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 conference call of Usiminas, in which the results of the second quarter 2020 will be discussed. [Operator Instructions] Let me remind you that this conference call is being recorded. This presentation accompanied by slides is being broadcast over the Internet at www.usiminas.com/ri. In it, you will also be able to download a copy of the company's release. Participants who are listening in English will also be able to ask questions directly to the speakers. Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business as well as projections, operational and financial goals related to its growth potential constitute forecasts based on management's expectations regarding the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation of international markets. So they are subject to changes. With us today are Usiminas Executive Board, Mr. Sergio Leite, CEO; Mr. Alberto Ono, Finance, Investor Relations and Corporate Planning Vice President Officer; Mr. Américo Ferreira, Industrial Vice President Officer; Mr. Kohei Kimura, Technology and Quality Vice President Officer; Mr. Miguel Homes, Commercial Vice President Officer; Mr. Carlos Rezzonico, Managing Director of Mineração Usiminas; Mr. Ascânio Merrighi, Managing Director of Soluções Usiminas; Mr. Heitor Takaki, Managing Director, Usiminas Mecânica; Mr. Bruno Paulino, Head of Legal Department; Mr. Julio Arroyo, Controller; and Mr. Leonardo Karam, Head of IR. At first, Mr. Sergio Leite will make some initial considerations. Then Mr. Alberto Ono will present the results for the second quarter 2020. Then the officers will be available to answer the questions asked. Now I turn the call over to Mr. Sergio Leite. Mr. Leite you may proceed.

Thank you very much. Good morning, everyone. Thank you very much for attending our conference to discuss the results of our company. We are addressing you at a scenario which is very different from what we saw in May when we announced the results of the first quarter at the peak of the pandemic. Today at Usiminas, we are confident that what's about to come, the pandemic continues. However, we have a perspective of growth recovery. Market indicators, all the positioning of several players, economic players have been very positive so that we can move towards a positive scenario. We are confident that this scenario will continue. And we would like to communicate to you, and we do this with a lot of pleasure, that we are returning our last furnace of Ipatinga. We are reforming the operations at Cubatão. And we are also increasing our guidance for investments considering the healthier situation of the company. All in all, we are starting the third quarter in a very different scenario that we saw in the second quarter. In the second quarter, pandemic was a moment for reflection and action. We worked intensively during this period to minimize the effects that we had, the serious ones that we had in relation to the pandemic affecting the economic situation of the country and preparing our country for the moment of recovery. And this is the time we are going through right now. As you all know, we restructured Usiminas Mecânica. We concentrated the businesses of this company in order to provide services and also in the other 4 companies of the company. We -- the Board approved unanimously some actions and Usiminas Mecânica will be a company that will add positive EBITDA. We also restructured our activities in Cubatão, where we are now adopting a new configuration in this month of August, and we'll make it ever more competitive. We have made, and we are going to continue working on increasing the competitiveness of our operations in Ipatinga. And Soluções Usiminas also goes through a moment of increasing its complexity and changing its structure. So this has been propelled by the pandemic that led us to profound reflections. And we made immediate actions related to resilience and adaptations. It was a period that will remain in our memories of a time of a lot of suffering, a lot of fight, a lot of struggle. And in March, when the pandemic was [ told ] in Brazil, on 26th of February, when the first case was recorded, we adopted deep and immediate measures. We formed a Coronavirus Crisis Committee. And we worked 7 days a week in the beginning, and they did a great job. And we have a social part which is very important, which is Fundação São Francisco Xavier, the foundation that allowed us to follow this path in scientific and professional way. And we have competent professionals working at that foundation. And this will always -- this will be our greatest priority, to preserve safety, health and the life of everyone. And this is a work that we have been doing, not only involving our operations and employees, but also the trade partners, the third parties that work with us and also the communities. We invested more than BRL 27 million, providing support to the communities, all the operations of our hospitals. And important to mention that we have 4 hospitals located in the steel area in Itabira that has a very large influence in the region and where Vale, our partner also works and also in Vale [indiscernible] And it's important to mention that our hospitals provided services to 90% of our communities. All those people who needed support, we were there. So we did a very important job. In March, our second priority at that time was to do a proper management. And we had to manage our cash as our second priority. So we worked hard on this. And we are very happy to mention that we have had good results as our cash management results, the controller cash ended the quarter as the third highest cash level of the previous years. And the result is very important and brings us a very healthy situation in terms of finances. And if we look at the consolidated cash, since the second quarter 2019, every quarter, we have presented consistently an increased cash. Today, at the consolidated level, more than BRL 2.5 million. So the cash management work that included all the team of Usiminas when we looked at the working capital, doing an excellent job. We are going to see details during the presentation. And the good news is that we will have an inflow of BRL 300 million that Eletrobras has already deposited, and we are just -- the management of how to do the transfer, so we have this additional amount in our cash. And so we are going to add BRL 311 million to the positive results that we have already achieved. The third focus that we had, and we are going to work on this in the next quarters, are the results generation. In the second quarter, we had an excellent performance of our operations in mining MUSA. We generated EBITDA, which was a record of all quarters of the company, a company that has been in operation for 10 years. So it was the best quarter. In the second quarter, we also granted the installation permit of the dry stacking for the mining. We are working hard on this investment already. And this is going to go live in the first quarter 2021. We eliminated the operation of our last dam, which is a downgrading dam, and we are going to work with dry stacking. So we have been working on mining, and the result has been very positive. So all in all, we have been working hard on this restructuring, preparing our company to the new periods to come. We are increasing our investment guidance in 33% from BRL 600 million to BRL 800 million, which is also a very important aspect to consider. And today, we are bringing it to you together with the results of the second quarter that we are going to present in a short while. So it's a prospective network that has been done in order to prepare our company for the new challenges, the new scenarios in Brazil and I believe the rest of the world so that we can build together the present and the future of the companies. Thank you very much for your attention, and I turn the floor over to our Investor Relations, Corporate Planning Vice President Officer, Mr. Alberto Ono.

