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 Usiminas conference call in which we will discuss the results of Q2 of 2023. I'm Leonardo Karam, Investor Relations General Manager. To those who want to follow us in English, you will find a translation of the webcast presentation on the Usiminas IR website. We also have simultaneous translation. [Operator Instructions] This conference call is being recorded and simultaneously broadcasted by the Usiminas YouTube channel. Please note that this conference call is exclusively for investors and market analysts. [Operator Instructions] We also request that any questions from journalists be directed to Usiminas Media Relations by phone, 31-3499-8919 or by e-mail, imprensa@usiminas.com. Before we proceed, 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 forecast based on the management's expectation of Usiminas future. These expectations are highly dependent on the performance of the sales sector, the country's economic situation and the situation of international markets and, therefore, subject to change. With us today is Marcelo Chara, our President and Vice President of Finance and Investor Relations; Thiago Rodrigues; and Miguel Homes. Initially Marcelo will begin, and then Thiago will present the results after questions will be answered. I give the floor to Marcelo.

Good afternoon. It's a pleasure to be here today. I have been spearheading Usiminas since July 4, and I'm happy to be here in this deep transformation process. This is a transformation process because we are undergoing reforms which are extremely complex in our Ipatinga plant. We have carried out a structural change in our Blast Furnace #3. Our works are underway. We've changed the fuel system a number of things. This is a very encompassing restructuring and structured -- and carried out by professional teams. There are also interventions in the steel mills like in the primary refineries and other facilities that we have in Ipatinga. After these interventions come to and then we will clearly have more production and more competitive production. There will be fuel efficiency, which is connected to our decarbonization agenda. And together with our rolling mills of hot rollers, we will be competitive in the Brazilian market. Now speaking of markets, there is a slow demand during the last press conference. I announced this, and we are concerned and we are seeing some factors as the high interest rates. The finished product imports from China that have significantly increased. This causes concern and we are paying attention to the evolution during the second semester. To this point, therefore, our main point within this stage, in addition to all the interventions, we are developing a strategic plan that is strongly focused to improve operational efficiency of our industrial equipment and our industrial processes, and strongly focused on excellence, the preservation of the environment and careful regarding our processes. We have a positive prospect -- there is a positive prospect for 2024 because we believe that all our interventions in the upstream of the industrial system will be finished, and we believe in Usiminas based on its huge potential, based on its products of high added value as well as the potential and the ability that our team has and that our company has in all the processes. Now I would like to give the floor to Thiago, so he can talk about the results of Q2.

