Usinas Siderúrgicas de Minas Gerais S.A.

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Usiminas conference call, where we will discuss the results of the fourth quarter of 2021 and year 2021. I am Leonardo Caran, Usiminas Investor Relations General Manager.

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All participants are logged on listen-only mode and questions can be asked in writing in the Zoom Q&A session. This is an icon at the bottom of your screen. Participants who are listening in English can also ask questions directly in this section. This conference call is being recorded and simultaneously broadcasted through the Uzi Minas YouTube channel. Please note that this conference call is exclusively for investors and market and analysts. Please identify yourselves so that your question can be answered and for better flow, please limit your questions to two questions per participant. We also request that questions from journalists be directed to Uzi Minas Media Relations by the phone 313-349-9918 or email imprensa at usiminas.com. 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 regarding its growth potential are forecasts based on the management's expectations regarding 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 subject to change. With us today, we have Usiminas' executive board, President Sergio Leite, Vice President of Finance and Investor Relations, Alberto Ono, Industrial Vice President, Américo Ferreira. Vice President of Corporate Planning, Yoshiaki Shimada. Vice President of Technology and Quality, Kohei Kimura. Commercial Vice President, Miguel Holmes. President Director of Mineração, Usiminas Carlos Rezonico. Executive Director of Solutions, Usiminas Canio Meirigi. Superended Director of Usiminas Mecânica, Fernando Mazzoni. Legal Director, Bruno Paulino. and Controllership Director, Julio Arroyo. Initially, Sergio Leitchi will make initial remarks. Subsequently, Alberto Ono will present the result. At last, the questions in the Q&A session will be answered. I now turn the floor over to Mr. Sergio. Sergio, you have the floor. Thank you very much, Raelle. Good morning to everyone. Thank you very much for participating in our results live session. For us, it is a great satisfaction. Today, we are presenting the results of 2021. This was an important year for Uzi Minas in its history, the best year of all of our history, where we present a consolidated EBITDA that supersedes 12 billion net profit, above 10 billion reais, over 7 billion reais in cash, negative net debt, 2021 undoubtedly was a very important year for us in Usiminas. We are embarking in 2021 with important challenges ahead of us and in the upcoming years. We are also working intensively in our pluriannual plan. That is our plan for 22 and 26 and our view 2031 that is our long-term planning We are intensively working. And within our long-term plans, one of the main objectives would be climate changes and our ESG agenda. Today, we are presenting to the market a new set of targets of our ESG agenda. Here we have 10 targets for 2022. And Uzi Minas' commitment to reduce greenhouse gas effect emissions together with the ESG agenda and everything that will affect mankind in the upcoming 30 years is very important for us. Once again, I would like to thank you for the support that the market has given us and we will continue firm building the present and the future of Uzi Minas. Thank you to all of you. Alberto, you have the floor now. Well, good morning to everyone. I will take my mask off to improve the audio quality. So now we can go to our first slide. Here we can see we will start with our yearly results. Steel unit sales. Here we have 4.8 million tons. It is the best result in terms of volume since 2013. Therefore, we have been waiting for this result for a long period of time. We wanted to achieve this figure in terms of sales. The increase was of 30% vis-a-vis 2020 in terms of iron ore sales. That is the following chart. These are record sales. We exceeded the 9 million tons. This is the best figure. from Minerações e Minas. In terms of EBITDA, we achieved a new record, 12.8 billion reais, with 38% margin. This basically is twice the figure that we had in the past. This is a significant figure in terms of net profit, a new record 10 billion reais. With a number of observations, we have a number of extraordinary effects that contributed for this profit. But if you eliminate the extraordinary effects, we have the best figure in our history. Now to our next slide. Here we have broken out our EBITDA. Here you can see the level the level that was reached in 2021, and here it's broken out, and we can see the non-recurring effects throughout the year. I believe that the two main points of the year here would be tax credits, especially peaceful things, and also a reversal of our health plan liabilities, right? and therefore we had a significant effect and this is concentrated on the fourth quarter regarding the extraordinary effects here with 2.1 billion but the operating effect of almost 11 billion but anyhow this is the best historic figures even when we discount the non-recurring effects now the steel unit here I would say the same in the case of the steel unit. Tax credits were 1.7 million. Here we have the reversal of health plan liabilities. This was connected to the steel unit, and you can see the effect here. When we exclude the non-recurring effects of 6.7 million reais, this is the best EBITDA number in history. Now, when we go to our next slide, here is Mineração Usiminas. In Mineração this year, practically, we see no recurring effects. 