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

Good morning, ladies and gentlemen, thank you for waiting. Welcome to the conference call of Usiminas to discuss the earnings release of the fourth quarter '22 and for the whole year of '22. I'm Leonardo Karam, Manager of Investor Relations for Usiminas. Those who want to follow us in English, the translation of the webcast presentation is available on the Usiminas IR website. We also have an interpret for simultaneous translation. Choose the sound channel on the icon Interpretation on the bottom of your Zoom screen. [Operator Instructions] This conference call is being recorded and being streamed through YouTube channel. This is a conference exclusive for investors and market and analysts. [Operator Instructions] Questions made by journalists can be submitted to Media Relations of Usiminas using phone (313) 499-8918 or through email imprensa@usiminas.com.  Before moving on, we would like to clarify that forward-looking statements that may be made during this conference call with respect to business prospects, forecast, operational and financial goals of the company and its growth potential are all based on beliefs and assumptions of the Executive Board of Usiminas. These expectations depend largely on the performance of steel industry, domestic economic conditions and the situation of international markets and therefore are subject to variations. We have here with us today, the executive team of Usiminas, CEO, Alberto Ono; VP of Finance and IRO, Thiago Rodrigues; Industrial VP, Américo Ferreira, VP of Corporate Planning, Gino Ritagliati; VP of Technology and Quality, Toshihiro Miyakoshi; Commercial VP, Miguel Homes; CEO of Mineração Usiminas, Carlos Rezzonico; CEO of Soluções Usiminas, Leonardo Zenobio; and CEO of Usiminas Mecânica, Fernando Mazzoni. Alberto will make his initial remarks followed by Thiago, who is going to present the results. Later, questions submitted through the Q&A will be answered. Let me now hand it over to Alberto.

Good morning, everyone. I would like to start by thanking all of you for being here with us in our conference call of the fourth quarter '22, and we are also going to go over the results of the full year '22. 2022 was characterized by major volatility. You've all seen how we evolved throughout the years with some events that we were not anticipating, but they turned out to be a reality, and that impacted not only the steel sales, steel processing and also the economic perspective, which started with the Russia, Ukraine and more. In the first half of the year, we've emphasized that extensively before, but also COVID cases in China, and that impacted lockdown and impact of supply chain, also the decrease of the development of Chinese economy. And finally, here in Brazil, the elections and the expectations for the election of the new President. It has all resulted in a very volatile complex situation. And for Usiminas despite all that, the results of the year have shown that we have still delivered consistent results. It was the second-best result for the past 13 years. Despite the complex scenario throughout the year, the complex situation presented consistent results.  Let me also emphasize that 2022 was the year in which we celebrated 60 years of our operation. In Ipatinga, a company for a long time in Brazil, we are now going in into a period where the CapEx and the investments is required in renewal of equipment, overhauling and so on. It has already been accounted for in the investments that we made in 2022 and the same applies to 2023, as we've already communicated. So it's important to bear in mind, we've been in operation for 6 years in our main site, which means that we require investments to renovate, realign and recover most of our equipment. I'll say that these are the main highlights that I wanted to share with you, and I'm going to hand it over to Thiago, who is going to talk about the results and our highlights.

