all material respects, the Company s equity and financial position, and recommends that they be approved by the Management Board. São Paulo, February 1 st, udit and Risk Management Committee Priscila Grecco de O. Neves Committee Coordinator Henri Penchas Committee Member Ricardo Egydio Setubal Committee Member Rodolfo Villela Marino Committee Member

10 December 31 st, 2017 Balance Sheet Fiscal Years ending on December 31 st In thousands of reals December 31 st, 2016 Liabilities and shareholders equity December 31 st, 2017 December 31 st, 2016 ssets Note Note Current assets Current liabilities Cash and cash equivalents 7 56,357 33,768 Trade payables 18 54,252 33,450 Trade receivables 8 122,363 97,349 Borrowings 19 80,807 67,715 Inventories 9 79, ,020 Financial liabilities at fair value 35-2,413 Salaries, wages and employee-related expenses 18 9,669 10,231 Other receivables 12 5,283 7,417 Taxes recoverable 10 28,412 8,086 Other payables 18 8,901 22,688 Prepaid expenses 1,719 1,797 Taxes payable 20 5,930 4,394 Dividends payable 31 7, Officer and employee profit sharing payables 9,118 - Total current assets 293, ,437 Total current liabilities 176, ,942 Non-current liabilities Non-current assets Borrowings 19 87, ,526 Long-term receivables : Financial liabilities at fair value 35-1,054 Held-to-maturity investments 7(b) 3,587 3,335 Provision for contingencies 21 26,717 31,011 Trade receivables Other payables 18 15, Taxes recoverable ,723 Deferred taxes 11 18,345 18,345 Financial assets at fair value Other receivables 12 25,500 33,405 Total non-current liabilities 130, ,000 Investment properties 14 2,029 2,037 Investments 13 21,245 22,972 Total liabilities 306, ,942 Property, plant and equipment 15 90,167 83,923 Intangible assets 16 2,661 3,784 Shareholders equity Total non-current assets 164, ,888 Capital stock 22(a) 103, ,000 Capital reserve 22(c) 8,326 8,326 Retained earnings 22(d) 39,895 - Loss carryover 22(d) - (218,943) Total shareholders equity 151, ,383 Total assets 457, ,325 Total liabilities and shareholders equity 457, ,325 The accompanying explanatory notes form an integral part of these financial statements

11 Statement of Income and Comprehensive Income Fiscal Years ending on December 31 st In thousands of reals Statement of Income Note Operating revenues, net , ,785 Cost of sales 24 (825,186) (730,803) Gross profit 153,355 39,982 Selling expenses 24 (47,536) (37,913) General and administrative expenses 24 (64,110) (64,639) Other income (expense), net 25 26,085 (234,855) Operating profit (loss) 67,794 (297,425) Financial income 26 35,442 27,854 Financial expenses 26 (53,734) (44,843) Financial income (loss), net (18,292) (16,989) Share in joint venture profits (losses) 13 (1,091) (1,029) Profit (loss) before income and social security taxes 48,411 (315,443) Deferred income tax and social security-funding tax 28 - (28,239) Current income tax and social security-funding tax 28 (749) - Profit (loss) for the year 47,662 (343,682) Earnings (loss) per share, basic and diluted (10.92) The accompanying explanatory notes form an integral part of these financial statements

12 Statement of Income and Comprehensive Income Fiscal Years ending on December 31 st In thousands of reals Statement of comprehensive income Nota Profit (loss) for the fiscal year 47,662 (343,682) Other comprehensive income components for the period - - Total comprehensive income for the fiscal year 47,662 (343,682) The accompanying explanatory notes form an integral part of these financial statements

