Usinas Siderúrgicas de Minas Gerais S.A.

Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Usiminas conference call in which we will discuss the results of Q1 of 2022. I am Leonardo Caram, General Manager of Investor Relations at Usiminas. To those who want to follow us in English, a free translation of the webcast presentation is available on the Usiminas IR website. We also have an interpreter for simultaneous translation. Please choose the sound channel on the icon at the bottom of your Zoom screen. All participants are currently on listen-only mode and questions can be asked in writing in the Zoom Q&A session. This is the 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 using the YouTube channel. Please note that this conference call is exclusive for investors and market analysts. Please identify yourself so that your question can be answered. And for better interaction, please limit your questions to two questions per participant. We also request that questions from journalists be directed to Yuzunina's Media Relations by phone 313-498-918 or by email imprensa at uzininos.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 forecast based on the management's expectations regarding Uzi Minos' 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 Uzi Minos' Executive Board, our President Sergio Lecce, the Vice President of Finance and Investor Relations, Alberto Ono, the Industrial VP, Américo Ferreira, VP of Corporate Planning, Yoshashiki Shimada, VP of Technology and Quality, Kohei Kimura, the Commercial VP, Miguel Holmes, CEO and Mineração Usuínas, Carlos Rezónico, the Executive Director of Soluções Usuínas, Ascanio Merigui, the Managing Director, Usiminos Mechanica, Fernando Maldonado, the Legal Director, Bruno Paulino, and the Controllership Director, Julio Arroyo. Initially, Sergio will make his remarks, and subsequently, Alberto will present the results. Then questions in the Q&A session will be answered. Now I give the floor to Mr. Sergio. Mr. Sergio, you have the floor. Thank you, Leonardo. Good morning to all of you. And thank you for participating in our live to announce the results of Q1 of 2021 of Uzi Minas. Our results will be presented by Alberto subsequently. I would like to highlight where we're making progress. Regarding our 10 ESG targets that we presented to the market in the beginning of the year, when we announced the results of 2021, we are working intensely and making progress. We signed a contract with Calais Solid to produce photovoltaic energy as of 2020. 530 megawatt, and this will represent 12% of our concept. We signed a charter, the World Steward Association Charter, that is our commitment toward carbon neutrality to reduce a carbon emissions and to minimize the climate effects throughout the decades today there is a special meaning in all of this and i am very grateful to all of you because this is the last live where i will participate as of may 19 i will become the chairman of the board of directors of uzi mean is in first sense for most i would like to thank all of you we have created a re earnings results announcement system First Juvie conference call in 2001, and I participated since the first edition. We've had over 80 calls in these 20 years, and for me, this is a very special moment. because this is a moment where I'm accountable to our investors, to our shareholders, and this is a moment of discussion as well. These are important discussions that approach the company's results, but mainly perspectives. Very intelligent questions are always made, and the reports are an object, are something from which we learn. This is my 14th position in a career. that this is a career of over 45 years i've been a ceo i've been the 12th ceo of the company and as of may i will be 11th board member chairman for Uzi Minas. And for me, it has been important to participate with you in this special moment. Throughout a number of years, I participated directly in these things that involve commercial aspects of the company. And for me, this was very important. I would like to thank all of you. Each one of you, for your presence, everything that we've discussed throughout the 22 years, everything that I have learned, in 2016 we took over the company in a critical moment you followed up this moment intensively you participated and you also gave us support in the beginning of this year we presented the results of 2021 that have been the first the best results in the past 60 years And I am very happy to continue my career in this company. As of now, I'll be the chairman of the board. Of course, I will miss participating in this special moment. That is the moment where we announce our earnings results. But first and foremost, I would like to thank all of you for this very fruitful 20-year experience. Thank you very much for everything. And now I would like to give the floor to Alberto, our future CEO. And Alberto, I wish you a lot of success. and i'm absolutely sure that he will be very successful as a leader of our company he is a very competent professional with a solid background and with a lot of experience and that will develop excellent things in our company and now alberto you can present the earnings results of q1 of 2022. thank you very much to all good morning to everyone thank you for participating and i would like to thank sergio for his kind words so now let's go to our results of q1 of 2022 the first slide okay steel unit sales our sales increased seven percent in steel and in the domestic market ten percent So this is above the 860,000 tons and total volume, we were 1.1 million tons above. So we can see significant growth. Now iron ore sales, on the other hand, here we can see that we had an operating problem because of climate, which hampered our operation during January. We had very strong rainfalls. These were record rainfalls during the month of January that hampered our operation. and also the ramp up of dry filtering also this also affected the production during the quarter but we still are maintaining our guidance throughout the year because we believe that we will recover the volumes in the upcoming quarter now regarding the air the talk on q4 last year we had non-recurring upset and accounted during this quarter here we have a drop of 37 percent it seems significant nonetheless we will show you that during q1 we we don't have recurring effects and this is an operational figure that is 1 billion 560 in net profit 1 billion 263. i would like to note that during this quarter, we have the effect of the exchange rate. The real was appreciated 50%. So I believe that this is an interesting figure. Now when we see our next slide.