Thank you, Alberto. Good morning, everyone. Let's go on with our slide presentation. We can go to Slide 2, where we can see the main highlights for the period, something which we have already published at the end of December, which Usiminas is now part of the ISE, which is the Corporate Sustainability Index of B3. Confirming our commitment with sustainability of operations, something that really makes us very happy. We are the only steel company that is part of this index. In terms of revenues, we had the second highest annual net revenue in history, BRL 32.5 billion, BRL 7.7 billion in the fourth quarter, and I'm going to provide further details. In terms of EBITDA, it was also the second highest for the past 14 years, BRL 4.9 billion in '22, BRL 579 million in the fourth quarter. Second highest annual net income in the past 14 years, BRL 2.1 billion profit with loss of BRL 839 million in the fourth quarter due to internal factors and we are going to share with you later.  In December, we completed our 9F issuance of debentures, BRL 1.5 billion with a maturity of up to 10 years, very favorable conditions. So BRL 2.2 billion issued in 2022. Solid cash position of BRL 5.1 billion, very comfortable level. and net debt EBITDA of 0.2, which shows really our solid financial position. And we are going to keep on increasing our slab inventory for the relining of BF-3 as initially planned. Now going to the next slide, we can see the consolidated numbers for 2022. The first chart, we can see still sales of 4.2 million tons, 12% below '21, but still above the period before the pandemic. In iron ore, BRL 8.6 million within our guidance of 8% to 9%, even with problems with supply chain and projection and the production in the beginning of the year because of the rain in some of our sites. Now in terms of consolidated net revenue, BRL 32.5 million, below EUR 21 million, but still at very high levels if we compare against 2018 to 2022. Adjusted EBITDA has presented absolute and margin drops -- marginal drops. If and so it's the highest of the past 14 years. And this drop was due to effects in steel production and in mining as we are going to show you later. And net income of BRL 2.1 billion, just following the trend of a deterioration of some of the margins. Now in the next slide, we can see consolidated numbers of the fourth quarter. There was a reduction of the main indicators of results caused primarily due to lower volumes and low prices in the steel unit. And we're going to see that specifically in the upcoming slides. So 7.7 billion net revenue, 9% below the third quarter EBITDA, BRL 579 million, with a decrease of 2.3 percentage points. And net income in the quarter, there was a net loss of BRL 839 million, including BRL 1.4 billion of the impairment effect. The company has run some variability recovery of some of the assets. And due to the high investment levels required for coming years, generated impairment of BRL 1.4 billion in the steel unit and a reversion of an impairment that we had already recognized of BRL 0.3 billion. Now speaking of steel unit sales volume was higher than the guidance, 963 tons. Our guidance was $950 million. We expected that decrease due to seasonality because the last quarter of the year tends to be weaker. The good news is in the internal market, domestic market, we exceed the volume of the fourth quarter of previous year of fourth quarter '21, showing favorable conditions in the domestic market. Net revenue, we can also observe a reduction primarily due to prices in the domestic market, the reduction was 5.9%. Adjusted EBITDA had a reduction over the third quarter, '22, but with a positive effect on costs as we can see in the next slide. Here, we can see the main reason for EBITDA reduction, which was due to price and sales volumes, partially offset by lower costs. There was a reduction of the cost by tons of 6,640 in the third quarter to 647 in the fourth quarter. We also had the expectations of decrease of cost due to the cost of raw material, primarily the slabs and some stability in operational indicators.  Concerning mining, minerals in Usiminas, we closed the quarter with 2.2 million tons of sales, the largest volume in the year, quarter-over-quarter, and we can see stability in revenues and EBITDA level, reflecting then the market indicators for the period. Usiminas Solutions, [ Solso ], similarly to the steel unit, a lower sales volume over the third quarter '22, but still above the fourth quarter '21 with reductions of revenues and EBITDA because of lower prices being applied. Now going into financial indicators, working capital. It has presented the stability just a minor reduction over the third quarter, even with the increase in inventory levels of slabs because of better control and reduction of inventory, especially of coal and Co, which have really helped us maintain stability levels and also a price repositioning of these materials. Concerning steel inventories, as you can see on the right, we have the necessary inventory levels for the shutdown of BFI. We have here the level of inventories as had been initially planned.  The next slide shows us the CapEx for the year, consolidated caps of BRL 2.1 billion, somewhat above our guidance was 2.05. This was due to the activities that are setting motion. And the closer we are to the main renovation of the unit, more activities are required. So that's expected. During the fourth quarter, there were BRL 215 million invested in the renovation of the blast furnace and also in the steel operations 611 million. So total BRL 611 million invested BRL 1.5 billion or rather BRL 1.1 billion in the other activities of the steel unit 364 for mining. The next slide, we can see the impact it has on cash generation of EBITDA improvement of working capital all offset by the CapEx invested in the period. So we had a BRL 65 million reduction in cash position, which has not impacted significantly our results. Now going into cash position, net debt and amortization. We've maintained a very well-controlled net debt, BRL 1.1 billion and the leverage index of 0.23x EBITDA, which is still a very comfortable level for the company.  With the issuance of the new debentures, we have now a maturity -- some of the balance for 242.5 were extended for 10 more years. So now we are not going to have any significant debts to pay within the next 10 years, which means we can keep on making the investments as originally planned. Now to close, I would like to tell you about our ESG agenda. Once again, we were included in the ISE index and the main factors that enabled our inclusion in the index are shown here. We've created the area of risk management and internal controls management. We've also approved our risk management policy in the company. which helps us with governance giving more transparency and control. We've also evolved in the steel chain project, which includes suppliers and bring suppliers to be our partners so that we can reach our sustainability goals. We've also completed our emission inventory recognized by GHG protocol. And we've also participated in the carbo disclosure project, providing all the important information for the industry. For the second consecutive year, we are also part of the carbon-efficient Index of B3.  The next slide shows our ESG goals and our status throughout the year. Most of them were met. So water recirculation in Ipatinga, contraction of clean energy, engagement of critical suppliers with Scope 3 of the climate agenda, reaching minimum level of women in our printed training groups and execution of our innovation pilots as well as the certification of rolled laminate steel. The other items were not met yet. So GHD inventory, we completed that for MUSA, but not for Soluções Usiminas. Lost time accidents were outside our expected rate. This is something that we have a full commitment with the general Customer Satisfaction Index was very close to our goal, and this is constantly monitored by us and implementation of our environmental compliance program, which had some changes to scope and we are going to have it completed now in 2023. So that was the overview of our results. And with that, I'll hand it over to Leo, so that we can go into the Q&A session.