13 Statement of Changes in Shareholders Equity In thousands of reals Capital reserve Revenue reserves Capital Tax Tax ccrued profit Total shareholders stock incentive Statutory incentive Special (Loss) equity On January 1 st, ,000 8, (218,943) 111,383 Profit for the fiscal year, net ,662 47,662 Total comprehensive income for the fiscal year ,662 47,662 ppropriation of loss for the fiscal year bsorption of losses for the year (218,943) ,943 - Statutory reserve - - 1, (1,635) - Tax incentive ,648 - (1,648) - Re-establishment of tax incentive reserve ,310 - (13,310) - Dividend pay-out (7,767) (7,767) Formation of special reserve ,302 (23,302) - Total appropriation of profit for the fiscal year (218,943) - 1,635 14,958 23, ,281 (7,767) On December 31 st, ,057 8,326 1,635 14,958 23, ,278 The accompanying explanatory notes form an integral part of these financial statements

14 Statement of Changes in Shareholders Equity In thousands of reals Capital reserve Revenue reserves Capital Tax Tax Loss Total shareholders stock incentive Statutory incentive Special carryover equity On January 1 st, ,000 8,326 18,811 13,310 92, ,065 Loss for the fiscal year (343,682) (343,682) Total comprehensive income for the fiscal year (343,682) (343,682) ppropriation of loss for the fiscal year bsorption of losses for the period - - (18,811) (13,310) (92,618) 124,739 - Total absorption of loss of the fiscal year - - (18,811) (13,310) (92,618) 124,739 - On December 31 st, ,000 8, (218,943) 111,383 The accompanying explanatory notes form an integral part of these financial statements

15 Statement of Cash Flows Fiscal Years ending on December 31 st In thousands of reals Cash flow of operating activities Loss before income and social security funding taxes 48,411 (315,443) djustments for Depreciation and amortization 19,252 53,731 Residual value of derecognized PP&E and investments 2,240 31,651 Provision for trade receivables, in inventories and contingencies (6,297) 47,597 Share in joint venture profit (loss) 1,091 1,029 dvantageous purchase to acquire equity interest - (4,987) Impairment of property, plant and equipment and intangible assets - 154,798 Interest expenses 18,039 7,823 Derivative transactions 2,931 - Patent amortization Changes in assets and liabilities Trade receivables (25,142) 2,680 Inventories 27,101 66,349 Court deposits 2,332 (161) Other receivables (18,115) 2,034 Taxes recoverable, non-current 13,042 1,879 Receivables, non-current 5,937 (834) Trade payables 20,801 (25,801) Employee-related taxes and expenses 1,443 (761) Other payables 9,820 (7,479) Cash provided by operating activities 123,522 14,105 Income and social security funding taxes paid (749) - Interest on borrowings repaid (17,816) (8,297) Cash provided by operating activities, net 104,957 5,808 Cash flows from investing activities Equity interests - (13,864) Purchase of investments - (568) Purchase of property, plant and equipment (26,412) (18,521) Purchase of intangible assets (232) (76) Revenue from disposal of assets Held-to-maturity investments Financial investments (251) (3,335) Cash used in investing activities, net (26,865) (36,109) The accompanying explanatory notes form an integral part of these financial statements

16 Statement of Cash Flows Fiscal Years ending on December 31 st In thousands of reals Cash flows from borrowing activities (+/-) Short-term borrowings - (72,714) New long-term borrowings 21, ,615 Borrowings repaid (76,953) (32,437) Cash provided by (invested in) borrowing activities, net (55.503) 26,464 Increase (decrease) in cash and cash equivalents, net 22,589 (3,837) Cash and cash equivalents at the start of the fiscal year (Note 7) 33,768 37,605 Cash and cash equivalents at the end of the fiscal year (Note 7) 56,357 33,768 The accompanying explanatory notes form an integral part of these financial statements

17 Statement of Value dded Fiscal Years ending on December 31 st In thousands of reals Revenues Products sold 1,217, ,502 Provision for doubtful debtors (128) (22,323) Inputs purchased from third parties 1,217, ,179 Costs of sales (984,210) (806,013) Materials, electric power, third-party services, and expenses (51,792) (298,651) (1,036,002) (1,104,664) Value added, gross 181,807 (159,485) Retentions Depreciation, amortization and depletion (19,252) (53,731) Value added by the company, net 162,555 (213,216) Value added received in transfers Share in joint venture profit (loss) (1,091) (1,029) dvantageous purchase to acquire equity interest - 4,987 Financial income 35,442 27,854 Total value added available for distribution 196,906 (181,404) The accompanying explanatory notes form an integral part of these financial statements