Good morning, everyone. Again, I would like to thank you for attending this earnings call. And let's move on to the Slide #2 of our presentation. And these are the main figures of the company. First, steel unit sales. We can see here that the largest impact of all the coronavirus pandemic effects can be seen here. We had a significant reduction by 42%. As we have said before, in the last call, we said that the Brazilian company had its industries nearly come to a stop in April. So this impacted the sales quite significantly. In relation to iron ore sales, we can see there has been a small reduction of -- in our sales. This is a result of a planned stoppage for maintenance activities. But this is not likely to repeat in the quarters to come. So we are likely to recover the volumes that had been lost in this period up to the end of the year. In terms of EBITDA margin, we can see the results of the impact, especially in the steel unit, but also other businesses were affected. So we had a drop of 66%, with 8% of margin. And it's important to mention here as we will show in more details during the presentation, we had no recurring effect that affected the results of the second quarter. In relation to the net profit, again, we had reported a loss, a bit smaller, BRL 395 million. And here, we can see the net exchange variation was smaller. In the previous quarter, we had an FX change of BRL 174 million, 5%. So it's a result of the operating results that impacted the -- this loss. Next slide. We can see a sequence of EBITDA of the latest 5 quarters, we would like to draw your attention on this slide that there is this information of nonrecurring effects. And if we do not consider those effects, our EBITDA would have been BRL 281 million. Out of those nonrecurring effects, we have the provisions associated with the COVID-19 impact that affects the production perspectives because those are provisions associated to what is likely to be observed in the quarters -- in future quarters, more specifically in the third quarter. And then we have the impact of doubtful accounts and the associated provisions. This is considered nonrecurring because the sale was related to an energy sale in 2019, and the client who purchased that energy had problems to pay. We were negotiating the payment. But unfortunately, in this quarter, this client went bankrupt. So we had to recognize this provision of loss, which was related to energy sale related to 2019. And lastly, the restructuration cost of Usiminas Mecânica, which will be reflected in the other quarters. It's nonrecurring that will -- was done now, but the effect will be felt in the future quarters. Without those effects that amounted to BRL 89 million, our EBITDA would have been BRL 281 million. In relation to Steel unit, as can be seen on Slide 4, we can see the nonrecurring effects that has its operational aspect that was impacted by the expressive drop in volume. So we can show the number of BRL 102 million, but the impact is more than double of what would have been the negative operational EBITDA. Next slide. Mineração Usiminas, as mentioned by Sergio, in spite of volume, which was a little lower than the previous quarter. So we reached BRL 380 million, which is the highest result of the quarter, with 50% of margin. So this is very favorable to us. And this was an action that was well used by our company. Next slide. We can see the steel transformation Soluções Usiminas. And we can see there has been a reduction in sales affecting the EBITDA. So we had a negative EBITDA of BRL 11 million. And moving on to the next slide. Lastly, Usiminas Mecânica. In addition to the provision for the restructuring of Usiminas Mecânica, we also had, for this specific company, COVID impact in the quarter. They were recognized in the quarter, and they were associated to a lot of stoppages of some construction works that were being carried out at clients. And they stopped, and they had to follow the guidelines established by their own companies related to COVID-19 crisis. So we have these costs that were recognized in the quarter. Now talking about other financial indicators on the other slides. As has been mentioned by Sergio in this presentation, as for working capital, we had 5% reduction. And we went back to a level of BRL 4.1 billion. And as we have already mentioned and also contained in the release, we had a judiciary deposit in relation to the -- deposit received by Eletrobras. So if we do not consider this aspect, we would have reached the level of working capital at BRL 3.8 billion. So it is the lowest working capital level in the past quarters. In relation to steel inventories, as we can see on the next slide, during this quarter, we had a 4% reduction. So we can see that we have been managing this drop in the volume of inventories so that we can have a more stringent control of our inventories. So this shows that the measures adopted led to good results, and this can be seen in the result of the working -- our working capital. But in function of this drop, the working capital has been increased, but the physical volume has been reduced. Next slide. We talk about cash position and indebtedness. As Sergio mentioned, we have been going in this continuous trend. So if we look at the cash position today in a consolidated manner, we can see that as of the second quarter of 2019, we have our cash doubled. Now we reached BRL 2.5 billion. And FX variation affected the debt, as I mentioned, and this makes our gross debt increases. So about BRL 300 million. So the cash was balanced partially, but it was impacted by a lower EBITDA and the increase of gross debt, which was not totally offset by the increase of cash. We have an increase of our leverage. But we believe that even though we have seen this increase, the level is still quite reasonable considering everything that is happening now. The focus now, as Sergio mentioned, is to preserve our liquidity and you can see this very clearly and that we have reached this objective. Next slide. We will discuss our CapEx. And in this quarter, we reached BRL 193 million of realized CapEx, BRL 11 million more than the previous quarter but practically at the same level. And as mentioned before by Sergio, we have extended our guidance to BRL 800 million. And this is basically due to the projects. And the main one is the dry stacking, but there are other projects as well connected to the mining activities. And they all make a lot of sense considering everything that we have been observing along the previous quarters. So we are going to concentrate this increase allocated in the mining activities. So this is the presentation, and we will now open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Mr. Gabriel Galvão with Crédit Suisse.

