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

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Usiminas' teleconference where we will discuss the results for the Third Quarter of 2023. I'm Leonardo Karam, Usinas Investor Relations, General Manager. For those that want to follow us in English, we have pre-translation of the webcast presentation is available on Usiminas IR website. We also have an interpreter for simultaneous translation. [Operator Instructions] This video conference is being recorded and simultaneously broadcasted on Usiminas YouTube channel. Please note that this video conference is exclusive for investors and market analysts. We kindly request you to identify yourself for your questions to be addressed and for smoother proceedings we request you to limit your questions to two per participants. We also ask any questions from journalists be directed to the Usiminas Media Relations by 31-3499-9312 or through the e-mail imprensa@usiminas.com. Before we proceed, we would like to clarify that statements made during this video conference regarding the company's business prospects as well as projections, operational and financial targets related to the growth potential are forward-looking statements based on the management's expectations regarding Usiminas future. These expectations highly depend on the performance of the steel industry, the country's economic situation and the international market situation and are subject to changes. With us today, we have our President, Marcelo Chara; the VP of Finance and Investor Relations, Thiago Rodrigues; and VP -- Commercial VP, Miguel Homes. Initially, Marcelo will start with his remarks. Subsequently, Thiago will present the results. Subsequently questions from the Q&A session will be answered. Now I hand it over to Marcelo. Marcelo, you have the floor.

Good morning. Thank you very much. Today, we're in Ipatinga with Miguel and Thiago. This is the industrial center and here, we're following up all of our operations. This has been a quarter mainly concentrated on the pursue for operational excellence, continuous improvement in performance in all the industrial operations of our Usiminas system. Mainly we focused on the efficiency of primary areas. And we also had the opportunity, and we define important definitions like in [ Coke Lime 3 ], where that was activated and it impacted significantly environmental improvement and cost. We have routines, management routine focused on more control and the optimization of all the productive resources. I can all -- I would like to say that we have concluded the relining work of blast furnace for our main facility, which defines the productive capacity. Currently, we are carrying out all the necessary tests in order to begin the operation and in the upcoming days, we will be able to have the growing or the effective production of the blast furnace 3. Now this, as we have changed our productive configuration with the integration of blast furnace 3 with this, we will be able to face the major challenges that we have in the market, the Brazilian market, mainly what this is associated to the enter of Chinese and imports of finished products in the Brazilian market, this negatively impacts of the industrial sector of the country. In terms of comparison in imports steel in the apparent consumption of the country, the history of the last decade was 12%. Now year-to-date, this has doubled. The income of imported products account for 23%. And what concerns us is that we've seen that these products have present sales value that don't compensate the costs. So we are before unloyal competition here. Now we see stability in the consumption of steel in the Brazilian market in 2023. This shows the resilience of the Brazilian economy. The GDP will grow between 2.9% and 3% with high consumption and strongly driven by the agro sector. But there is low performance from the transformation industry strongly affected by imports. Now this has dropped 0.7% and they are negative indicators in fixed capital. These indicators impact strongly the steel industry and all its value chain for 2020 for our expectations. And as we saw in the last focus result, the growth of GDP will be positive, but in half of -- but half of what we saw in 2022. And it is important to highlight, we need to strongly focus on the reindustrialization policies of the country. It's important to make progress in the reforms that are undergoing the Congress and the contention policies against unloyal trade? Just an example, what Europe has done with Safeguard in Mexico and the United States that tax all the steel products with 25%. We have to pay attention to this. This already was initiated by [indiscernible] Brazil with the associate that we participate together with the government, and we have to resolve that in the short term to avoid negative impacts in terms of -- in the industrial activity of the country. That also negatively impacts the generation of highly qualified labor in the industry. I do thank you for your attention and Jago you may continue.