18 Statement of Value dded Fiscal Years ending on December 31 st In thousands of reals Value added distribution Personnel Direct compensation 63,155 63,772 Benefits 9,637 10,794 Severance Pay Fund (FGTS) 4,213 4,503 Taxes and charges Federal 27,917 55,919 State (3,074) 343 Local/Municipal 1,221 1,033 Return on debt Leases 3,773 4,458 Interest 42,402 21,456 Return on equity Dividends 7,767 - Retained earnings (loss carryover) for the fiscal year 39,895 (343,682) Value added distributed 196,906 (181,404) The accompanying explanatory notes form an integral part of these financial statements

19 1 General Information Management s Explanatory Notes to the Financial Elekeiroz S.. ( Elekeiroz or the Company ) is a publicly-held corporation with shares traded on the B3 Stock, Commodities and Futures Exchange, controlled by Itaúsa - Investimentos Itaú S.., and has three industrial sites, two in Camaçari, Bahia, and one in Várzea Paulista, São Paulo, where its headquarters are located. The Company is engaged in the business of processing and marketing chemicals and petrochemicals at large, including the business of reselling such products purchased from third parties, as well as importing, exporting and holding interests in other companies. The products processed by Elekeiroz are essentially designed for the manufacturing sector, particularly the building and construction, apparel, automotive and food industries. In compliance with CPC 01 (Impairment of ssets), in 2016 the Company found signs that its assets had lost economic representativeness and proceeded with an evaluation of the items making up its intangible assets and property, plant and equipment, which brought up the need to impair the assets of the Company s oxo alcohol/gas, polyester resin and maleic anhydride plants. Based on consolidated, long-term projections for its operating plants, the Company also identified the need to reduce its tax credits for deferred taxes, derecognizing those credits which were expected to be recovered within more than 10 years. In 2017 the Company reviewed its long-term projections and, despite the significant improvement in the results of its operations, found that it was necessary to keep the impairment values of its assets and the measured amount of its deferred taxes. The aforementioned adjustments, as well as other provisions accounted for in 2016, have led to a R$276,866 decrease in the Company s shareholders equity. The issuance of these financial statements was authorized at a meeting of the Company s Management Board held on February 6 th, Summary of Principal ccounting Policies The principal accounting policies applied in the preparation of these financial statements are described below. These policies have been consistently applied in all reported fiscal years, except as otherwise provided. 2.1 Basis for Preparation The financial statements have been prepared under the historical cost convention, and adjusted to reflect the measurement of financial assets and financial liabilities (including derivative financial instruments) at fair value through profit or loss. The preparation of financial statements requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Company s accounting policies. Those areas which involve a higher degree of judgment or complexity or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. Financial Statements The financial statements have been prepared and are being presented in accordance with accounting practices in place in Brazil, including the pronouncements issued by the Brazilian ccounting Pronouncements Committee (CPC, the initials in Portuguese), as well as the International Financial Reporting Standards (IFRS) issued by the International ccounting Standards Board (ISB), and reflect all of the relevant information typically disclosed in financial statements, and that alone, which have been consistent with those used by Management in its job. The presentation of the Statement of Value dded (DV, the initials in Portuguese) is required by the Brazilian corporate laws and the accounting practices in place in Brazil for public companies. The presentation of said statement is not required by the IFRS. s a result, for IFRS purposes, such statement is presented as supplementary information, without prejudice to the set of financial statements.