My first question is related to how you see this recovery of steel demand in this month. Could you provide more details on the comparison on a monthly basis and as to last year? And could you give more details on how the assemblers are doing? So you would -- you said you would expect those levels to normalize. And what about the pricing -- price increase in the domestic market? You announced an increase of price in July, and I would like to understand if this increase has been approved, and there has been a movement to increase prices. Do you intend to accompany this price increase? And how big would this increase be? And how you see parity today? And what would that mean after the increases?

This is Miguel speaking. It's a very complete question, right? So you're talking about demand and price. So it's important for us to understand how the recovery is happening, the demand recovery. It's important to understand what happened in the previous quarter. The result of the sector was announced together with the forecast for the apparent consumption of steel for 2020. When this -- when Aço Brasil announced this, it said that the sector had a drop in its plant of 17% in relation to the -- year-on-year. So there was a drop in the apparent consumption for the whole quarter of 13.5%. When we consider the whole year, Aço Brasil estimates there will be an apparent total consumption. And -- but it gives no details of which is long and which is short. And we should expect a drop in apparent consumption higher than 14.5%. And as for Usiminas, Usiminas follows those indicators and is an -- because it's an active part of Aço Brazil. In relation to Usiminas for the second quarter, as you know, Usiminas, we are -- we have a very important presence in the automotive sector. So the drop of production was very high, and the recovery has been important considering the demand. So there was a drop in production. But in May, there was a drop of 105%. And in June, there has been a recovery in the production of vehicles, reaching a level of 100,000 units, which is a drop compared to the previous year of 60%. This drop in the vehicle production is 31%. It's a very strong impact on Usiminas. When we consider this important drop together with a strong drop in the household appliances, this can account for 40% of impact. But we can see that along the quarter, the sales have been evolving, but it's a drop of 44%. And this is how the sales evolved a company in the sectors where we operate. ANFAVEA has estimated that production will be kept at 45% with the sales drop in exports of 50% in the automotive sector. We are looking at the future with good expectations. So we can see that the level of cars put in the market is higher than the previous period. So this would lead to the increase in production because the inventory levels are very low in the automotive sector. And we have to watch closely because when consumption recovers, the inventory -- which is very low in all industrial chains. So we are, in other words, prepared for this consumption recovery both in our inventory levels and as well as our production levels. In relation to the price, it is also important to say that we are showing the -- an average price of 1% drop in comparison to the previous quarter. In May, we mentioned that we are facing a scenario of negative parity. At this time, what happened, as you said, we had an increase in price in July, yes, as you mentioned, about 10% for the sector. And also, there was a drop in the value of the dollar. If we consider the parity of 10% and also the evaluation of 5% of currency and we consider all this, we would have a positive parity of 5%. But what happened in the international prices is that there was an adjustment of nearly 50%. This leads to a negative parity. And as we said, in different opportunities, we cannot have a negative parity. It's not very good for our -- to the health of the company. So we are going to -- want to return to a healthy parity in the short time.

Okay. And what about the increase that you're planning for September?

We do not talk about figure events. Maybe you should -- you could come to a conclusion after all we said today and what we would do to return to a healthy parity.

Our next question comes from Mr. Thiago Ojea with Goldman Sachs.

My first question is in relation to the restart of the blast furnaces, especially in Cubatão. How do you see the price dynamics of plates, what would be a healthy price for the production of plates after you start operation at Cubatão? And with the improvement in the cash position, you mentioned the increase in CapEx, but do you see any possibility of adopting a different policy for dividend payout and/or allocation of capital?