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

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Usinimas Conference Call in which we will discuss the results of Q1 of 2023. I'm Leonardo Karam, the Investor Relations General Manager. To those who want to follow us in English, you will find translation of the web's past presentation on the use of Insr website. We also have simultaneous translation to the sound channel on the icon at the bottom of your sunscreen. All participants are logged on listen only mode and questions can be asked in writing through the Zoom Q&A session icon at the bottom of your screen. Participants who are listening in English will also be able to ask questions directly in this section. This conference call is being recorded and simultaneously broadcasted by the Usinimas YouTube channel. Please note that this conference call is exclusively for investors and market analysts. Please identify yourself so that your question can be answered and for better flow, please limit your questions to 2 questions for participants. We also request that any questions from journalists by directed to Usiminas Media Relations by phone 31-3499-8918 or through email [email protected]. Before proceeding, we would like to clarify that forward-looking statements made during this conference call regarding the company's business prospects as well as projections, operating and financial targets related to its growth potential are forecasts based on management's expectations of Usiminas future. These expectations are highly dependent on the performance of the steel sector, the country's economic situation and the situation of international markets and therefore are subject to change. With us today is Usiminas Executive Management; our CEO, Alberto, the Vice President of Finance and Investor Relations, Thiago Rodrigues, the Industrial Vice President of Medical headed the Vice President of Corporate Planning; Gino Ritagliati, the Vice President of Technology and Quality, Toshihiro Miyakoshi, the Commercial Vice President, Miguel Homes and the CEO of Mineracao Usiminas, Carlos Rezzonico. Initially, Alberto will now give some remarks, and then we will have a Q&A session. Alberto, you have the floor.

Well, good morning to everyone. Once again, I thank you for your participation in our earnings results for Q1 of 2023. During this quarter, vis-a-vis Q4 of last year here we can present improvement in terms of our operating indexes in steel and financial indexes by enlarging each one of our operations as well as our consolidated results. And this is a result of the hard work of the Usiminas team that has been trying to deliver the best performance to you after the bad performance of Q4. As we had already stated during our last presentation, during the results of Q4, this was a point that we would strongly focus on, and we would be pursuing for better results and I believe that during this quarter, we were able to achieve this target. Another aspect that I would like to highlight here in our earnings results call is that we are very close to the shutdown of our blast furnace in Ipatinga to rest. And there will -- we will start the overhaul and the shutdown of our equipment is scheduled for the upcoming days and everything is going according to our plan. Our plan is being strictly followed that is as expected from the aspect of intervention of equipment and a number of works are underway in the surroundings of the equipment, but now I believe we will intervene within the equipment, and we -- this will happen in the upcoming days and all the preparation regarding the inventory of semi-finished products. I'm talking about plates. In order to service our customers and our markets during the period, we will not have production of steel in Ipatinga. Well, I believe that this is complete. So we have an inventory to fulfill this, the production of our plates-- of our slabs are ready. So we do have a slab inventory to service the market according to our plan. And now I will show you in detail our figures, but I would like to highlight our commitment together with the published with the ESG targets as we did in the past years. Here, we have some goals are an extension of what we had last year. Some goals are new goals. But once again, I would like to highlight how committed our management is to these goals. All our goals are connected to personal or collective goals. Now I will give the floor to Thiago.

