Usinas Siderúrgicas de Minas Gerais S.A.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the conference call of Usiminas, in which the results of the third quarter of 2022 will be discussed. I'm 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 connected in the listen-only mode, and your questions can be asked in writing in Zoom's Q&A icon below on 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 broadcast simultaneously on the Uzi Minas YouTube channel. We would like to remind you that this conference call is exclusively for investors and market analysts. We'd like to ask you to identify yourself so that your question can be answered. And for better dynamics, we ask you to limit yourself to the question for participants. We request that any questions from journalists are referred to Press Media Relations of Usiminas by the telephone number 3134-998918 or by email in prensa at usiminas.com. Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding the prospects of the company's business, as well as projections, operational statements, and financial goals related to its growth potential constitute forecasts based on the management expectations regarding the future of usiniras. These expectations are highly dependent on the performance of the steel sector, the country's economic situation, and the situation of international markets, so they are subject to change. With us today is the Executive Management of Zeninas, CEO Alberto Orno, Vice President of Finance and Investor Relations, Thiago Rodrigues, Vice President of Industry, Américo Ferreira, Vice President of Corporate Planning, Gino Ritagliatti, Vice President of Technology and Quality, Toshihiro Miyakoshi, Commercial Vice President, Miguel Holmes, CEO of Mineração Usiminas, Carlos Rezonico, Executive Director of Solução Usiminas, Leonardo Zenóbio, Superintendent Director of Usiminas Mecânica, Fernando Mazzoni. At first, Mr. Ono will make some opening remarks. Then, Tiago will present the results. Afterwards, the questions asked in the Q&A session will be answered. I now turn the call over to Alberto Ono. You may proceed, sir. Good morning. Before anything else, I would like to thank you for attending this session to discuss the results of the third quarter 2022. Tiago will give the presentation, so the comments related to the figures are up to him. But I would like to highlight that this has been a quarter where we had a change of scenario, which was quite significant, involving the major business of the company, as for the mining and the steel unit. And it was quite different from what we saw in the the other quarters, and this reflects in the results, okay? On the other hand, I would also like to say to you, especially now at this moment, when we are close to the end of October, on the 26th of October, Uzi Minas celebrated 60 years of operation. So this is an important hallmark of our history. And what I would like to say to you that we continue working hard in order to ensure the sustainability of the company for the years and decades ahead of us. So we work very hard involving all the companies on the search of the sustainability of all operations in the short, medium, and long terms. We have challenges ahead of us, such as decarbonization, the higher integration of bringing other dimensions related to the population of composition so that we can bring them into our activities. And this is reflected in our inclusion program. And I believe this is how we see the future. and what we are going to do for the next year. We look at the sustainability, we see the retrofitting of the blast furnace three, which is going to be the most important event in the last years, and it's going to ensure the sustainability of our operations of Ipatinga for the decades to come. So I would like to draw your attention to the fact that we are working hard in spite of the challenges and area that we are facing. in the economy and in the steel sector, and we are working to ensure the sustainability of our operations. And since we are celebrating 60 years of operations, and this is what we want for the decades to come. And this is the spirit of the management of the company, the executive board, and all our employees. Thank you very much. I'll turn the call over to Tiago. Thank you, Alberto. Thank you very much. So we are now going to start the presentation to discuss the results. We start with the highlights for the quarter. At the top, we see everything related to sales of steel, and this is where the good news is in relation to the results. So there was a drop of 4% in the steel unit sales, but there was a very positive effect of the sales mix, and we are going to discuss it ahead of the presentation. And the net revenue was stable in spite of the dropping price in some segments. And we are going to discuss this in more detail during the presentation. EBITDA had a relevant drop, $836 million for the quarter with 10% of margin. And we are going to provide more detail about it. And because of the major impact that was felt in the cost of the steel activities, we are going to show you where the impact came from and also in the impact in the in the iron ore because of the price. Net profit was lower than the reduction of EBITDA because of the FX variation, which was more favorable than the previous periods. So we ended at $609 million. On the next slide, we are going to see the breakdown of EBITDA per segment. So in the consolidated results, as we have mentioned, there