Usinas Siderúrgicas de Minas Gerais S.A. (USIM5) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Usiminas conference call to discuss the full year and the fourth quarter of 2019. [Operator Instructions] As a reminder, this conference is being recorded. I would like to mention that this conference call is being broadcast live on the company's Investor Relations website at www.usiminas.com/ri. The earnings release and a slide presentation are also available on that site for download. Participants who are listening to the conference in English may also ask questions directly to the speakers. Before proceeding, let me mention that forward-looking statements are made during the safe harbor of the Securities Litigation Reform Act of 1996 (sic) [ Private Securities Litigation Reform Act of 1995. ] Actual performance could differ materially from that anticipated in any forward-looking statement as a result of macroeconomic conditions, market risks and other factors. With us today are Usiminas' Executive Board, Mr. Sergio Leite, CEO; Mr. Alberto Ono, Finance and Investor Relations Vice President Officer; Mr. Túlio Chipoletti, Industrial Vice President Officer; Mr. Takahiro Mori, Corporate Planning Vice President; Mr. Kohei Kimura, Technology and Quality Vice President Officer; Mr. Miguel Homes, Commercial and Vice President Officer; Mr. Carlos Rezzonico Managing Director of Mineração Usiminas; Mr. Ascânio Merrighi, Managing Director of Soluções Usiminas; Mr. Heitor Takaki, Managing Director of Usiminas Mecânica; Bruno Paulino, Head of Legal Department; Mr. Julio Arroyo, Controller; and Mr. Leonardo Karam, Head of IR. First of all, Mr. Sergio Leite will make some initial comments, followed by Mr. Alberto Ono, who will comment on the full year and the fourth quarter of 2019 results. After, the entire management will be available for questions and answers. Mr. Sergio, you have the floor, sir.

Good morning to all of you. Thank you for attending this results conference call for our fourth quarter of '19 at Usiminas. It is a pleasure to have you all here. We are beginning the year 2020 when we are receiving signals from the market which are positive in terms of the GDP, of civil construction, of employment rates. We are beginning the year in which a scenario that was signaled to the market is positive. In 2019, the steel industry experienced an international scenario that was marked by a lot of protective measure in commercial relations and trade relations, an increase in -- or a decrease in steel where we had a compression of the margins at the international level last year. In Brazil, we experienced a growth scenario of the GDP, with a projection that was inferior to then -- that was projected in the beginning of last year and much lower than 2017 and 2018 according to what was announced by the Instituto Aço Brasil. There was a drop in the steel consumption in -- by 3.7% in 2019. And the international factors, obviously, impact the steel business in -- across the world. We, at Usiminas, have been working very hard, and we obtained Mineração Usiminas results which was very positive for 2019. We had at Soluções Usiminas, Usiminas Solutions, very -- record EBITDA for the year ever since we created the company. At Usiminas Mecânica, we had a difficult scenario, and we were impacted by this international scenario which compressed many -- much of our margins. There was an action that we carried out in debt management. We managed to renegotiate and roll the debt for a month. We were able to pay up every debt negotiated in 2016, in September, and to reposition ourselves in the market by launching bonds in July and debentures of BRL 2 billion in October. With this, at the end, we had a total gross debt of BRL 5.6 billion, a debt which, 6 years ago, was BRL 6.9 billion. Our condition today is much more comfortable not only in terms of value, but the cost of the debt as well. In terms of the deadline or the payment terms, we have 4 years to pay up, and we will pay debentures after October. So we have more or less 4 years, with no commitment of debt payment, which was a reduced scenario and very much improved. And today, we published a material fact that our net revenue -- the expenses of BRL 271 million was published. So that was very important for us to carry out our activities with much more focus on the generation of results. Also, in our material fact today, we disclosed our investments guidance for 2020. And it's worth noting that in the very challenging years where we were recovering the company, we had a level of BRL 220 million per year for investments, so '16 and '17. And in 2018, we increased investments twofold. We went to BRL 460 million. Last year, 2019, we grew by 50% in terms of our investment levels, totaling BRL 690 million. And now we are communicating -- we have communicated to the market our guidance of BRL 1 billion. And now going into 2020 with a more positive outlook, our commitment to the market with investors is to work very hard, the entire Usiminas team, in order to achieve results and, of course, face all the challenges that 2020 will also bring. I thank you all for being here. I will now give the word to Alberto Ono so he can present the results for 2019. Thank you.