20 Management s Explanatory Notes to the Financial Changes in ccounting Policies and Disclosures Changes dopted by the Company. Below is our account of the amendments to standards that have been first adopted for the fiscal year commencing on January 1 st, Other than the amendment to CPC 03/IS 7 (Note 2.21), all amendments adopted have had no material impacts on the Company. (a) CPC 03/IS 07: Statement of Cash Flows This amendment introduces an additional disclosure intended to enable users of financial statements to evaluate changes in liabilities arising from financing activities. Entities are required to disclose changes in liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. (b) CPC 32/IS 12: Income Taxes It clarifies that the analysis for recognizing deferred income tax assets is to be performed for the financial statements taken as whole, considering expected future taxable profits and taxable temporary differences available. This is a particularly relevant theme where an asset measured at fair value and that value is below its tax base. The general principle of recognizing a deferred income tax asset should always be applied, i.e. the recognition analysis must not be carried out considering one separate transaction. (c) CPC 45/IFRS 12: Disclosure of Interests in Other Entities It clarifies that, other than the disclosure of summarized financial information, all disclosures required under CPC 45/IFRS 12 apply to interests classified as held for sale, according to CPC 31/IFRS 5: Non-current ssets Held for Sale and Discontinued Operations. Other amendments effective for the fiscal year ending on January 1 st, 2017 are not relevant to the Company. 2.2 Segment Reporting The information on operating segments is reported in a manner consistent with the internal report provided to the principal operating decision-maker. The principal operating decision-maker, who is responsible for allocating funds, assessing the performance of operating segments and making the Company s strategic decisions, is the Company s Management, which consists of the Management Board and the Board of Directors. 2.3 Foreign Currency Translation (a) Functional Currency and Presentation Currency The items included in the Company s financial statements are measured using the currency of the primary economic environment in which the Company operates ( functional currency ). These financial statements are presented in Reals (R$), which are the Company s functional currency, and its presentation currency as well. (b) Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the respective transactions or of valuation, where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in the statement of income for the fiscal year. Foreign exchange gains and losses relating to borrowings, trade receivables and trade payables are presented in the statement of income within financial income or expenses. 2.4 Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks and other highly liquid short-term investments with original maturities of three months or less and a negligible risk of change in value.

21 2.5 Financial ssets Classification Management s Explanatory Notes to the Financial t the initial recognition, the Company classifies its financial assets in the following categories: measured at fair value through profit or loss; loans and receivables; and available for sale. The classification depends on the purpose for which the financial assets were acquired. Derivatives are also classified as measured at fair value through profit or loss, unless they have been designated as hedging instruments. Financial assets are presented as current assets, except for those with maturity dates in excess of 12 months of the balance sheet date Recognition and Measurement Purchases and sales of financial assets are usually recognized on the trading date. Investments are initially recognized at fair value, plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recognized at fair value, and the relevant transaction costs deducted from the statement of income. Financial assets are derecognized when the rights to receive cash flows from investments have been realized or transferred, and in the latter case, to the extent that the Company has transferred substantially all related ownership risks and rewards. Financial assets measured at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method. Gains or losses arising out of changes in the fair value of financial assets measured at fair value through profit or loss are presented in the statement of income under Other income (expenses), net for the period in which they arise. Where securities classified as available for sale are sold or suffer loss (impairment), the accumulated fair value adjustments recognized in equity are included in the statement of income as Financial income and expenses. The fair values of publicly quoted assets and liabilities are based on current purchase prices. If the market for a given financial asset (and for unlisted securities) is not active, then the Company determines the fair value using valuation techniques. These techniques include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models that use as many market inputs as possible and rely as little as possible on inputs provided by the Company s own Management. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in equity Offset of Financial Instruments Financial assets and liabilities are offset, and the net value is presented in the balance sheets where a legal right exists to offset recognized amounts and these are intended to be settled on a net basis or the asset is intended to be realized and the liability settled simultaneously. The legal right must not be contingent upon future events and must be applicable in the ordinary course of business and in the event of default, insolvency or bankruptcy of the Company or the counterparty Impairment of Financial ssets (a) ssets Carried at mortized Cost The Company assesses on the date of each set of balance sheets whether there is objective evidence that a financial asset or group of financial assets is impaired. financial asset or a group of financial assets is impaired and impairment losses are recognized as such only if there is objective evidence of impairment as a result of one or more events occurring after the initial recognition of the asset (a loss event ) and that such loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Company applies to determine whether there is objective evidence of impairment losses include: (i) (ii) (iii) (iv) significant financial difficulty of the issuer or debtor; breach of contract, such as default or delinquency in interest or principal payments; the disappearance of an active market for the relevant financial asset on account of financial difficulties; or observable data indicating that there has been a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of such assets, notwithstanding that such decrease may not be identified with any individual financial assets in said portfolio, including:. adverse changes in the payment status of borrowers in the portfolio; and. national or local economic conditions that correlate with defaults on the assets comprised in the portfolio.