was a reduction of EBITDA in all business areas, and we will talk more about it. Now we are going to talk about the steel unit. Yes, Leo? As I said before, as for the steel unit, we had a sales volume which was stable in relation to the previous quarter. However, the Rio per ton, better than the previous quarter, in spite of the drop in price in some segments. And on the right, we can see the justification because there was an increase in sales for the sector. In industries, we had a significant increase of the margin and the volume of sales of slabs. And also for... the sales of agribusiness, implements, and industry as a whole, as I mentioned. So we were favored by this better mix. We increased the share in the sector of industry and reduced in the sector of the major networks where we saw some drop in price. On the other hand, What made a difference in the results of the company, as we were expecting, was a high pressure on cost. And it's important to mention that there was an effect that came from the price of the raw materials. So on the graph below, we can see the reappearance on cost. comparing the second quarter and the third quarter, we see a difference of 511 reals per ton, and we look at all raw materials but with a high light on the slabs and on the coke. So if you look at the market indicators in relation to the prices of the slabs, we came from an average in the second quarter of 900 per ton, and the average of the third quarter was $600 per ton. And that means that what impacted the cost for the quarter was the period of the second quarter, where the price reached the top, $900. The $600 and the reduction that we saw in the third quarter, we are going to notice, realize in the fourth quarter. So we went through the COGS with the highest price of the slab. And as for Coke, there was a reduction of 20%. So we reached the peak price of Coke in this quarter, and we are likely to see a reduction of about 20% in the quarter, in the second, fourth quarter, sorry. And we see that Coke that was acquired considering the stability that we have seen in the cocaine unit and the purchase of cocaine from the international market. So the message is that there was a price effect in this quarter, but this price is likely to be reverted in the fourth quarter. Thank you. As for the mining units, we have also observed a reduction in EBITDA, 157 with a margin of 18.8%. And if we go into detail, we see that the story was a bit different. We had a 6% drop in the volume of sales that was impacted by the reduction of demand, especially for iron pig and pig iron. And this was impacted by the price of the iron ore. The COGS was stable without any relevant variation. And as for... the steel transformation, we go back to a historical level of a margin of 5.6 with 148 real as a result. And this drop was expected already. The effect of the second quarter was impacted by the inventory level, the acquisition of inventory at a price which was stable. when there was an increase in income and revenue, and we see a reduction of this margin going back to the historical level for the steel transformation unit. And following the other Financial aspect, working capital, about 700 million rials. There was an increase that was expected, as we had mentioned before in the other calls. So we started to compose our inventory of slabs. And this increase was highly influenced by the reduction of the payables, because most of the suppliers of slabs have a shorter payment term. And we can see these two inventories and the effect. So we break down this composition of the inventories for the retrofitting of blast furnace number three. So we had an increase in the inventory of slabs because we had in mind this retrofitting of blast furnace number three. And we see that there was a reduction in the volume of inventory, especially for finished product and producting processes. We are now going to talk about the CAPEX. And as we have already mentioned, our guidance of 2.5 million is maintained. So there was an increase that was expected for the third quarter. So we are in line with what we had planned. So we expect that for the fourth quarter, we are going to have capex at the level of 700 million, the guidance of 2.05. involves some minor variations, because as we get closer to the moment we do the retrofitting, the capex increases a lot. So there is a transference between one period of the other. It's very normal, but we understand that 2.05 billion is quite an adequate guidance. Going to the cash flow, cash position of the It was offset by the variation of the working capital, as mentioned before, and also by the capex that made the cash to be reduced at about 500 million from one quarter to the other, and that also impacted our net debt. As we can see in the graph below, that is now one billion rials, but the leverage is level is still very low of 0.14 times. With the perspective of high capex and working capital high for the year, we expect a higher number of the leverage level, but still at comfortable levels. And now these are the highlights for our ESG agenda. So the targets, as we mentioned in our press release, have been disclosed to the market. And 10% of the targets have already been reached. 