Thank you, Alberto. So we will start with our earnings result. We always start with the highlights of the quarter. So during this quarter, the first quarter of 2023, there was an increase in sales. We would like to highlight the domestic market. This is 7% growth vis-a-vis the last quarter and 8% vis-a-vis Q1 of 2022. Well, a 35% increase in adjusted EBITDA and increase in all business units. This is something that we will see subsequently a cash generation of BRL 764 million with a reduction in our working capital despite the increase in our slab inventory. Now our net debt dropped 75% vis-a-vis the last quarter as well as the net leverage that is close to 0. And as Alberto already mentioned were preparation, the preparation for blast furnace 3 relining according to the plan. So the blast furnace will -- in the upcoming days will go through an overhaul. Now the results, consolidated results here in the net revenue, there has been a drop in the consolidated net revenue during Q4 of 2023, mainly because of the lower volume in the mining industry and a drop of prices in the steel area that we will give you more details after. And moreover, there has been a significant improvement in our EBITDA. We totaled BRL 783 million EBITDA with a significant improvement in margin that totaled 10.8%. And this we will see this in each one of the segments. Net income following the same trend, BRL 544 million during Q1 in percentage. This is an increase in comparison to the past quarters and the net profit was higher. Now when we see the steel unit result that we already mentioned, an increase in sales, we totaled 1.35 million tons of steel sold with an increase of 7% vis-a-vis Q4 of 2022 and an increase regarding the domestic market, both in comparison to the last quarter and the first of 2021 net revenue. It was BRL 6.390 billion. This is a drop because of the drop of prices. And moreover, here, there is a significant increase in the EBITDA of BRL 438 million during the last quarter, which has been the best quarter in the past 3 quarters and a margin of 6.9%. And during the next slide, you can see more details regarding the improvement of our EBITDA. Here, we can see the negative effect of price, which was overcome by the higher volume inventories and better costs, mainly cost of raw material and cost of slabs that were recently purchased. But this is a result of a more stable operation with less interferences and shutdowns. Now when we go to Mineracao Usiminas in terms of iron on sales. There was a significant drop during the first quarter, 1,883 million tonnes, impacted by internal and external factors. Here, we can mention the intense rainfall during the period rainfalls that weren't as intense as Q1 of 2022 nonetheless, there were production shutdowns and also scheduled maintenance shutdowns in our plants. And now we are -- we believe that we will recover our production volume. This is why we're maintaining our guidance for 2023 in terms of production, net total net revenues, BRL 784 million, also downturn because of the lower volume that we would like to highlight. The revenue per ton that increased from $70 to $89 during this quarter following the trends of the main market indicators. And within the EBITDA has also followed. This growth in percentage points, we totaled BRL 254 million of EBITDA Mineracao a margin of 32.4%. Now Soluções in terms of volumes. Well, there is a stability vis-a-vis Q4 with 296 million tonnes in sales and a drop in the net revenue following the drop of prices. And also in the steel industry, there is a net revenue of BRL 2.34 billion, a drop of 3% vis-a-vis the past quarter. And likewise, as we see in the steel unit, there has been an improvement in the EBITDA margin. We have 3.1% and  BRL 65 million of EBITDA, mainly due to the steel purchases at more favorable prices. Now our financial indicators, well, number one, would be working capital. I believe that this is one of the main highlights of the quarter. When we significantly dropped our working capital due to 2 factors. One was a greater concentration during Q1 of slab suppliers, which give us better payment terms in this, but mainly the reduction of inventories of coke and coal. This is a result of our team's focus. Now we established a committee of raw materials since the beginning of the year, where we constantly and objectively follow up the inventories, and therefore, we were able to achieve this reduction. This is a temporary reduction. The blast furnace is in maintenance, there is the need of coke and coal diminishes. But then it will go back to normal levels. This reduction of working capital was achieved even with an increase of the inventory of steel because the buildup, we build up we had 449 million tons of slabs because of the shutdown of blast furnace 3. So we are very happy with this result with our working capital. Now our CapEx during the quarter of BRL 580 million is slightly below our expectation in all the segments. Nonetheless, we do believe that the acceleration of investments will take place as of the second and third quarter. And with this, we will maintain our BRL 3.2 billion guidance in terms of investments for 2023. With here, there has been an increase in our cash position, an increase of BRL 764 million in cash with the main effects, a strong generation of our EBITDA, a drop in working capital, which outperformed the CapEx in the period. To end our financial indicators, here, you can see our cash or net debt. With this increase of cash, we reduced our net debt to -- this is an effect from the leverage level. That is 0.07 the EBITDA. And now we are in a comfortable position regarding our cash for 2023 and the debt amortization profile, we do have a comfortable position with the first relevant matures only in 2026. Now we -- our ESG agenda. We always try to show you interesting highlights of the period. Throughout this quarter we've seen the first women in the company to work as locomotive engineers. Generally, this role was occupied by men. And now we have 10 professionals that are working in the Ipatinga plant, and this reinforces our commitment with the pillar diversity. In the next slide, our public ESG goals has some more details you may find in our release, but I would like to highlight a few like the inventory of greenhouse gas effects that will be concluded by September this year. The objective of 18 -- our objectives by 18% of women as leaders and donation of 100% of the steel aggregate generated in 2023 to the Camino do Vale program that helps the administrations to use this aggregated. And with this, well, I end my presentation, and now we have space for our Q&A session that I believe that this gives more value to our discussion. Leonardo, you have the floor.