22 Management s Explanatory Notes to the Financial The amount of any impairment loss is measured as the difference between the carrying amount of the relevant assets and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the original interest rate in place for such financial assets. The carrying amount of the asset is reduced, and the amount of the loss is recognized in the statement of income. If the amount of the impairment loss decreases in a subsequent period and the decrease can be objectively related to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the reversal of the previously recognized loss is recognized in the statement of income. (b) ssets Classified as vailable for Sale t the end of each reporting period, the Company assesses whether any objective evidence exists that a financial asset or a group of financial assets is impaired. For debt securities, the Company uses the criteria referred to in item (a) above. For equity investments classified as available for sale, any significant or prolonged decline in the fair value of the relevant securities below their cost is also evidence that the assets are impaired. If any such evidence exists for available-for-sale financial assets, then the cumulative loss measured as the difference between the acquisition cost and the current fair value, minus any such impairment loss on the relevant financial asset as may have been previously recognized in profit or loss is removed from equity and recognized in the statement of income. For debt instruments, if the fair value of any given instrument classified as available for sale increases in any subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, and then the impairment loss is reversed through the statement of income. 2.6 Trade Receivables Trade receivables correspond to amounts receivable from customers for products sold and are recorded and maintained at the nominal amount of the trade notes arising from sales of products, plus foreign exchange fluctuation, where applicable. If expected to be received within one year or earlier, the receivables are classified as current assets. Otherwise, they are presented as noncurrent assets. Trade receivables are initially recognized at fair value, and subsequently measured at amortized cost using the effective interest method, minus a provision for doubtful debtors (PDD) or provision for impairment of trade receivables. 2.7 Inventories Inventories are stated at either the cost or net realizable value, whichever the lower. The cost is determined using the moving weighted-average cost method. Costs of finished products comprise raw materials, direct labor, and other direct and indirect costs related to production (based on the normal operating capacity), except borrowing costs. The net realizable value is the estimated selling price in the ordinary course of business, minus estimated conclusion costs and estimated selling expenses. Imports in transit are stated at the accumulated cost of each import. 2.8 Other Receivables (Current and Non-Current) Other receivables are stated at cost or realizable value, including, where applicable, any interest accrued thereon and currency and exchange fluctuation, as adjusted to present value, where appropriate. Contingent assets are recognized only where there is evidence that realization is virtually certain or favorable, final and non-appealable court decisions have been obtained. Court deposits refer to amounts deposited in court and maintained until the relevant legal proceedings are concluded, and are measured at amortized cost. Where provision for contingencies exists, they are presented net of the related court deposits. 2.9 Intangible ssets (a) Software Includes the right to use software, with software licenses capitalized on the basis of the costs incurred and amortized over their lifespan, which is estimated at 5 years. Costs associated with software maintenance programs are recognized as expense, as incurred. (b) Registered trademarks and licenses Registered trademarks and licenses acquired separately are initially stated at the historical amount. Subsequently, trademarks and licenses valued with a defined lifespan are carried at their cost amount minus accumulated amortization. mortization is calculated using the straight-line method to allocate the cost of registered trademarks and licenses over their lifespan, which is estimated at 5 years.