Here you can see the five past quarters, mainly here.

And the past quarter, the non-recurring effect of 690 million. And when we see Q1, we can see a drop of a practically 15%, a margin of 20%. This is a lower margin than that of the past quarter, but still significant when you see the historic levels of the past five and six years. Now our next slide. Here we can see our steel unit, the EBITDA of 1 billion 11, this is a 15% margin. This is below the past quarter, but it is still at a reasonable level when we analyze the past five years now, the mining unit. Although we were impacted by the volume production, the prices were favorable. Although there is a lower volume, we have a better bet when we compare it to Q4. exceeding the 340 million riyals. You can see the effect due to the price that is above 40%. Now our next slide. Here we have solutions as a recovery regarding the past quarter. We had a number of non-recurrent effects that were negative, and discounting this, there has been a where there has been an impressive significant improvement from 46 to 67 million. Our margins go to a level closer to the normal levels, that is a margin of around 3%. It is not the high margins that we saw last year that historically were the highest in this segment. Now when we see our next slide, here we have other indicators mainly working capital, there was a reasonable increase of 900 million riyals. But when we discount the tax credits or the taxes recoverable, this is almost 1,100,000,000. And the makeup of the working capital, a significant part is because during Q1, there was a significant drop in taxes to pay. This is because how you calculate and how you pay income taxes in the mining industry, first you see the results and At the end of the year, you pay during the subsequent quarter because of the significant record results of the mining unit. We had to pay a great number of taxes that were settled during Q1. And this diminished the amount of taxes that we would have to pay. So this reduced our liability in working capital. This increases our working capital. And another point is there was an increase in accounts receivable that was around 200 million reais. And we also have the mining effect, but there was a global price effect. Now, in terms of steel inventories. You can see that in terms of steel values, there was a significant drop of 10% in terms of global inventories. And our level is very similar to one of last year. and above 60 days of turnover. So during the third, fourth quarter, it was high, and now we're at a level closer to normal levels. Now, next slide. Here you can see our cash position and indebtedness. our cash position is 6.6 billion still strong this is above our debt our debt is 5.5 billion so there was a drop because of the exchange effect we have a negative net debt and a net cash of 1 billion reais now our next friend next slide capex as we've seen in the past year Q1 is still starting up its path. Therefore, the level is lower than the past quarter. But as we fulfilled last year's guidance, we will fulfill the guidance of this year geared toward the steel unit. And at last, our slide, you can see our new follow-up, our follow-up regarding our ESG goals, and with the exception to one point that is a bit delayed to regarding what we have planned. All of the rest are according to our plan. I am not going to mention one by one. You can read them all in our release, and you can read them in detail. But this is the new follow-up of our goals, and now we can proceed with our Q&A session. Thank you, Alberto. So now we will go to our Q&A session. The first question. is from Leonardo Correa, DTG Pato, and Marcefari de Goldman Sachs. Alberto, they want to know about the working capital. And Leo asked, he would like you to elaborate the in the working capital anticipation to the refurbishment of glass furnace 3. And Marcia asks about the commercial strategy to buy plates and for inventories. Alberto? Alberto, I'm going to talk about the glass furnace 3 and its preparation. And Miguel will talk about the commercial side. Regarding the shutdown strategy of Blasphemous 3, as we have already mentioned, the shutdown is scheduled. That will be April 2023. and what we want to have an inventory of place between 600 and 700 tons so during the shutdown that will be 110 days this can be used for don't pay for using our rolling mills in ipachinga We will start this mainly by the end of the year. We will probably start this six months before the shutdown because of the logistic matters involved in all of this. And this is how we are seeing this. I believe that in terms of working capital, well, this will be more effective during the last quarter of this year. As Alberto