Thank you, Thiago. Let's start our Q&A session now. The first question is asked to Miguel by Daniel Sasson with Itau. And he asks you Miguel, what are the results of the negotiation with the automotive part for contracts being renewed in January? Do you have the same expectations for contracts which will be renewed in April.

The negotiation with contracts renewed as of January 1 were concluded at the end of December, and the results led to 12% price adjustments. It's important to emphasize the duration of contracts. In the Brazilian market, we had been using 12-month contracts. But as of '23, January 1, now contracts of most of those contracts will be 6 months because of the volatility that we've come across in both the domestic and international steel industry.

Another question to you, Miguel, about demand in the domestic market. Leonardo Correa of BTG, Carlos De Alba of Morgan Stanley ask whether you can anticipate any improvement of demand and which are the industries that are surprising you in terms of higher demand. Any other comments concerning demand for flat steel?

The local demand seems to be stable, aligned with the expectations of growth or evolution of consumption of steel in 2023, disseminated by Aço Brasil in its last conference call. We see it stable. We don't anticipate any sector, except for oil and gas, which has been developing and presenting important projects of oil and gas for the past 8, 10 months, and there are still some ongoing discussions and quotations. So I would just highlight oil and gas. But in general, we expect very stable demand similarly to what we've observed in the past 6 months. So flat demand in other words.

Miguel, one more for you. Prices in the domestic market, Daniel Sasson and Itau, Leonardo Correa of BTG. So what were the prices in December as opposed to the average of the quarter. And Leo asks whether it has been difficult to have a price adjustment in this more challenging market.

Well, concerning the average price in December in the domestic market was 1% lower than the average price of the quarter. So very much aligned with the average price of the fourth quarter '22. It's always challenging really to have price adjustments. It requires negotiations, complex negotiations. But we believe that the foundations for price adjustments are solid, are robust because we are under pressure. And the whole steel market globally is subject to pressure and increased cost, especially because an increase of ore and carbon in the past 6 months. So by having a robust system and by really showing them the increased costs, we've been successful in our price renegotiations.

One more question to you, Miguel. People are asking about exports. Isabela Vasconcelos from Bradesco is asking what the prices of export still have been quite healthy. What can we expect in terms of volume and prices for the upcoming 6 months.

Exports will be focused on added value products to markets which are more profitable to Usiminas. There is a very important challenge, which is the relining of a blast furnace 3. So we want to have a profitable market for exports. We expect export levels, which are stable to the levels that we've had in recent quarters. So focused on automotive industry. We have a very significant share in the region and also oil and gas projects, which are added value products, therefore, offering better price margins.

Thank you. And there is one more. To Usiminas Solutions and maybe you can ask the Nobia to add. So Soluções Usiminas, Carlos De Alba is asking, what's the outlook for Soluções Usiminas?