Marcelo, welcome. It is a pleasure to have you in our conference call, I believe that you will contribute to the growth of Usiminas. Here, we have a brief presentation of our quarterly results, and then we will go to our Q&A session. Here, we have the highlights of the quarter. Despite a slowdown in the demand in segments, the steel sales volume within guidance is with 972,000 tons, recovery of iron or sales volume compared to Q1, which was impacted by the rainfalls in the region and there were scheduled shutdowns and there were 2.4 million tons of iron ore maintaining our guidance in terms of iron or sales. Consolidated EBIT of BRL 366 million. It was impacted by lower prices in mining and lower cost and greater costs in the steel mill. Working capital, there has been a drop because of lower slab inventories and also there has been a drop in accounts receivable. The net leverage -- net debt over EBITDA is 0.38. There were greater margins and more cash consumption during Q1, but we are in a comfortable level. The revamp of Blast Furnace #3, as Marcelo mentioned, we are at the right pace, although we have updated the return of the blast furnace in September. And this quarter, we're beginning the works to the -- of the decharacterization of the Samambaia dam. And during the next quarters, we will talk about the evolution of this deep characterization project. Now we have the consolidated result to say the net revenue is BRL 6.9 billion with a drop -- because of a drop in prices in mining and in steel, which also contributed on a drop of an adjusted EBITDA BRL 366 million with a drop in all the business areas that we will see. And there was a net income of BRL 287 million. Now per segment, we start with steel units. The sales volume, there is a drop of 6% vis-a-vis the last quarter, but with a better product mix. Therefore, the revenue per ton is stable when we compare it to Q1 despite the drop in prices in a number of segments that we will be able to observe. The EBITDA of BRL 74 million, margin of 3% and 7% last year. This is an important drop with other impacts that we will see in the upcoming slide. Mainly, in addition to the effects of price mix and volume -- in addition to the effect of price and volume, there has been an increase of 2.4% in the cost per ton, especially at the adjustment -- the market value, and there has been higher cost in terms of idleness and expenses -- we have expenses with idle equipment regarding the Blast Furnace #3. Now Mineração Usiminas, the sales was 2.4 million. This is a recovery after the first quarter that was impacted by rainfalls and maintenance scheduled. We had an increase of 15% vis-a-vis the first quarter because of greater sales and greater sales with maritime freight, the EBITDA of BRL 147 million. Here, we can see a drop from 32% to 16%. This is not only by the market price, but also because of the price of the freight and the exchange rate in the period. In Soluções Usiminas, the sales volume was 3% higher than Q1. The revenue per ton of BRL 6,910, 4% lower than Q1. Now the EBITDA was practically low because of the value of the stocks that were acquired at higher prices, and result for the automobile industry with the prices updated after the renegotiations during April. Now when we see the financial indicators, working capital and inventories, working capital dropped with BRL 9.4 million, a drop of BRL 400 million vis-a-vis Q1 because of the reduction of the slab inventory and also here, we can see the slabs that are directed to the revamp of Blast Furnace #3. And during Q3, we will recover our inventory, iron or coke will be seen here. The CapEx. Here, we're talking about BRL 879 million. When we see the accrued valiance, we see BRL 1.5 billion, in line with our plans. Now regarding revamp of Blast Furnace #3, we are also aligned with the revamp of the blast furnace. Now our cash, there was a drop of BRL 992 million with -- BRL 996 million with working capital of BRL 770 million, offset of the CapEx of BRL 879 million and dividends payout of this is mining, steel unit from 2022 that was distributed this year end-to-end. Now regarding our net debt, the second quarter was BRL 965 million because of the drop of the cash flow, but it was offset by the drop of our debt in dollars. So with this, our leverage went up 0.38, and the debt profile that will mature in 2026, and we are not concerned about this currently. So this was the brief presentation of our results, and I will hand it back to Leo so he can begin the Q&A session.

Thank you, Thiago. We will start our Q&A session. Our first question is for Miguel. Daniel Sasol from Itau and Morgan -- and Carlos De Alba from Morgan Stanley want to know about prices. He wants -- what is the price of [ HDE ] in Brazil by premium vis-a-vis imported products are at. Now margins are compressed in it is difficult to provide discounts. Carlos De Alba wants to know about the market outlook regarding steel.

I believe that your question is important to explain our current scenario in the Brazilian domestic market. The prices have remained relatively stable in the past months despite the pressure of the high amount of imports. It is important to highlight the following. When we talk about a premium we do have a higher premium than they have -- than the historic average. Now we have to highlight the following, the price imports that we see mainly rolling new products that come from China have presented according to reports made by specialized magazines. They present a history of negative margin in the last 12 months, China, in the past 7 years. These indicators presented a margin of [ $115 ] per ton. Now during the past 12 months, the Chinese steel mills are working with negative margin. So no, we will not follow this trend to operate during long periods with a negative margin because this would be unsustainable. So this premium is important to analyze because today, this measurement, although it is above average, these are reasonable values. When we could adjust -- when we adjusted to positive margins in the market, we feel pressure by prices, the margins are compressed and we see relatively stable prices in the future with no major variations. Any variation should be aligned to variables that will impact the cost, being iron ore or coal.

Thank you, Miguel. For you, Miguel, again, we have Enrique Marquez from Golden Sachs and Caio Ribeiro, Goldman Sachs. They want to know about the auto industry. What were the negotiations like? Do you have an update? What do we expect for the second semester because we're talking about semestral contracts? What were these negotiations like in July?