Good afternoon. So we will start with the results of our quarterly results. Well, here, we have the highlights of the quarter. I would like to highlight the steel sales volume, slightly above expectations. This is [ 102,000 ] tons. Now they were 2.4 million tons. Now consolidated EBITDA was negative in BRL 20 million, impacted by the steel segment that we will see in detail. We also had a strong working -- reduction in working capital. And this is an increase of BRL 780 million in cash and the reduction in leverage was 0.21x and the re-initiation of the blast furnace will start in the next few days. Here, we have consolidated results. Therefore, the net revenue continues dropping. In 2022 we had very high prices on Q3. The revenue was BRL 6.7 billion, BRL 2.5 billion below the past quarter. Now this drop in price is because this is because of the drop in price and this contributed with the drop of EBITDA that was negative BRL 20 million. Net income was impacted by the operational and financial results, especially because the exchange rate we had a net loss of BRL 166 million. Now when we see the steel unit results, the sales volumes presented an increase of 5% vis-a-vis the past quarter in the domestic and the foreign market. This total [ 1,021,000 ]. There was a drop of net revenue there was because of the drop in price and a worse mix in the exports because that included the sales of plates during the quarter. This impacted our EBITDA. We have a negative EBITDA of BRL 251 million and a margin of minus 4% vis-a-vis 3.1%. That was last quarter. On our next slide, we will give you more details. It's clear to see what impacted the EBITDA during the quarter. And here, we can see that the price mix effect was the main factor, partially offset by lower COGS. Now the COGS drop is because of gains of efficiency during the quarter because of the mix of sold products. On the other half side, the fixed cost of blast furnace continues negatively affecting the result. Now on our next slide, we will see [indiscernible] results. The sales volume is stable to 391,000 tons. Net revenue BRL 793 million. This is below the last quarter to part to the -- we had more sales with no maritime freight, but worse mix quality, the EBITDA was BRL 129 million, a drop of 2% with negative impact because of the mix and because of the appreciation of the real. This is an impact of BRL 10 million in the final result. Now Solucoes Usiminas, on the next slide, our sales volume was stable 301,000 tons. Here, the revenue, BRL 6,675 million, BRL 3 million below last quarter and the EBITDA of BRL 28 million showing a slight recovery vis-a-vis the last quarter because of the steel. Now our financial indicators, we will start with our working capital and inventory, we are dropping our working capital during this quarter. The effect was very important because of the drop of steel inventories also plate inventories because of the overhaul of Blast Furnace 3, but we improved the accounts of suppliers and also advancements from customers. On our next slide, we have our CapEx. The CapEx of the quarter was BRL 886 million. This is aligned with our plan and we continue with the expectation to end our yearly CapEx within the guidance that we already disclosed that was BRL 3.2 billion. Now regarding our cash position, a great impact was working capital, BRL 1.544 billion. And now we have a cash position, which is sound for the company, highly robust, and this affects the indicators that we will see in the next slide, the drop in our net debt and the maintenance of the leverage index of 0.21, which is extremely comfortable and no changes in our timeline of that and time regarding the amortization. This was our brief presentation. I will hand it back to Leonardo, so we can start the Q&A session.

Thank you, Thiago. Well we will start now our Q&A session. Our first question come from a number of analysts, Gabriel Simoes from Goldman Sachs, Rafael Barcellos from Santander, [indiscernible] from Bank of America, everybody is asking about working capital. They want to know how much of this change is a result of the drop of the input and how much is because of the consumption of plate? And how do we see this in the upcoming quarters if we will see more releases in the upcoming quarters? Daniel asked this dynamic, if there is additional drop of third-party slabs, can we see a liberation and [indiscernible] asks if this release will be the peak in -- during Q3 in terms of slabs and what can we expect in the future?