3.5 billion reais is an operational figure, a margin of 60% during the year. It is the best historic EBITDA of our operation. Now, when we go to the next slide, here in Soluções Usiminas, We also can see a historic record now. We have non-recurring effects. We had tax credits with peace coffins and some adjustments, especially that took place during the fourth quarter. Here we have provisions for inventory adjustments and provisions for tax credits. and this appeared at the end of the year, and you will see the effect on the quarter. Nonetheless, this is an EBITDA of almost 1 billion Reais with a margin, a two-digit margin, and this is something, this is the first time we see this in Soluções Osiminas as an annual result. Now, when we go to the results of the quarter, In the case of steel unit sales, there was a drop that is aligned with our guidance. That would be 1.1 million tons in terms of sales. And mainly, we see a significant decrease in the export area. This has already been mentioned in the past. And here we can observe a seasonality during the fourth quarter that was emblematic. Now, in terms of iron ore sales, there was an increase vis-à-vis the last quarter, 8%, 2.6 million tons. And this helps us to make up the year's record. We also have the adjusted EBITDA. practically 2.5 billion reais, 31% margin in terms of net profit. This was 2.5 billion reais and positive contributions because of the tax credits that were accounted during this quarter and also the reversion of the health plan liabilities. And this also helped us with the quarter figures. Now on our next slide. Here we have broken out this information and you can see the non-recurring effects on our EBITDA. Here you can see that we're at 620 million reais that are non-recurring effects. Now on our next slide in the steel unit, Most of these effects were in the steel units. These were R$666 million of non-recurring effects for a EBITDA of R$2 billion. Well, here in the mining unit Mineração de Minas, you can see a drop, a continuous drop since Q2 of last year, of 2021, regarding the result. And basically, you can see that this was driven by the price variation in the market. You can see that there was a drop of almost 33%. And in our press release, we've commented on discounts regarding qualities that during this quarter was a bit more expressive. Therefore, the EBITDA of mineração during the quarter resulted in a figure lower than in the past quarters. Now on our next slide. Here in Soluções dos Iminas, the operating EBITDA 46 and then is affected by a non-recurring effect. This was a provision for inventory adjustments and provisions for tax credits statements. So during the quarter, the EBITDA was one million reais negative. Now, speaking of working capital, here you can see a drop of 4% in the quarter vis-à-vis Q3. Here there's greater oscillation when we see taxes recoverable. So taxes recoverable that were already, this we maintained a regime of 100 million reais in terms of tax offset, and therefore we could reduce this amount and the working capital. These are non-recurring. Here we see a drop of 6.7 to 6.6 in terms of working capital discounting tax credits. And we will see throughout the next slides a drop in terms of steel inventories. There's a drop of 8% in volume. but it's stable. We could say that it's stable in 70 days. It's working capital. It is stable. It goes from 69 to 70. We are still at a level slightly above the normal inventory turnover days, but we believe that things will normalize from here on. Now our next slide. Here we have our cash position and indebtedness. Our debt increased a little bit, 6.3 billion reais because of the exchange rate variation. We had a devaluation of the real vis-a-vis the last quarter. Nonetheless, our cash flow is 7 billion reais and therefore our net cash is positive by 700 million reais. Therefore, our net leverage is negative. Now, regarding our CAPEX, we achieved 1.5 billion reais within our guidance for the year, and there was an acceleration in the steel mill projects, but also the dry stacking, our dry stacking project, ended and this contributed with three-quarter CAPEX. So this is why we were able to achieve our guidance as well. Now our next slide. During the last quarter, we have a CAPEX that is two-fold the last quarter's 600 million there was an acceleration and steel and mining this is what sergio stated regarding our targets for 2021 what was the final agenda here we have a target our first target is being reviewed And although this is something that we wanted to achieve in 2022 and 2021, we realized that we had to carry out an adjustment. There is one goal that has to be reviewed. And what we did not meet was, well, zero accident target, lost time accidents. Unfortunately, we did not achieve this target. There was a certain delay regarding the dry stack project, but it was concluded throughout the year. Therefore, we believe that this is mission accomplished, but with a certain delay. Another group of goals for 2022, some are repeated here, regarding what we did in 2021, like accident frequency rate, And now we have other targets that are associated to concepts that already existed in 2021, like greenhouse gas effect emissions. Also, regarding the inventories, we continue incorporating this as our goals for 2022, basically. And this is it. After the presentation, we can entertain questions. Thank you, Alberto. Ladies and gentlemen, we will go to our Q&A session. Our first question is from Daniel Sasson in Carlos Ribeiro, Bank of America. Miguel, they want to know about our expectation of price negotiation with the car industry in April. What is the gap? between the automobile industries that negotiate in April and January. This summarizes the question of these two participants. Thank you, Leo. Good morning, Daniel and Caio. As a matter of fact, the negotiation with the auto assemblers, well, the contracts are valid as of April. We started negotiations in the past two weeks. Although Ziminas doesn't announce future events, we close the contracts that are valid as of January with an increase of 60 and 70%. They represent around 20% of our sales volumes for the auto industry. And these are globalized and internal sales. And you have to remember that one of the industries has operations in Brazil and in