Enrique and Caio most of the contracts updated throughout 2023 are semestral. Now when the contracts ended in July, there have been no changes in the prices for the third quarter. And for the contracts that mature in September, we are starting the negotiations. This being said, we will not see any changes in the prices for the auto industry on Q3. And as of Q4, we're still in the middle of negotiations.

Thank you, Miguel. Now Marcelo, questions regarding Blast Furnace #3. Our investors want to know what the revamp is. Here we have Itau, Sasson; Caio Ribeiro, Bank of America; Carlos De Alba, Morgan Stanley; and Carlos -- and Mr. Barcellos from Santander. Everybody wants to know the revamp evolution. And the more specific question, how will this impact the margin after the conclusion? And when do we impact -- when will it be up and running? Marcelo?

Thank you for your interest. Just for you -- to give -- just to give you a practical reference, our Blast Furnace #3 is like a 30-story building that has a basement. Yes, it was totally [ unassembled ], and we are rebuilding it. And you do this with carbon blocks that were bought years ago, and this is underway, and it's working. Now the body of the blast furnace are the 3 -- 30 stories. Can you imagine that in 3 segments, the 30 stories to take away and to place -- to put in totally 3 -- totally new 3 segments of 30 stories. We've imported special equipment from Europe in -- for lifting and we have had extremely complex welding, and this has been in preparation for months. This has been executed successfully. Can you imagine the top of the building was totally changed. The top -- the upper part of the blast furnace was totally modified to incorporate state-of-the-art technology that will allow more efficiency with fuels, especially coke. Now we have a low distribution system that is amongst one of the most modern in the world. Now, the regenerators that it is the heating -- or the cooling system of the building, here, we have 3 regenerators with complex structures. And they were replaced, totally. The top of the 3 regenerators have been completely replaced. What do I mean? This work is extraordinary in terms of complexness and it is underway, of course. This type of project where you have thousands of people working is complex. But everything is running as expected in this type of project impact. Well, this blast furnace ended a 24-year campaign at low production levels after the revamp. It will be one of the most modern blast furnaces in the world because here, we have state-of-the-art technology and efficiency production will increase. And it's going to improve the fuel efficiency. And when you consider that the cost in our industries are closely connected to iron ore and fuel, we will see that as we carry out the adjustments in the blast furnaces, we will see improvement in costs.

Marcelo, just Carlos wants to know -- after -- what is the ramp-up time once the operation begins?

As I already mentioned, here we're talking about industry mature processes, and it can take a couple of weeks. We're not talking about days, and there are very rigorous processes to adjust each one of the new components that are being incorporated. So during the first weeks, we will be able to complete the ramp-up that will be during the month of September.

Leonardo, I would like to add something here. Now the impact that we will -- the total impacts of the blast furnace projected on cost, we believe that we will see the results during 2024 because the ramp-up can take weeks or months. So -- and the production goes through the P&L. We believe that we will see the results only in 2024.

Our next question for Miguel. Miguel, Rafael Barcellos from Santander wants to know what can we expect in terms of volume and prices in terms of flat steel for 2023.

Although we don't announce future events, we are seeing stability as you could see in our guidance. We are prioritizing in our exports, our regional markets, contracts with the auto industry, mainly in Argentina, that follows the contracts of our domestic market. There are no price variations for contracts during Q3, and we are -- let -- our exports during the second semester will remain very similar.

Our next question for Thiago. Thiago, Enrique Marquez from Goldman wants to know about working capital, what to expect in terms of working capital because the revamp will end at the end of Q3.

As I mentioned, we dropped our slab inventory, we have iron, coke and coal. We will recompose it. There will not be a significant drop in working capital from here on.

There is a group that wants to know about cost, Carlos De Alba, Caio Greiner from BTG, [indiscernible], Rafael Barcellos from Santander. They want to know what are the cost expectations for steel units and mining. And Caio, he says that the cash cost of steel unit increased significantly this quarter. Will we expect the increase of cost of sold products? And he wants to know if with the drop in prices, we will see negative margins during the third quarter?