So ladies and gentlemen, we will go to our Q&A session. Our first question is from Daniel Sasson from Itaú [inaudible] Miguel. He asks if you can talk about the price negotiations with the auto industry in April.

Well, as a matter of fact, the contract negotiations that were renewed as of April 1, there's a drop of 12%. Now the contracts that renew as of April represent 80% of the volume of the sales for the auto industry, we would like to highlight that the level of price drop is aligned with the negotiations of the contracts that will be renewed -- that were renewed as of January 1.

The next question to Americo from Daniel Sasson from Itaú from Caio Grener BTG but you have a Barcelos from Santander. America, they want to know about blast furnace 3, what are the initial impressions the -- what is going to happen here? What was the performance of this blast furnace during April? And what are the preparations for the shutdown? And is your plan following what was scheduled? Have there been any changes? And what is the execution of the shutdown of blast furnace 3 going to be like.

Thank you, Leo. Caio and  Rafael post these questions. Thank you for your questions. As Alberto and Thiago already mentioned the shutdown of the blast furnace 3 will take place next year. And now we have this -- there is a blowout 8 hours after it begins. And it takes Asalamandra is the remaining material inside the plant. Our planning continues. We will -- the blast furnace will be of 110 days. We are ready for the shutdown and according to operational follow-up that go before the blowout and the Saamendra, emptying every -- these are follow-ups of operational variables, especially of the activation of CAD to have a thermal flow that can withdraw the remaining material from the interior, and we have not identified any problems. Our expectation is that everything will take place as planned.

Our next question to Miguel from Caio Ribeiro from Bank of America. Caio Ribeiro from Morgan Stanley. Caio asked about export prices, both of them. So the revenue per ton was corrected during the quarter, and I believe that this is associated to volume side of plates. How do you see the evolution of this line in the next quarter? This would help us. And Thiago talks about the steel export. If this could be opportunistic measures and that helped in the prices in the past quarters or the second quarter expects a drop of prices higher than the ones from the international prices.

Now point number one, the variation of the export prices is because of the worst mix of products. When you analyze the export sales in the beginning, 75% went to the Argentine market and part of the sales with the finalization of the delivery of our projects that we already mentioned in the past quarter and 25% to the Asian markets that our spot sales are connected to products of second quality generally generated by the technological drop of our processes. This worse mix strongly impacted the average price of export as well, we cannot -- it is important to remember that sales to Argentine significant volume goes to Argentina, and they are connected to the auto industry and the Argentine auto industry renewed their contracts as of April 1. So part of our sales to the auto industry in Argentina already presents an update of the contracts that was carried out during the Q1 of 2023. Now second quarter, we believe that we continue with good expectations to deliver to the Argentine sector. We want to export added value products to traditional markets supporting the industrial chains of the Brazilian sector, we will continue exporting to the auto industry in Argentina. This is important. This is -- there is a special project. It's not opportunistic. We develop products of great quality for these type of projects. And it's important to highlight that although this project has ended its delivery, we continue delivering projects of regular volumes. And it's important to highlight that we have in our portfolio negotiations of important projects in this market and the industry of oil and gas is presenting an interesting dynamic in the Argentine market, and we continue in negotiations may turn into future deliveries.

Now we're going to group. We have 4 questions about the same subject costs. Everybody wants to know the steel cost expectation for the upcoming quarters and especially Q2, questions from Caio Grener from BTG Pactual, Ricardo Monegaglia, Morgan Stanley and Vanessa Quiroga from Credit Suisse. In addition to the cost expectation of the steel mill for the upcoming quarters and mainly the next quarter, Caio is asking if it's possible to see a slowdown of this because of the consumption of slabs that were bought during the Q4 at a lower cost than what last furnace 3 was performing. Could you talk about the cost of slabs and the costs that we will see during Q2 onwards?