Well, in terms of sales, we also follow the market. The area of solution, Soluções has a sales mix very similar to that of Usiminas as holding, right? So it adds in the automotive industry, according to the last report, there is an increase in the -- there is an expectation of increase in car manufacturing at 2%. So we believe Soluções Usiminas will also have increased sales. We expect to have a total increase of flat steel consumed in Brazil as well. So Usiminas is expected to follow along the natural movement. So Soluções and Usiminas, the holding, our focus on added value products on long-term commitments and development of products that can really meet specific market requests.

Now one question to Thiago. I try to encompass a number of questions. Most are asking about the CapEx guidance that we announced today, Daniel Sasson with Itau, [ Lucas Diogo ] of JPMorgan, Rafael Barcellos of Santander; Carlos De Alba of Morgan, Sean Martin of Goldman Sachs. They all want to know about the guidance of CapEx concerning the increase of CapEx guidance, our expectation was announced of 2.4% last year, and now it's BRL 3.2 billion. That's the CapEx for 2023. Daniel says that the CapEx for the relining of the blast furnace has not changed. So He'd like to understand whether the increase is just due to maintenance or should we also expect that's going to be carried on in upcoming years. Lucas would also like to know more details about the CapEx and Rafael would also like to have some more details, and also Carlos. They all would like to elaborate further. Are there more projects than relining of blast furnace 3, concerning the CapEx new level. And finally, Marcio Farid, just concluding the guidance on CapEx has asked, what would be the CapEx for recurring maintenance from now on? Thiago?

Well, thank you for your questions. So many questions within one. So let me set the context and then we can always build up on it. So the first important point is, we talk a lot about the CapEx of blast furnace 3, but there are other relevant investments being made in other operating units of Ipatinga, which are going to take place. At the same time, it does have the relining of blast furnace 3. For example, maintenance or overhauling in one of our reoperations with over BRL 500 million. It has not had any impact in values. What we have had is an increased value of CapEx of palliatives we have in the operations of Coke. They were partial for '22, and that's going to be throughout the whole year. And with this stop of blast furnace in the Coke operations, there would be a reduction of the sustained CapEx. And we've reviewed the plan, we are maintaining the sustained CapEx at similar levels as we had in 2022. And this has increased the total CapEx of the steel processing. The maintain cap is between BRL 801 million. So in addition to the main shutdowns that I pointed out, some other activities will be carried out at similar levels as in 2022. As we are going to have the shutdown of important pieces of equipment. So by doing that, we can take the opportunity and also perform other works once we are going to have enhanced yield and productivity once the blast furnace is back into operation. We've also had some CapEx for mining, primarily the compact project study and the beginning of the environmental license process and also the plant of [indiscernible]. The tailings area of Samambaia it's also going to be a very important point and it has requested more impact in that. And also the Usiminas Solutions, it will have higher CapEx than previous years, really maintaining all the different lines and also all the different added value to our products. Well, I hope it has been enough. Please let me know if you'd like to know any further details.

Maintenance recurrent CapEx for sustaining and for everyone in between BRL 800 million and BRL 1 billion. That's great. Now the next topic concern costs. Caio, Bank of America, Rafael Barcellos of Santander are asking about cost expectations for upcoming quarters. Can you please tell us a little bit about that, especially concerning the relining of the blast furnace? And how do you expect that cost dynamic?

Well, we don't give any guidance on cost. But what we can tell you is that the market indications show that in the first quarter, we expect to have a positive cost impact of raw material. So slabs and some other raw materials which are coming at a lower price in terms of COGS than what we currently have. Operationally, we don't expect any significant changes. Just a small reduction by price and operational stability, aware of the fact that we are coming very close to the relining of the blast furnace, and there might be instability. So stable costs in the first quarter compared to the fourth quarter '22.

Thank you, Thiago. The next question is through Carlos. Caio Ribeiro of Bank of America is asking about the guidance of volume of mining. You've announced 8.5 to 9 tons per year. But with the relining of the blast furnace, do you think there's going to be increased sales to a third party? And if yes, how long can we expect it to expand?

Thank you, Caio, for the question. We've been monitoring the variation of demand and what it will mean in terms of the relining of the blast furnace. So we are planning our sales based on that as well. There is a very important part of the volume, which is going to be directed to export primarily concerning the fine ore all the granular bulk will be directed to the domestic market. And we are also considering sales to this market. The main purpose of Usiminas is not to impact our production considering the limits that we all have for -- in terms of increase. That's it. Leonardo, thank you.