Thank you, Daniel, Gabriel, [indiscernible] the amount was made during this quarter because of the consumption of our slabs inventory. And the beginning of the operation of Blast Furnace 3 is it still hasn't started. We have been able to better manage the coke and coal inventories. In our view, this quarter was the peak moment of the drop of our working capital, our expectation is to have more drop next quarter, not as big as now be lower because we ended the replenishment of the inventories after the operation of blast furnace. Now the [ asset ] price and volume grade impact on the volume, we had a peak of over 60,000 tons of slabs and with the drop of the slab inventory, the effect was on volume. In summary, our expectation is more dropped, but lower than what we saw this year -- this quarter.

Our next question -- it's about price. There are a number of people that want to better understand this, and I will try to merge these question because of time. Gabriel Simoes from Goldman Sachs, Rafael Barcellos Santander, Guilherme from Bank of America want to better understand the price dynamic of steel in Brazil because of the drop of prices in the bank market vis-a-vis the average of the third quarter should we see steel prices pressured on Q4? Do we expect a change in the sales mix dynamic or cost that offsets this phenomenon? Rafael wants you to elaborate on the dynamic of flat steel in Brazil, what about the increase in China? Is there a partial normalization in terms of profit for the steel mills in Brazil? And finally, Rosito from Bank of America wants to know if we can -- it will be a downward review in the new contracts in the automobile industry.

Good afternoon to everyone when we talk about the prices on the end and the expert of Q4 Usiminas doesn't announce future events. These are prices in the distribution or spot negotiations on a monthly basis in this sense, yes, there have been adjustments throughout the Q3, which impact the average price of Q3 when we compare the price of September of the domestic market and the average price of the quarter, we can tell you that the average price of September in the domestic market was approximately between 3% and 4% below the price of the quarter. This impacts. This is a carryover on the fourth quarter. Now this is for the distribution sector and the spot market. As we always clarified the business to automobile industry. One group as of January will be updated, one as of April. And other contracts of the other industrial sector, most of these contracts continue are re-negotiated every 3, 4 or 6 months that follow the trend of the price of the distribution sector. Now regarding the mix, we don't expect major changes in the mix of Q3 vis-a-vis Q3 in the domestic market, but there can be an improvement of mix in export for -- during Q4. And we will present the result of sales for oil and gas, especially in Argentina. Another question regarding the automobile industry? Yes. Now the auto contracts, the ones that will be updated as of January, we're negotiating it. Now it's too early to give you our guidance about the results. In our view, in the next 45 days, we will have had already concluded the negotiations and the contracts that are updated in January, they are 30%, 35% of the car volumes. The other contracts will be updated in April. We still have not started. These negotiations Usiminas always looks for long-term partnerships. Our share in the auto industry is major. So because we supply a great amount of steel to the automobile industry in Brazil. First, we have a long-term strategy and we see the current situation of the market, and we also see the future expectation. The other question was regarding China. Of course, we have observed a very complex situation in the margins of the steel industries in China. According to some specialized magazines we can see that in the past 4, 5 quarters, the Chinese steel industries are operating with negative margins. We don't believe that the scenario will maintain because with some material as iron ore and coal, this may affect and we may see an increase in prices of Chinese products. And this will positively affect the steel industry globally and in Brazil.

Now a follow-up because here, we have some questions that people didn't understand very well. Can we expect a downward review in the contracts?

For the automobile sector, most of our contracts are [ semester ], and there is no update of contracts during Q4. For one part of the contract, we expect an adjustment on Q4 of 2023.

Thiago, we have a number of questions regarding costs. We have Daniel Sasson from Itau, Lucas from [indiscernible] and Mr. Rosito the cost production that dropped on Q2 dropped 7% on Q3 COGS per ton of Q3 should show a sequential improvement. Rosito asked the same question, what is the cost per ton if it will drop even more during Q4? And Lucas how to think about the evolution of these COGS throughout the quarter seeing the cost of inputs and the slabs and the improvement and the improvement in our operations, something that we've seen in Q3?