Thank you, Caio. Ricardo Vanessa. As you know, we do not provide cost guidances, what we could say is the following. As of the shutdown of the blast furnace, we continue producing in the 2 smaller furnaces, but we consume our slabs in our rolling in our own. So -- and our rolling mail. And as you saw during this quarter, during Q1, there was a drop in the average price of the raw material, especially slab. And when we analyze the market indicators, it is clear that the trend of the average price of this lab is -- well, it will increase because the market indicators point out to these actions. In a nutshell, I would say that the expectation is that we will increase the average price of the slabs that we have in our inventory, and this will affect the costs during quarter 2.

Thank you Thiago. The next question goes to you. It's about Vanessa Quiroga from Credit Suisse is asking to elaborate. What is included in the line others, what we included in our release, which explains the low risk cost from the steel division, which is in the column of raw material. What does others mean?

Vanessa to provide you more details to break out -- I will have to break out these values, and I can send them afterwards. But I can mention a couple of things. I help you here. I have my t sheet here. Vanessa others mainly we're talking provisions of stock adjustment, a drop in idleness because -- we reconnected blast furnace to during Q4. So there is less idleness and the rest are others. But basically, it would be -- these would be the 2 main reasons why this figure was higher.

Americo, there was a question about Coke. Ricardo Monegaglia wants an update on the normalization of the operations and the cost of the coke plants.

Thank you for your question, Ricardo. We continue with the recovery plan of both coke plants. These are repairments that we have already announced in coke plant 2, we have the heart repair that has already been approved and will initiate in 2024 and the coke plants -- we are studying which are the best road to follow for the definite repair, and we will submit this for approval in the future.

The next question is for Miguel, and for Thiago, Rafael Barcellos from Santander is asking what about the price dynamic for flat steel what can we expect -- what can we expect in margins for the steel unit on Q2.

Well, we have observed throughout Q1, a strong pressure of increase of raw material increase. And this increases the international steel prices and the spot domestic prices with the evolution of the international prices, freight and strong pressure from the price point of view, we could expect a continuous increase of the prices of steel. Now obviously, there are many variables and many uncertainties regarding the market. We are facing a challenging scenario in terms of demand. It is stable in terms of demand, but it is challenging because of high inflation, restricted credit. Many reforms that will still happen, although there are many challenges in the domestic market, there are opportunities because of the improvement of the economic variables of the country. What we can expect in terms of prices is an increase, and this will -- this is what we expect we have to match Miguel's comment with the past comment, there is a trend for stability because of an increase in prices of the main feedstock. For production during the next quarter, by and large, I believe we will not see major differences, but there is a possibility of tighter margins.

Our next question. Miguel people want to better understand how we reached this guidance of the sale of steels. Soes this come from weaker demand or production restriction? This is from Ricardo Monegaglia from Morgan Stanley, Rafael and Vanessa.

Okay. Thank you, Ricardo, Vanessa and Rafael. The well guidance. It's important to highlight that we do not break up our segment in order to explain our drop in guidance, this is related to what have been mentioned. Our focus on export will be to regional markets and segments of high value. We can expect that the drop of guidance is connected to a drop of in exports and in the domestic market, as you are aware, we see a domestic market, which is stable, and we see this in the industrial distribution and auto industry are presenting consumption stability. And we expect that-- we expect Brazilian economy to evolve throughout the next month. In terms of production, that was -- that is part of the questions, we don't see any restrictions in offerings because of the shutdown. And the other way around, we are prepared to get -- we prepare to together with our customers to guarantee that we will supply products to all of our customers and where we operate in the domestic and in the regional chains.

The next question is for Thiago, Lucas Yang from JPMorgan and Gabriel from Goldman Sachs are asking about working capital, Gabriel says that he expected greater pressure because of the inventory of slabs, as this was offset by other factors. Here we have taxes calls and supplies. It would be interesting to understand if you understand that these are more structural factors if there should be a reversion of part of this improvement in the upcoming quarters. Basically, Lucas asked the same question, what are the expectations of working capital during the upcoming quarters because of the shutdown of last furnace 3? Thiago.