mentioned, according to our current plan, we have scheduled a shutdown of 110 days during the second quarter. of 2023 and this means that we will not produce 700 000 tons now when we buy from third party depends on the number of variables it depends on the domestic demand another important variable would be the export business as well We have to see the profitability during the period and the inventory level that we can have using our own plates. Now, during the past years in New Zealand, we've developed good plates. suppliers national and international today we have approved over 11 steel steel mints that fulfill our requirements in terms of quality and volume in the past years when we bought plates from from local suppliers represent 85% and 15% of foreign suppliers And remember, exports, 87 million tons a year. Last year, we bought 2.2 million tons, and we would add to this the necessary level of purchase during the shutdown. And as Alberto said, our purchase for our inventory would start during the last quarter of 2023. Now about price. it is important to understand the impact of the conflict between russia and ukraine in this russia and ukraine represents five percent of the steel production you can see you can say that this is not relevant but they have relevant in beckinson segments and market russia and ukraine account for one-third of the worldwide plate trade and one fourth of European imports. So what we have observed here is a great distortion and instability and uncertainty since the beginning of the conflict. And we see international indicator of plate prices that are above what is normal, that is not sustainable throughout the period. in the up after the distro after the distortion was important what we've seen in the past days is an organization of supply and demand in place so we believe that we will see greater participation of china in the plate market and the russian production although it dropped since the beginning of the conflict, this is being absorbed by China and Turkey. So we see a normalization of the plate market in the world and we believe that the indexes will go back to normal that have an impact in the price and the cost of field mills worldwide. Our next question. from Leo Correa once again from the EPG. He wants to know about Cubata. What about the economics of the business with the inflation of plate prices in the market? And if the Cubata business would be unfeasible to work with this with these level of price inputs? Well, this is also associated to what Miguel mentioned. Speaking of Cubatão, today within our horizon, we are maintaining the Cubatão operations because they are feasible and profitable. Now, of course, there was a price volatility, but as Miguel mentioned, we are going back to a normal level. And in our case, in Cubatão, not Cubatão, but by and large, when we purchase plates, they are scheduled. So every time we buy a plate, it is more or less geared to service segments and clients with predefined prices for it. So when you have volatility, perhaps we will have to wait and see what is going to happen. But as these things are going back to normal levels, we continue buying plates, and we continue providing products to our customers. Up until the moment, nothing has emerged in our horizon that... that can enable the business now there was there was stress points in the market but we have to remember that the world has a major over capacity of steel so when you have these imbalances it takes some time nonetheless we go back to a balance period and it's important to mention that in this sense that when we analyze the plate exports from ukraine and russia they represent about one percent of the chinese production in reality the chinese arbitrage in the market has a low impact in production adjustment now china reduced the production in the first quarter but we believe that march there will be a slight recovery and we these international markets will be now we analyze now this impact and the entire period of volatility did was we reanalyze to businesses and we and we this is part of marginal So now I'm going to you this goes from Daniel Sasson, Itaú, from Caio Ribeiro, from Bofa and Guilherme Rosito, and Thiago Lo Fiego from Bradesco. I am going to try to now, regarding the guidance of volumes for the second quarter, This is a drop of 12%. Quarter and quarter, this is because of the greatest difficulty to buy plates from third parties, or there's availability and there's more. Cardio and Rositos ask if this is because of an anticipation, because of the increases, or if they believe that the real demand drops. And Tiago asks, what is the expectation of volumes for exports during the second quarter because guidance? So he asked to explain this.