Good morning, everyone. I'm going to Slide 2. This is the steel sales in 2019. Our level was very stable compared to 2018, 4,000 -- 4.004 million tons. Domestic market, there was a slight increase, 1%, more or less. And just as Sergio has said that Brazil faced a challenging scenario last year, the -- our domestic market shrunk. So I think it's a very good result. Concerning iron ore sales, to your top right, we have a record volume per thousand tons, over 8.616 million; and also record rates, over 4.631 million in exports, which is also a record. And later on, I'll break this down for you. Concerning EBITDA, adjusted EBITDA, we are slightly below BRL 2 million for the year, a 13% margin; and net profit, BRL 377 million. Going on to the next slide, you can see the evolution of the adjusted EBITDA margin since 2015, almost BRL 200 million. Today, this year, actually, in 2019, we had a recurrence in the maths. Adding up the positives and the negative factors here in 2017, we had BRL 115 million. This is a breakdown. The main nonrecurring events are listed here on the slide. And in 2019, especially because of the fourth quarter, there was an acknowledgment of credits from Eletrobras, the BRL 117 million. And the financial potential is BRL 306 million according to what was shown in -- what are stated in the financial statements. Concerning Steel Unit on Slide 4, as Sergio also has said, we had a year that the margins shrunk across the steel industry. We closed the year with a margin 10% lower than the previous year, with an EBITDA rate that was lower as well. And then the main nonrecurring effects are broken down to your right. We had some nonrecurring in mining as well, which is what you can -- be seen in the next slide on Slide 5. In the Mining Unit, Mineração Usiminas, the record volume for sales in the year in which prices -- international prices of iron ore were favored due to events we already know of. This made us attain an EBITDA of BRL 680 million, a better result, the best one in -- of this unit since the unit was created. Going on to steel transformation, Soluções Usiminas, BRL 120 million in EBITDA. It's also the best historical result since the company began operating. Going on to our Capital Goods Unit, which is Usiminas Mecânica, we are still suffering because of the lack of a return on investment, especially in terms of infrastructure in Brazil. This is the third year in a row in which we have a negative EBITDA. We were able to diminish the losses, but we are still suffering with -- due to the lack of investments. Now we have the results for the fourth quarter of '19. In terms of Steel Unit sales in thousand tons, we are above 1 million tons. And here, with the reduction in the domestic market, which is natural for -- in terms of seasonality. 2019 was a year in which there was a more typical behavior of seasonality factor. It was a fourth quarter, which was lower in figures in -- compared to the previous quarter. As we see iron ore to your top right, this is also a record. And also, a new record in terms of export volume, more than 1.707 million tons here. In terms of the adjusted EBITDA, BRL 468 million, a margin of 12%, and we are very close to what we had in the third quarter. Concerning net profit, there was a different scenario from the loss to a positive result of BRL 268 million. Going on to the next slide. The opening of the extraordinary events that happened, they are nonrecurring events in the fourth quarter -- are broken down to Eletrobras credits as we have already mentioned. And in terms of the mining, we also -- the main point was renegotiating our lease agreement with a positive impact. Going on to the next slide. The Steel Unit, again, you can see the main point here in the -- an EBITDA of the quarter of BRL 184 million. As we can notice, we are still suffering -- we have been suffering during the year because of this margin compression Sergio talked about and the acknowledgment of the Eletrobras credits also with the nonrecurring events. In the Mining Unit, for results, Mineração Usiminas, an EBITDA of BRL 209 million, a margin of 36%, which was favored by the record volume we have attained. In terms of Soluções Usiminas, the steel transformation unit, it's the third quarter in a row in which we had a result above BRL 37 million -- BRL 30 million, and there was an expressive improvement compared to the previous quarter. And now the Capital Goods Unit, Usiminas Mecânica, as you can see, this area has offered because of the lack of investments in infrastructure. Going on to other financial indicators. Concerning working capital, we had a drop by 12%. And the main factor in the third quarter were that we had credits for Eletrobras that were launched as revenue at the end, and we received it in the fourth quarter. This influenced our working capital. And now in the fourth quarter of '19, also, these credits, BRL 306 million of them, were accounted for as receivables in working capital. So taking that out, our working capital was stable in that period, around BRL 4.2 billion. In terms of the Steel inventories, there was a drop in terms of volume and working capital. As you can see, our inventories are controlled. And now our cash position and indebtedness levels. Our cash is close to BRL 2 billion, and our net debt, as Sergio has already mentioned, BRL 3.2 billion in net debt. And during the fourth quarter, as we have paid off the remaining debt that was to be renegotiated in 2016 with the resources received from the Eletrobras credits, our gross debt level is BRL 5.1 billion. And this means that even if we have a fourth quarter compared with the previous year, year-on-year, with a lower EBITDA, our leverage rate is stable. Lastly, the evolution of CapEx. We had a pickup in the fourth quarter as you have -- already know. In the fourth quarter, we obtained BRL 356 million. Totaling for the year, as you can see, BRL 690 million. This is slightly lower than what we had expected in our forecast. Some points, we still have to consider that our motives -- we have lateness, delays. We had licensing problems, and they affected the development of our investment, especially in mining, and other more connected to delays in projects. But nothing too exceptional if you look at the entire normal operations for regular course of business. This is the end of the PowerPoint. And now we have a question-and-answer session.