Lucas, Gabriel, thank you for your question. It's difficult to talk in the long run because this is a year where product configuration will undergo a number of changes. But for the next quarter, we can give you some color that we do not expect a significant change in our working capital. Changes the drops achieved during this quarter are structural. Therefore, they will remain. And there is nothing indicating a significant change for this quarter. For the rest of the year, we have to wait, and we have to see what happens. And what the overhaul of the furnace will be like we have to see the market demand, but these are things that we will announce during the other calls.

Next question for Alberto. Lucas Yang from JPMorgan ask which are the next steps after the acquisition of the group TT as a majority stakeholder, Alberto.

Lucas thank you for your question. In this aspect, I believe that all our information were announced on the material fact of March 30, I have nothing to add right now regarding shareholders' position.

Our last question is for Carlos Rezzonico. Gabriel Simon is from Goldman Sachs. [inaudible] due to the price and benchmark of iron ore, we were expecting a higher price than what you presented in your results. Could you give us more color and tell us why the price is different from the benchmark, and we expect to see this in the upcoming quarters?

When you see the revenue, you have to consider different factors that can impact this figure. Amongst them, we have hedges, freight, premium prices of iron ore, fixed prices, there are a number of factors to result in this revenue. Nonetheless, there is a variation of 24% between the revenue of the last quarter of last year and the first quarter this year vis-a-vis 27% of international price variation when you only consider freights that in our case, in the revenue, have 8% lower impact, you can determine that basically we were aligned with the international prices. Now for this month, we have to consider a level of 40% of fall value in their sales and our exports. These are values that can also change. But this has been the average in the past quarters. I believe that in the sense, we consider that we are highly aligned with the price variations.

I said this was the question, but we have 2 more questions here now. There is one about demand. Isabella Vasconcelos from Bradesco BBI asks, could you give us more color regarding the drivers of the stability of -- in the domestic demand in which industries are weaker, which are stronger. Miguel.

Thank you, Isabella, for your question. Well, by and large, all the sectors are being impacted by credit restrictions and high interest rate. This is a common situation for all the sectors, by and large, if we classify the steel consumer sectors that would be distribution, construction and drive. Well, will the growth is up 2%, 3%, and this would result to a scenario or to a dynamic of production and sales, similar to what we saw throughout the first quarter when we see the industry as well, sectors that had strong activity levels connected to the agribusiness stabilized themselves, but a relatively high level in comparison to the history. Remember, we will have a record -- we will have record crops with high interest rate, restricted credit and high interest rates are strongly impacting the growth of the economy and the consumption of steel in Brazil. We have opportunities. The reforms that are being discussed by our Congress and Senate that would be the tax reform, the new fiscal rules and federal programs that can give incentives to investments can impact consumption and economy and can impact all the sectors as of the second semester. This being said, we see stability in all the sectors that consume steel.

Now the last question, Caio Grener from BTG Pactual asking about prices. Can you elaborate the level of prices in March and the average during the quarter?

Now the average price of March and closed 1, 1.5% below the average price of the quarter impacted by a worse sales mix, we had already mentioned that special oil and gas ended the deliveries during the 2 first months. So this mix will maybe remain -- we see this mix -- we believe this mix will be similar during the second quarter with no major variations.

Thank you, Miguel. And now we bring our Q&A session to an end. I will hand it over to Alberto, so he can give us his final remarks.

Once again, I would like to thank all of you for your participation, and I would like to highlight that we are focused on this major intervention in Ipatinga, we are prepared. We have been preparing ourselves for the past 4 years, and we do believe that we will be very successful in this undertaking. And after the intervention not only in the blast furnace but in the steel mill and other pieces of equipment that will suffer these overhauls. With this, as a result, we will have a significant increase in our competitiveness in the sustainability of the operations in Ipatinga. So we are focused on this -- and you can see the importance that we are giving to this major intervention that is taking place in our main plans. During our next earnings results, we will be able to give you more color regarding the situation of this overhaul of this intervention. Thank you very much, and we will see you during our next earnings results call.

Thank you, Alberto. We thank all to your participation. Should you have any questions, the IR team is at your disposal.