23 2.10 Investment Property Management s Explanatory Notes to the Financial The Company owns a property in rujá, São Paulo, which it does not occupy. The Management has opted to value the property at cost, and the balance is presented at the historical cost of acquisition minus the depreciation amount, where applicable. Depreciation is calculated by the straight-line method to allocate the costs of the property to its residual value over its estimated lifespan at an average rate of 4 percent per annum. The Company owns an apartment located in Canoas, Rio Grande do Sul, which has been received as payment from a customer and classified as investment property. s of the date of these financial statements, the carrying amount of these assets does not exceed their recoverable value, as estimated based on an appraisal report at market value. The balance of the investment property is presented in the Investments account (Note 14) Property, Plant and Equipment Land and buildings comprise mostly production plants and offices. Property, plant and equipment are stated at their historical cost minus accumulated depreciation. Historical cost includes expenditures directly attributable to the acquisition of such items and financing costs related to the acquisition of qualifying assets. ny subsequent costs, such as those incurred in connection with renovations and periodic inspections required for operating, are included in the carrying amount of the relevant assets or recognized as a separate assets, as appropriate, only where the Company is likely to perceive economic benefits associated with the item in the future and the cost thereof can be reliably measured. The carrying amount of replaced items or parts is derecognized. ll other repair and maintenance costs are entered in the statement of income for the fiscal year as incurred. Land is not depreciated. Depreciation is calculated by the straight-line method at rates compatible with the lifespan of the relevant assets. For equipment and facilities used directly in the production process, the Company applies the unit-of-production method, taking into consideration the lifespan of the relevant assets. The estimated lifespan of each of such assets is reviewed annually, and then adjusted if necessary. The estimated average lifespan of each property, plant and equipment item by category is as follows: Years Buildings 25 Equipment and facilities 3 to 20 (5 on average) (*) Data processing equipment 5 Furniture and fixtures 10 Vehicles 5 (*): The depreciation of equipment and industrial facilities will vary according to the production volume at average rates ranging from 5 to percent per annum. The residual values and life spans are reviewed and, where appropriate, adjusted at the end of each reporting period. The residual value of property, plant and equipment items is promptly derecognized at their recoverable amount when the residual value exceeds said recoverable amount (Note 2.12). Gains and losses on disposals are determined by comparing the proceeds to the carrying amount and recognized in the Other income (expenses), net account in the statement of income. On the date of these financial statements, the Company does not have any leasing transactions.