Argentina. Therefore, we believe that the April negotiations should follow or should be aligned with the contracts that were signed in January because the scenario is very similar. Thank you, Miguel. There is an add-on, but I believe that you already gave the answer. Thiago Lofego said, what percentage... of your contracts were renewed in January. It's 20%. This is important for your calculation and you have to bear in mind that the price impact of this 20%, one part will be on our internal sales and the other part on our globalized sales. Thank you, Miguel. Our next question comes from, oh, it's about cost, Alberto, from Daniel Sasson and Caio Ribeiro from Bank of America. What are your expectations on the coal impact in the cash flow during the quarter? How much can this cash cost increase? And how do you believe that margins will evolve? Kasia asked about this dynamic of costs during the first quarter of 2022 regarding coal. And what about the impact of the price increase of coal, the coal price increase? Thank you, Daniel and Caio, for your questions. Now, coal. The price of coal has increased, and this is something that we've observed since Q3 and Q4. There has been a sharp increase in terms of prices. This, according to our inventories, we have an estimate of four months of inventory, generally, of coal, right? From the moment where prices started to increase, now we will see the effect gradually coming into effect during Q1. We have to remember that today within our operation, only one part of our steel production or of rolled steel will use more coal because the other part has another dynamic. It's difficult to talk about the general composition of what the behavior of the price will be. I can say that still during Q1, the expectation is that we will not feel a strong effect from this. Now, as of Q2, we will feel a more intense effect. I would like to remind you that mainly now, in January, although the price of coal is increasing, but we also see a valuation of the BRL that will affect this dynamic. So by and large, I could say that for this, For Q1, we will not feel intense effects. Nonetheless, the trend from the second quarter and the third quarter, well, yes, I believe that we will feel the effects. Okay, our next question is about the seasonality and volumes from fourth quarter. This comes from Thiago Lafiego, Bradesco, and Milton Sullivan, XP, they want to know about the performance of the domestic market during Q4 because Usiminas dropped more than the competition. There was a drop in the shares here. We have data of ABR that showed that competitors dropped 18% and Usiminas dropped 28%. Quarter on quarter, they want to know about this performance and if Uzi Minas lost share during the quarter and if there is an expectation of recovering the share, this market share in the upcoming quarter. Good morning, Milton and Tiago. Well, as a matter of fact, fourth quarter showed a seasonality that is typical of this period. What happened when you analyze our figures? We had... we felt the impact of sales drop in distribution offset by the industry performance. The auto industry also had a complex quarter, mainly because of the lack of semiconductors that affected the production and the consumption of seal in the auto industry. When you analyze when you analyze the market share during a quarter can lead you to wrong results. The fourth quarter sometimes is affected by variations of our customers and the sectors, so it would be more correct to analyze longer periods when we talk about market share issues. We have to analyze 2021. Our performance in terms of performance was higher. Of course, we had a drop in distribution. We always say that Uzi Mina sales, we could classify one-third in the distribution sector, one-third in the industry, and one-third in the auto industry. When we analyzed Q4, 39% of our sales were allocated in the industrial sector and 30, 31 allocated in the distribution and auto industry. In distribution, they were impacted because there was an increase in imports. Well, we have a forecast that there will be a drop going back to historic levels that represent around 10, 11% of the apparent consumptions, we continue working closely with our customers, our partners from the distribution sector in order to go back to our historic representation that is one third of our sales. The first quarter of 2022 presents a typical seasonality of the cycle that we see in each one of the years and we will follow the growth of this sector throughout 2022. That is our expectation. Thank you, Miguel. Our next question for Carlos Rezone. They want to know the results from Musa. So we have questions from Leonardo Correa, BTG, Marcia Faridja, Goldman Sachs, and Koji Pojic. Everybody wants information. Here, I'm going to try to summarize regarding the Moosa results. They see a better prospect for the upcoming quarters with the level of iron ore, the drop of the freight prices. Could you comment on the discounts? This is higher than what we expected, and we want to know what to expect. in the upcoming quarters because we will have more rainfalls and more difficulties for processing. Now also the mining prices and the discount expectations for the first quarter and what to expect in terms of prices throughout the year and discounts as well. Unfortunately, his microphone is off. Carlos, your microphone is muted. I will pose the next question, okay? Then we will go back to you. Our next question... is for Alberto from Leo Correa from BTG Pactual Carlos de Alva. Everybody wants to know about the capital allocation due to the excessive cash. Why don't you consider your cash policy for shareholders What are you going to do with the surplus of cash and if there will be a change in your dividend policy? If not, where is this cash going to? And Rafael wants you to comment on the net and gross debt level, something that you consider ideal for the company. Alberto? Leo? Carlos and Rafael thank you for your