It's important to note that in the domestic market,

Well, we evolved in a positive way throughout the quarter. Now, the data, they present an improvement of an important volume of the associations, and this is a growth of 17, 18% vis-à-vis this year, and this is aligned Regarding March last year, we have seasonality. We have a week of first quarter, and we can improve this in the domestic market improvement. We follow up the market. We will follow up the sequential improvement that we expect for the consumption during the second quarter this year. the volatility of the plate market. Perhaps we will drop our export vis-a-vis the past two quarters, and making the sales mix very similar to what we had during the first semester of 2021. the our guidance is focused on the drop of our exports because of the volatility of the plate price and the gap of the price of the plate and the steel prices but we will follow up the sequential improvement on the domestic market thank you miguel next question We also have Daniel Sazon from Itaú and Carlos de Alba. Morgan Stanley asking for the glass furnace too. Daniel asked about the return of the glass furnace too. How long will it take to ramp up the prices of plate, coal, and how will you resume this operation? And Carlos de Alba wants to know why the delay in the glass furnace too. and which are the problems with the coke plant and why this reconnection of the glass furnace is conditioned and has not been decided yet. Alberto, please. Daniel and Carlos, thank you for your questions. number one black furnace too regarding the black furnace too it is a bit delayed because it took us more time than what we expected to carry out the retrofit of the equipment after the problems that presented last year but nothing nothing that will hamper. Therefore, you can see that the capex amount has been changed. It took some time to receive a number of components, and there were certain matters regarding to supply chain that also affected it. But I can say that there are no major issues here in addition to delay. We believe that it will be ready to become operational as of June. And we are assessing the scenario as soon as it is available would be Coke. Well, currently we're undergoing a period where there is less availability of our Coke batteries they are going through a maintenance and preservation cycle therefore we have lower production and with this during q1 we've had to use imported coke in the production of steel and the resumption of glass furnace too would force us to buy more coke in order to produce the additional steel volume. And in our view, No, here ENDS will not meet interestingly, so we are still waiting. We're waiting for the recovery of this production in the coke plant, and for the time being, we don't have a clear forecast. We're working with people of technology with lots of knowledge. They're focusing on this matter, and in order to resolve this problem, but we don't have a clear forecast when we will go back to our normal. operational level. For the timing, we will have a coke deficit. We will have to go to the market. But the resumption of blast furnace 2 would increase this deficit. And in this equation, it doesn't make sense to do this because of this situation. So we will continue working with blast furnace 2, blast furnace 3, and Ipachinga as we have better visibility. regarding the renormal resumption of our copepaths. Thank you, Alberto. Our next question from Daniel Sassoni Itaú, and he wants to know about blasphemy in S3. If you will delay next year's Blackburn Street shutdown. You already answered. Yes. Yes, we continue with our scheduled maintenance. Nothing has changed. Our next question from Carlos de Alba from Morgan Stanley. It's about SG&A. He said the SG&A expenses were higher. And what drove this increase? If it was higher exports, if the exports were lower than on Q4, what do you consider a sustainable level from here on? I am going to answer the first part of the question. Miguel can answer the second part. Carlos, regarding the SG&A of Q1, although the export volume was slightly lower than that of Q4, what happened was that in destination ports, there were bottlenecks. When you have modalities that include freight costs, you are damaged in the arrival. And when you have bottlenecks, you have to wait for a ship to unload. And this also increases it. There was we had bottlenecks in ports, we had logistics problems, and this affected Q1. Now, regarding sustainability, Miguel can talk about this. As I said, during Q1, we expect to drop in exports because of reasons that we've mentioned, because of the volatility in the plate market and the gap between plate prices and finished products. For the second product, We will, well, we see different alternatives in terms of business focused on our traditional markets. What I mean is Europe and regional markets like Argentina. Thank you, Miguel, Alberto. Our next question will be about costs. And Caio Guilherme from Bank of America, Thiago Lo Fiegos from Bradesco, Manso Faridze from Goldman Sachs, they want you to elaborate on the cost during the second semester this year. When do you expect to see a relief in the play cost of third party and what are the coal prices that you expect in the upcoming quarters? And Marcio always also asks about coal and he says, what do you expect regarding coal prices on second and third quarters? Now, regarding the cost for the next quarter, we don't give this guidance, but what happens that the cost of reducers, coke and coal, on our side, I'm talking about production costs, these are still going up because we're consuming an inventory which we paid a high price because of the lead time and this will be offset by the plates. that we by the by the flaps that we negotiated before the conflict between Ukraine and Russia the slabs were negotiated and that they will be at production cost during q2 so the the high price of reducers because of the low cost, they are going to balance themselves. So the expectation, I would say, for the time being, we may see a variation, but this will be a stable cost production. But this is the expectation. Now regarding the coal cost. As I mentioned, the costs are increasing because the acquisition costs that go through the inventories that will also affect the production costs still go up. There is a certain inertia regarding our inventories. Now, the expectation for the replenishment market from here on We believe that they will accommodate. There hasn't been a significant drop, but there has been a drop in the international coal prices, but we want to see if this represents a trend because it dropped from 600 to 550. We still consider this high when we compare it to historic levels, and this is our view today.

Our next question is from Lucas Rota.