[Operator Instructions] Our first question comes from Thiago Ojea from Goldman Sachs.

My first question in terms of Eletrobras, which you acknowledge BRL 800 million. And now you have a decision, which allows you to receive BRL 300 million. When do you expect this cash to come in? And how about the difference of credits? And is there any other amount that you are expecting besides Eletrobras? And in terms of the steel industry, we know that it had a more difficult quarter. How do you see the first quarter of 2020 in terms of demand, the recent price increase that you have announced? Do you think this will be implemented and you'll be successful? Could you comment especially for the car industry, the automakers?

Thiago, this is Alberto. Concerning Eletrobras credits, what we have acknowledged, both in 2018 and 2019, was the unquestionable part where we had a court decision which orders Eletrobras to pay us. In 2018, it was a part considering -- concerning the [ Ipatinga ] plant; in 2019, the Cubatão plant. In both cases, we only had the unquestionable part that was paid that the court ordered Eletrobras to pay us. We also have ongoing lawsuits in which Usiminas believes that the amounts that they own is higher, both Ipatinga and Cubatão. Indeed, we inform in our [ DS ] that they are not acknowledged in the final statement. The precise amounts, you can look at our statements and our Investor Relations, is one that is still being discussed. And in terms of this, we believe it's BRL 1.1 billion. That is our interpretation. We are arguing for this, and this is not in the statement. In the statement today, we only have BRL 306 million, which is in the short-term working capital, and we expect this to be received during the course of this year.

This is Miguel. Concerning what Sergio said, the positive expectations for the Brazilian economy, in addition to other indicators such -- lower employment rates, lower interest rates and improvement in investments, lead us to believe everything in terms of demand. The growth for the steel in Brazil should be around 1.5% plus positive. In Usiminas, the goal is to carry on and to continue this -- to be able to meet this growth in demand. The increases that you have mentioned, the ones that were informed last year, they were implemented in the distribution sector. From now on, we have to monitor constantly the international indicators. When you look at the international indicators, both here in [ certain ] and other products, you can see a positive trend for 2, 3 months. Obviously, with all the coronavirus situation, this is a little bit different. But it's a little -- it's at another level -- at a higher level than the international level. Another thing is that the exchange rates has moved, fluctuated in the last 2 months. We have an exchange rate which is 10% undervalued, and various factors will impact in our pricing. And concerning your last question with the agreements with automakers, we signed contracts with American and European automakers, and they were closed with a higher price -- with a price increase.

Miguel, could you tell us what was this price hike in this sector? And Miguel, according to your legal department, do you know when these lawsuits will be concluded?

Well, the pricing -- the agreement, because they are a year every -- they are yearly -- they reflect what happened in the last 12 years and the future expectations. With these variables on the table, we try to keep the level according to competitive prices obviously. But if we look at an exact price increase level -- our compliance norms in Usiminas were reviewed, and I cannot tell you how much exactly we increased. Concerning the lawsuits in dispute, it's very difficult to say. It should take a couple of years for us to have a conclusion. And it's very difficult to forecast, but it's what I can tell you. The undisputable amounts that are owed to Usiminas, we can see, is what happened in 2019. We acknowledged them in 2018. And in 2019, we received the amount -- the payments. So we believe this will happen in the same period of time for the part of -- amounts that are also in dispute.

We now have a question from Daniel Sasson from Itaú BBA.