70% are according to the plan. And only 20% are below the plan. But we can still with a lot of possibilities for us to reach the target. So we are very confident about it. And some highlights in our transparency agenda. In the last quarter, we reported some information about the World Steel Association. These are data that are... will be consolidated by the relevant associations and they will be served as benchmark to understand where we are positioned in the industry and also to provide the guidance for all the actions we need to adopt in order to improve our performance. in ESG. And we also answered the Carbon Disclosure Project questionnaire related to combating climate change. Another highlight that we bring is the project Cadeia do Aço It's a steel chain project that involves a number of events that we invited suppliers, small and medium-sized suppliers who do not have the capacity to look at ESG. And we believe that this is a topic that has to be looked at, not only in our company. So we bring in all those suppliers. We share the best practices and everything we're doing in order to progress in this agenda. So we help the suppliers to go along with us in the same direction. So this was a very quick presentation. I'll turn the call back to Leo for us to open the Q&A session. Thank you, Tiago. And now we are going to start the Q&A session. Our first question is to Miguel from Miguel with Itaú about inventories of the blast furnace 3. What can we expect in terms of constitution of slabs for the retrofitting of Last furnace number three. Thank you. We would like to remind you that the retrofitting of last furnace will happen as of April next year. and it will take 110 days, so it will have an impact of 650 or 700 thousand slabs. And the inventory will be made six months before the retrofitting operation. So considering all the time we could estimate or estimated that up to December, we would have accumulated about 50% of those labs that will be required in order to meet the demand along the stoppage for the retrofitting of blast furnace number three. Thank you, Miguel. There are some other questions to you about the negotiation with the automotive market, the assemblers. Edgar and Enrique with Goldman Sachs and Ricardo with Morgan Stanley are asking you to make comments about the negotiations on the auto market. and so how are you negotiating the contracts for next year? What can you expect when you compare to 2022? And is there a possibility for us to expect any negative adjustments in terms of price for distribution? And if this trend would also be applicable to part of the agreements that are adjusted or readjusted or re-indexed in April? Edgar, Enrique, and Ricardo. I think these were the questions came from. The negotiations with assemblers whose contract ends in December have already started, but we are still in the initial phases. When we talk about levels of adjustment, the time of validity and The other items are definitions that we are going to decide together, but the negotiations are going to happen up to the end of the year. The agreement that ends in December would account for 20-25% of the volume of the sales of Usiminas for the auto sector. The other 75% are agreements that are going to last up to the month of March, and then the negotiations are going to start close to that date. And the last question was the adjustments and the magnitude. It's obvious to think about trends because the contracts tend to follow the international markets. Obviously, these are agreements that have different validity. We are talking about different products, and the services provided are also different. and these are related to the distribution sector. When we analyze the current situation in the market, we see, in addition to international scenario, which is quite challenging, we see that the steel sector has very limited margin. And today, the Chinese are offering a surplus of products with negative margin. And it's very hard to believe that it's going to be maintained for the future. So we're not going to use the current market conditions as reference for the definition of the conditions of the market in the future. Of course, we still have 60 days in order to continue our negotiations, and we'll be able to reach, as we have done in the previous year, to reach agreements so that we are going to continue to be the most important steel supplier for the automakers in Brazil. Miguel, just something to add. Ricardo also asks if this trend is also applicable to the adjustments of April. Yes, the characteristics are the same. It's a conceptual base. The times of negotiations are different, but the trend is likely to maintain if the market conditions are maintained. So we believe that there could be a trend, the same trend for the contract of January and April. We are going to continue monitoring all the variables that are part of the negotiation. Thank you, Miguel. Thank you. Our next question comes from Edgar with Itaú BBA to Carlos about mining. Carlos, he has a rationale, the following rationale. The EBITDA per ton, we notice a level of $15 per ton. Considering the current iron ore prices, what's the profitability of the imports? Can we expect any change in the levels of imports of iron ore for 2023? And is there anything that can be done in order to improve the profitability of the mining activities? Carlos, please. Yes, good morning. Good morning, everyone. Part of the questions. We are still working on the budget of 2023. As soon as the budget is approved at all levels, we can talk about this. However, we have been following the situation of the market. There was a drop. in relation to the latest meeting of the Communist Party meeting in China. And we have been