Well, regarding the cost we have verified the improvement in efficiency in the 2 blast furnaces that are operational. We have to remember that Blast Furnace 3 will become operational in the upcoming day; the start-up of our furnace needs more consumption of raw material. So the indicators aren't the best during the beginning momentum during the ramp-up phase, which takes a number of months. So by and large, during Q4, we don't expect to see a significant improvement. We will maintain our cost at levels very similar to the past quarter. But as we have already communicated the expectation for 2024 is very reassuring because our blast furnace will be stabilized, and we will be able to capture all the efficiency gains that we expect to achieve with the Blast Furnace 3.

Our next question from Miguel. [indiscernible] from HSBC, he wants color regarding how you see the steel demand, the flat steel demand for Q4 and Q1 of 2021?

Well, today, we see stability in that in the steel consumption, I would say that it's highly stable in most consumption sector. We could highlight some sectors like oil and gas, we have greater levels of this, but they are ongoing projects that will demand more steel in the upcoming quarters, not only Q4 but only Q1 of 2024 for the agro storage. The area is increasing is and the [ naval ] industry for agro and fuel transportation. So by and large, we see stability -- more stability in consumption.

Going back to cost, we have 2 questions. One from [indiscernible], Bank of America regarding Blast Furnace 3, they want to understand what is the improvement that you expect with the conclusion of the overhaul of the blast furnace. If you could give us an update regarding the overhaul and what level of efficiency do you expect as soon as it becomes operation. Now the inventory of slabs is it enough -- right now.

[ Lucas Guilherme ], it is difficult to do give an accurate value because there are a number of factors that affect the production cost on the productive configuration that Usiminas will have will depend on the market, with the market demand. We do our numbers to see if we continue producing with 3, 2 furnaces, the cost of -- cost and quality of raw material effects. The cost with all these variables, it is very difficult to see a drop. There is -- we have high expectations. Well, we believe a significant drop of cost as soon as Blast Furnace 3 becomes operational, we -- this furnace was operating it was around 2 million tons, and it has capacity of 3 million tons. So we believe that we will increase our productive capacity, increasing consumption, gains, diminishment of fixed costs. So we are not going to give you figures. We will just tell you that cost reduction will be important as of the next quarter. I would like to add that as [indiscernible] with this furnace, we have a configuration of 3 furnaces. An important fact is that we have carried out significant technological improvements in this furnace. I'm not going to give you details because this would take a long period of time. This is a furnace that is state-of-the-art furnace but we have to see the level of imports of steel in the market. Perhaps we won't be able to operate with 3 full furnaces because of the record level of imports that has been almost 5 million tons this year at prices with negative margins. So this doesn't only impact the steel industry but also the value chain. Can you imagine what this means? You could -- the product -- the steel products that are coming in from China, they are the -- here, we have a deficit of $40 million in our trade balance. So we just carried out a major overhaul. The ramp-up will start in the upcoming weeks in the beginning of 2024, we will clearly see the benefits of this overhaul, but if the level of imports continues this way, we are not only assessing how many furnaces will operate, but we're re-dimensioning our industrial operation. You also mentioned the importance of the approval of reforms that are undergoing our Congress; I would like to make a brief comment regarding our tax reform. And the report that was announced by the Senate recently, we believe that the proposal is better than what we have today. So this proposal is still a significant proposal and the impact will be positive in the economy, by and large, what concerns us a bit is number one when you start, when you establish too many exceptions to the rule, you like the simplification, what concerns us is selective taxes -- selective taxes that may impact inputs from the industry which generates jobs that goes against the principle of tax neutrality and when you have a selective tax on fuels and minerals, this can affect the industrial chain as a whole. And this affects the competitiveness of the Brazilian industry. This is something that I believe that we should highlight from Marcelo's statement.

Miguel, once again, -- let's elaborate a little bit more with the auto industry [indiscernible] -- they want to know about the negotiations with the auto sector for the April contract that should have been reviewed in October. And he wants to know what is the dimension of this review for Q4? This is regarding the high volume that you mentioned.