24 Management s Explanatory Notes to the Financial 2.12 Impairment of Non-Financial ssets ssets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. n impairment loss is recognized at the value whereby the carrying amount of the relevant asset exceeds its recoverable amount. Recoverable amount is either the fair value of the asset minus selling costs or the current value thereof, whichever the higher. For impairment assessment purposes, assets are grouped at the lowest levels for which identifiable cash flows (Cash-Generating Units, or CGUs) exist separately. Non-financial assets other than goodwill having been adjusted due to impairment are subsequently reviewed for possible reversal of impairment on the balance sheet date Trade Payables Trade payables are obligations to pay for goods or services having been acquired in the ordinary course of business, and are classified as current liabilities if payment is due in one year or less. Otherwise, trade payables are presented as non-current liabilities. Trade payables are initially recognized at fair value, and subsequently measured at amortized cost using the effective interest method. In practice, they are usually recognized at the amount of the related invoices Borrowings Borrowings are initially recognized at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. ny difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing costs directly attributable to the purchase, construction or production of a qualifying asset, which is one that necessarily takes a substantial period of time to get ready for the intended use or sale, are capitalized as part of the cost of the asset when they are likely to provide future economic benefits to the Company and can be reliably measured. Other borrowing costs are recognized as expenses for the period in which they are incurred Provisions Provisions for lawsuits (labor claims, civil, tax suits) are recognized when the Company has a present legal or constructive obligation as a result of past events, disbursements are likely to be required for settling the obligation, and the amount can be reliably estimated. These provisions do not include future operating losses. Where a series of similar obligations exist, the likelihood of settling them is determined taking into consideration the obligation class as a whole. provision is recognized notwithstanding that the likelihood of settlement related to any individual item included in the same obligation class may be low. Provisions are measured by the present value of expenses required to be incurred for settling the obligation, using such a rate before taxes as will reflect the current market appraisal of the amount of money over time and the specific risks of the obligation. ny increase in an obligation as a result of lapse of time is recognized as financial expense Current and Deferred Income Tax and Social Security Funding Tax The expenses incurred in connection with income tax and social security funding tax for the period comprise current and deferred taxes. Income taxes are recognized in the statement of income, except to the extent that they relate to items recognized directly in shareholders equity or in comprehensive income. In such cases, the taxes are also recognized in shareholders equity or comprehensive income. The current income and social security funding taxes are calculated on the basis of the tax laws enacted or substantively enacted as of the balance sheet date. Management periodically evaluates positions taken by the Company in income tax returns in respect of situations where the applicable tax regulations make room for interpretations. It makes provisions, where appropriate, based on the amounts expected to be paid to the relevant tax authorities. The current income tax and social security funding tax are presented net, either in liabilities, where any amounts are payable, or in assets, where any amounts prepaid exceed the total amount due on the reporting date. The income tax is calculated on taxable profit at the rate of 15 percent, plus a 10-percent surcharge, and existing tax losses are being offset. The social security funding tax on net profit is calculated on the adjusted accounting profit at the rate of 9 percent, also taking into consideration any offset of social security funding tax losses. The Company is the beneficiary of a partial income

25 Management s Explanatory Notes to the Financial tax reduction for its Camaçari production complex, Bahia, at the rate of 75 percent until December 31 st, The provision for income tax is formed net of the tax incentive portion, and there are no such conditions to be met as might affect the recognition of such credit. Deferred income tax and social security funding tax are recognized on temporary differences between the tax bases for assets and liabilities and their carrying amounts in the financial statements. In practice, the inclusion of expenses in the accounting profit or exclusion of revenues from the accounting profit, which is temporarily non-deductible in either case, generates deferred tax credits or debts. However, the deferred income tax and social security funding tax are not accounted for if they result from the initial recognition of an asset or liability in any transaction other than a combination of business, which transaction, at its closing time, affects neither the accounting income nor the taxable profit (tax loss). Deferred income and social security funding tax assets are recognized only to the extent that future taxable profits are likely to be available against which temporary differences can be utilized. Deferred income tax assets and liabilities are presented in the balance sheet at net value where there is a legal right and the intent to offset them at the time of determination of current taxes generally relating to the same legal entity and the same tax authority Employee Benefits (a) Private Pension Plan The Company offers all of its employees a private pension plan of the defined contribution type whereby fixed contributions are paid to a separate Entity (a pension fund), and the Company has no legal or constructive obligations to pay any further contributions if the fund lacks sufficient assets to pay all benefits due. Contributions are recognized as expenses for the period in which they are incurred and cease when the employment relationship between an employee and the Company is terminated. Prepaid contributions are recognized as assets to the extent that a cash refund or reduction of the future payments is available. (b) Profit Sharing The Company recognizes a profit-sharing liability and expense based on a methodology that takes into account the profit attributable to its shareholders after certain adjustments are made. The profit-sharing plan is also related to the achievement of specific operating targets and goals which are set and approved at the beginning of each fiscal year. The Company recognizes a provision where contractually required to do so or where a past practice has created a constructive obligation. (c) Other Benefits Other benefits are provided as well, such as life insurance and health care, which are recorded on an accrual basis and cease when the employment relationship between an employee and the Company is terminated Capital Stock The Company s capital is represented by shares in common and preferred stock, with no par value. Common and preferred shares are classified as shareholders equity. ny incremental costs directly attributable to any issuance of new shares or stock options are shown in shareholders equity as a deduction from the proceeds, net of tax Revenue Recognition Revenue consists of the fair value of a consideration received or receivable for a sale of products and services in the ordinary course of the Company s business. Revenues are shown net of taxes, refunds, rebates and discounts. The Company recognizes revenues when the corresponding amounts can be reliably measured and future economic benefits to the entity are likely to result from the transaction. No revenue is recognized if the realization thereof is significantly uncertain.