It's an individual. And what about the readjustments of steel for April contracts and how will this impact the future contracts? And Marcio Parigi asks about price. What about prices after the increase of the automobile industry in Brazil and if we will see this increase during the second quarter? Miguel? Thank you. The negotiation contracts were signed by the end of March These contracts are valid as of April 1st, and we will follow all these conditions as we do every year. So, yes, we can expect the implementation as of April 1st, and the increase are aligned with what we expected and reflect the evolution of conditions and cost of our materials. Throughout the past 12 months, and we have to remind you that these are yearly contracts at fixed prices in rail, and these contracts were 50-60%, and they will be implemented as of April 1st. now regarding the future impact we don't announce future events but what we can confirm that these increases will be applied on 80 percent of the auto industries and and 20 percent have been adjusted as of april 1st and sales to the auto industry represent one-third of our total sales So here you have the information to carry out your own calculations and your own forecast. Thank you, Miguel. Ricardo Monegaglio from Morgan Stanley wants to know about inventories. If you could elaborate on the commercial strategy to reduce the inventory and if you want to sell more production or buy more slabs. In reality, our target, our inventory level is according to our level to afford activity. So today we calculate that at the end of Q1 we have a normal inventory in our plant and there is a normal level of inventory in the market. When we see the results of INGA announced this week, we can see a level of inventory of two months. Of two months from the end, they associate something that we consider low, as Alberto mentioned, and the result, our inventory level is around 58 days of turnover. And this is something that we consider reasonable for the activity level. And each one of our plants, Miguel, the next question from Ricardo, He wants to know about prices, the level of steel prices during the last month regarding the average of the period. And if this price includes increases and price comparisons to the beginning of the year. The price. The price of March was aligned with the average price of the quarter. We adjusted throughout the first quarter, but the average prices of March are aligned with the first quarter now. And because of the conflict between Russia and Ukraine, we have been suffering because of increased prices in freight, energy, raw material, and this will impact the prices of Q2 in addition to the auto industry contracts that I already mentioned. Thank you. Alberto, we have a capital allocation. Edward Sondevecchi from Bradesco. wants you to talk about allocation of capital and priority between CapEx, return to the shareholder, and liability management with some opportunities. Victor Kitson asks, he says that due to the capital structure with extended indexedness, Will there be extraordinary dividend payout? Victor Polly wants to know the leverage of cash and the leverage that you consider ideal. Edward, Victor. Now regarding capital allocation, as we have already announced, there is no change. regarding our strategy. So the current policy of dividends continues. We pay out 25% of the net profit and the priority of our cash generation is to maintain investment. As we mentioned this year, we have a significant investments of 2 billion 50 to be carried out this year and in addition to this the the steel volume is reflected on our working capital and we also have inventory preparation for the refurbishment period of flat furnace 3d inventories will consume a reasonable cash because of the increase of the working capital working capital But at a first moment, you need resources in order to make up this inventory of priority, today's capital, and to finance the working capital with your own resources as possible throughout the maintenance period. After the maintenance period, we can discuss about about what to do with an excess of cash. But right now, we are focused on this. Thank you, Alberto. Now we've ended our Q&A session. Before giving the floor to Sergio, I would like to, Sergio, Alberto, we've received congratulations. Many people are saluting you. Gabriela from Inter says, Sergio, thank you very much. And thank you for your partnership, success in the new challenge. would like to congratulate Sergio Leche for his partnership throughout this year and to wish Alberto great luck and success in this new position. success to Sergio and Alberto in their new position. and congratulate Sergio Leite for his excellent job. So I have conveyed all these messages. Sergio Leite, your final remarks. Well, thank you very much, Leo. Thank you very much for your greetings and your messages. As I've mentioned, it has been a great pleasure to share with you our quarters during the past 20 years. And during the past 14 years, I've been part of the executive management. I would like to thank you for your partnership. I would also like to thank my colleagues during the past years especially Alberto, Miguel, Shimada, Kimura, and all of, and everybody that worked with me in the executive management. And I would also like to thank and congratulate all the employees of Uzi Minas. Today we have 13,000 employees, 12,000 partners that work with us, especially due to what we've done in the past six years. Nothing would have been achieved without the dedication, commitment, and confidence of each one of our employees. Thank you very much to each one of you. It was a pleasure to be with you. No, but I continue Luzi Minas as the Chairman of the Board of Directors. Thank you very much. We thank you all. And should you have any questions, our IR team is at your disposal.