questions regarding dividends we have not changed anything regarding our current policy so we will maintain for the time being our 25% that is by law and the main reason to maintain a conservative management in terms of the company's cash flow is because we still have a matter regarding capex and working capital. The 2022 and 2023 will be years where we will have significant capex. We already announced our guidance for 2022 That is slightly above 2 billion reais in investments. Therefore, it's a significant figure for the company. We haven't invested this much in a long period of time, just in one year. Therefore, this is a challenge. And because this capex will be financed by our cash flow generation, we want to finance our capex with our own cash. So this is why we need to have a solid cash position. In addition to this, as the main project, that is the blast furnace three retrofit. So in less than one year, we will start the retrofit. We expect to start it during the second semester of 2023. In less than one year, we will be in our countdown, and to prepare this retrofit, we will have to stock slabs in order to feed our rolling mills during a shutdown, a shutdown that will be above 100 days. Therefore, we have to stock a certain amount of slabs. Therefore, all of this Our objective is to finance all of this with our cash. With these two components, we still have to be conservative regarding our management, at least until we end the blast furnace 3 retrofit. This is the main matter. And this is why we haven't changed our dividend policies, because we need to finance these projects using our cash. And this is something that will take place in the upcoming two years, I mean 2022 and 2023. Now, regarding our indebtedness, well, we still... We have been discussing together with our board regarding what would be ideal. We still haven't reached a conclusion, but by and large, what we have to understand is which would be the level of generation, the level of habitat that should be used for this. Because mainly when we talk about leverage, There are a number of aspects in terms how you will select the denominator. The denominator here, it would be the depth, but the denominator, well, you have to be careful to do this. We just cannot extend it. for a long period of time, a low figure, neither a high figure. And this is something that we have to consider. Therefore, this is a matter that still hasn't been concluded, and we're still discussing these matters together with our board. Thank you, Alberto. Carlos? Okay, we already resolved your technical problem. So the question. Leo Correa, Gabriela Cortez from Inter, Marcio Farigi from Goldman, and Rokish Poggi. They want to know about your prospects in prices and discounts in mineração. Leo says if you see better perspectives in the upcoming quarter with the level of spot iron ore and the drop of freight, Could you talk about discounts of products during the quarter? It was higher than I expected. I would like to better understand what to expect during the next quarter because there will be more difficulties of processing and more rainfalls. Wes, what are your prospects regarding prices and discounts for Q1 and the same thing for the year? Okay, now can you hear me? Thank you. Yes, Carlos, we can hear you. All right. As you know, mining area, after an extraordinary period throughout the last years, at the end of last year, faced a perfect storm. And why do I say almost perfect storm? Because prices dropped, discounts increased, transportation... increased by historic levels, at historic levels. We went above $40 for Frey. So the situation during the beginning of last quarter was negative. The prices of other commodities like coal also had important record discounts, there was a drop in our margin during the last quarter, which was significant. Some of these factors have already been corrected because the discounts were today are much lower than the historic value that I mentioned. Shipping also dropped, freight dropped, and this also improves Musa's situation and the prices. The mining industry expected to see an improvement and that this would take place after the Olympic Games after winter. And after the market adopted measures, well, the market thought that China would improve. The market was expecting an economic improvement in China. Today, the situation is the following. We have prices rising. that anticipate this improvement that was expected after the Olympic Games, especially because of lower environmental pressure in a number of regions in China outside of the areas where the Olympic Games are taking place. There is a greater demand and there is a greater occupation of the blaster furnaces And this in a market where the suppliers still cannot quickly respond due to a number of circumstances. They cannot meet this demand, sudden demand. That comes from China. Therefore, now the prices are at a level of 150. And this also created a strong drop in demand. And this was driven by the drop of prices of other commodities like coal. We still have uncertainties ahead of us. The shipping prices, we also see the increase in oil prices. sometimes generated by the european expectations we still have an expectation regarding what is going to happen in china in regard to the real estate sector there are uncertainties regarding the stimulus plan from china something that they china will deploy after winter but there is no doubt that our expectation is more optimistic because the market variables have accommodated price shipping discounts perhaps in the case of musa during the first quarter we will feel a negative impact because of the rainfalls We've lost around 200,000 tons in January because of the rainfalls. But regarding the market, our market is helping us. And if things continue as we expect, the results will improve. I don't know, Leo, if you have another question regarding the market situation for me. Carlos, perhaps the quality discount expectation.