26 (a) Product Sales Management s Explanatory Notes to the Financial Revenues from product sales are recognized in the statement of income when all the risks and benefits inherent in the relevant product are transferred to the purchaser, i.e. for FOB sales, revenues are recognized at the time that each buyer picks up the goods at a Company site, while for CIF sales, the revenue is only recognized after the goods are delivered to the location designated by the customer. (b) Interest Income Interest income is recognized on an accrual basis, using the effective interest method. When a loan or receivable instrument is impaired, the Company reduces the carrying amount to its recoverable amount, which corresponds to the estimated future cash flow, as discounted at the original effective interest rate of the relevant instrument. (c) Dividend Income Dividend income is recognized when the right to receive payment is established. (d) Other Income and Expenses Other income and expenses are recognized in the income statement on the accrual basis of accounting Dividend Payout and Return on Equity Capital Dividend payouts and returns on equity capital paid to the Company s shareholders are recognized as a liability at the end of the fiscal year or in such shorter periods as may be determined by the Management Board based on the Company s by-laws. ny amount in excess of the compulsory minimum amount is only provided for on date of approval thereof by the Management Board and the relevant Shareholders Meeting. The tax benefit of return on equity capital is recognized in the statement of income Changes in ccounting Policies and Disclosures The new standard below have been issued by the ISB, but are not effective for the fiscal year While it is encouraged by the ISB, the early adoption of rules is not permitted by the ccounting Pronouncements Committee (CPC). (i) IFRS 15/CPC 47 (Revenue from Contracts with Customers): This new standard introduces the principles an entity will apply to determine how the revenue is measured and when it is recognized. This standard is based on the principle that the revenue is recognized when control over the goods or services is transferred to a customers. ccordingly, the control principle will replace the risks and benefits principle. It takes effect on January 1 st, 2018 and replaces IS 11/CPC 17 (Construction Contracts), and IS 18/CPC 30 (Revenues), as well as their relevant interpretations. Management expects the following impacts from its adoption of the new rule as of January 1 st, 2018: For the purposes of transitioning to CPC 47, the Company has opted for the modified retrospective method, i.e. without representation of the comparative figures for the previous year (2017), and with the accumulated impacts of initial adoption fully entered against retained earnings as of January 1 st, Currently, revenues from contracts with customers that are eligible for the purposes of CPC 47 refer to sales of chemicals where the dealings do not imply any after-sales obligations, including incorporated services, customer retention programs, performancelinked discounts or in any other form. The Company estimates that there will be no potential effects in respect of the new standard as of January 1 st, (ii) IFRS 9/CPC 48 (Financial Instruments): It addresses the classification, measurement and recognition of financial assets and liabilities. The full version of IFRS 9 was published in July of 2014, to take effect as of January 1 st, 2018 and replace IS 39/CPC 38, which refer to the classification and measurement of financial instruments. The main changes IFRS 9 brings about are: (i) new criteria for classification of financial assets; (ii) a new impairment model for financial assets, a hybrid of expected and incurred losses, to replace the current incurred losses model; and (iii) relaxation of requirements for adopting hedge accounting. Management has reviewed their financial assets and liabilities, and expects the following impact from their adoption of the new standard as of January 1 st, 2018: In the Company s assessment, the following impacts are estimated from its adoption of CPC 48 based on its position as of December 31 st, 2017: Impairment losses will increase the provision previously recognized under CPC 38 by R$100 to R$300. The Company is in the processes of preparing a methodology and defining impairment loss under CPC 48.