My first question is for Miguel, concerning pricing. Miguel, could you help us to understand what happened in this drop by 5% in price for the domestic market and in the automaker industry, the pricing decrease in general for distributions? How could this help us understand how much we should be thinking of sequential increases in the first quarter compared to the fourth quarter, especially considering an improvement in the overall mix? Could you explain us the mix and pricing components? My second question is about mining, about the renegotiation of leasing agreements and third-party areas. Could you explain and shed more light what is recurring? Can we think that your cost will be falling BRL 5 per ton, for example, in the future? Or BRL 20 per ton in the semester, but you acknowledge this impact for the entire year? Is it reasonable to think of a fall -- a drop of BRL 5 per ton in 2020? Or this will not be recurring?

I think your question is very important because should have information to be able to try to analyze what future pricing will be. Of course, the mix impacted the average price. For you to have an idea, a novel product may be 20% to 50% in terms of variation. And this pricing level in a novel product and more commercial goods will impact the average price. So we observed the larger impact of the average price or the fall and the drop of those average pricing explained by the mix of goods.

Daniel, as you said, in the last quarter, we had an impact on -- because of the renegotiations of the leasing agreements, in which we had a cost reversion for the entire year 2019. For the future, what we can expect is we have to follow the historic cost because we do not have a strategic long-term definition. As our material has shown, it will depend on the use that we may have for the [ court tax ] agreements that we are paying.

Just one follow-up. Miguel, 100% of the price drop has been priced by the mix. You did not have a drop in pricing in distribution. Is that it? I just want to try to understand it better.

Just to clarify, around 90% can be explained by a worse condition of the mix, yes.

Our next question comes from Mr. Leonardo Correa from BTG Pactual.

My first point, for Eletrobras. Just to see if I understood this, what is -- what remains that will be -- may come BRL 300 million. That is the undisputed amount, right? You don't have a period for this, but you'll be receiving this in 2020. The BRL 1.1 billion which is disputed in court can take a few years. Is that it? Because I believe this was not 100% clear so I just want to make sure I understood -- I understand. And my next question is if I look for the next quarter, and I'm focusing on the first when I say this, in the past, you helped us to understand the evolution of the quarter, talking about an expectation of price increase and an expectation of cost decrease. Could you help us understand this now? How can -- how much can the price or cost change per quarter? And my last question is according to the lines, focusing onto -- on galvanized and in the fixed rate, I think -- I know they are very different products, but what are -- is the idleness, what is the idleness rate in electroplating or galvanized steel? I would like to confirm these figures with you.

Leonardo, concerning Eletrobras, your understanding is correct. So the undisputable rate -- amount to BRL 300 million, and it will be received during this year. The disputed amounts are still submitted to the court and depend on the justice system. The last information we had is that it's going to take a couple of years. In terms of cost expectations for the first quarter, the expectation is that we have a reduction. Again, as Miguel, with a review of compliance norms, we cannot give you the precise number, but the trend is a downward one. Concerning the pricing, as Alberto said, there is a trend for pricing and a trend for the level -- local level. And what happened in the last 60 days that will be affected is that we see an increase of between 8% to 12%. If you look at exchange rates, it's also a downward level. And we should look at a positive trend in the local market for the future.

This is Julio. I'll -- I'm going to talk about our full capacity of our plating units, both Ag and HDG, the coverage. And therefore, in plated, we are occupying 100% of our capacity. In terms of the thicker plates, we have a lot of thick plates. In Ipatinga, for example, we could increase 400,000 tons in terms of capacity. That's what's available there, without mentioning that we have a sixth plate in [ Saca Grasa ] in Cubatão that is under capacity. Therefore, we are operating 30% of our capacity that is not being used. We have a lot of availability at disposal.

Our next question comes from Mr. Thiago Lofiego from Bradesco BBI.

Miguel, if you could comment, after the price increase, I believe that this was, what, 10%. What is the discount that you have in terms of domestic steel and imported steel? And if you see a discount, what -- is there room for an increase in March? And my next question is adding to what Leo said about the thick plates. How do you see this new demand or this pickup in demand of thick plates? You have a more -- a clearer outlook for 2020? Or should we expect this to take place? And the last thing is -- my last question is, how is the issue of expansion and compact being developed? I know it's still far away, but I believe we should understand what is the expectation concerning this asset.

Thiago, concerning the parity, as you have said -- concerning the evolution of pricing and the drop in the exchange rates, we are operating at a negative rate because of this low -- and weakness of the real. And therefore, the 10% is healthy for the local domestic. And we should expect a positive trend in the future. In terms of the thick plates, this is impacted by the level of activity of infrastructure and the naval industry. And another thing is that we have a higher level of exchange rate, which will affect the future demand. We do not have full data on this, but we also will depend on the projects of the local market. Yes, we can expect growth, where we can have specific increase in the next 12 months.