watching in order to understand until when the price is going to fall. And we are defining what are the actions that can be adopted. We may stop a plant. We can reduce the production of a What are we doing in order to face this challenge? As you know, the elimination of the dam led to a process of the tailings. And this generated a moment of difficulty, so we are accelerating and we're putting together all the knowledge that we have in order to accelerate the ramp-up of those plants. And in addition to this, we are also analyzing the processes. We are analyzing several projects that we used to have that we had implemented to reduce costs. Thank you. And we are considering everything that was compatible with what we had before, the elimination of the dam. So we are also implementing actions. We are renegotiating agreements, especially... to face this risk. We understand that many suppliers have to go along with us in this crisis situation in terms of prices. And of course, this would help the company to reduce costs so that we can continue operating in a scenario that we believe will continue to have prices at levels similar to those we have now. Okay? Thank you. Thank you, Carlos. Next question comes from Carlos Greenland with BTG, Arthur Santander, and Ricardo with Morgan Stanley. Tiago, they want to know about costs. All of them are asking about the increase or what's the impact of the increase that we have seen in the costs, in the cash costs for the increase of the COGS for the quarter. So what is likely to be the behavior of those prices in the fourth quarter? And you're also being asked to talk about the dynamics of the slaps and how this is going to impact on the quarters to come. Yes, Tiago? Okay, thank you, Caio, Arthur, Ricardo. Okay, I'm going to answer part of the question, but let me start in relation to the cash cost. The effect that we see on cash cost is not necessarily coming from the same store. It will have the same effect on the COGS. We can say that the cash cost increase that we had from the first to the second quarter is not the same as the second quarter to the third. So there is a reduction trend in other words. In other words, the 3% increase in the cash cost indicates betterment in the fourth quarter with a potential reduction of the price effect, as I mentioned before, and in relation to the dynamics of the slabs, right? between the negotiation of the purchase of the slabs until it reaches the cogs. It takes about three months only to simplify. So the slabs that we negotiated in the second quarter at a higher price of the curve impacted the cogs in the third quarter. The curve went down, so the slabs that are likely to impact the CPV, the cogs of the fourth quarter, will have a reduced price because of the part of the curve. And the other question was related to the trend for the fourth quarter. So the trend for the fourth quarter is obvious stability with some potential of reduction related to price, but it's difficult to say for sure. In the future, we are expecting something at this level until we finish the retrofitting of blast furnace number three and have a recovery of the cooking unit. Thank you. Tiago, just to add, Ricardo asks if it's possible to understand the sales cost of the third quarter as the peak for the year. I think we can consider that. Yes, I think we can consider that, yes. Again, in terms of price, I would say so. But in terms of this lab price, we see instability with the potential of reduction in the fourth quarter. Thank you, Tiago. Tiago, our next question is also to you. It's related to cash and leverage. It comes from Vinicius Andrade with Safra Bank. We would like to ask you what would be the optimal level of cash and leverage for the company? And there's another question, only to put them together. Lucas Young with JP Morgan asks about the capture structure. How can we think the capture structure? It was mentioned that leverage is likely to raise, but will be maintained at lower levels. But what can we expect? We do not provide any guidance to the market in terms of cash level or leverage, but it's important to mention that the company has at the moment a very relevant CapEx for 2023, and our strategy was to implement the CapEx with our own resources. And this is something we maintain. And with this cash reduction that we are likely to have in the next year, and we are living a moment of limited margins, we see that the level of leverage is relatively low, especially within the 3.5, which is the covenant that we have for our debt. So we are working considering this scenario, maintaining the level of leverage at this point without any specific target and waiting for the blast furnace to be back into operation, which will be a moment where the company will have the possibilities to define the strategy of the following years in a more accurate manner. So this is when we can talk about leverage and cash target. Thank you, Tiago. The next question is to Miguel from Leonardo Meretic with Bank of America, and Hikad Megane with Morgan Stanley. They're talking about export price. The realization of steel was very strong in the quarter considering the global benchmarks, especially for exports. Which were the factors for the stronger realization, and what helped this trend? for this quarter, and what's the trend for the fourth quarter? Miguel, please. Thank you, Leonardo and Ricardo. Considering the international market, Europe has been facing energy crisis and inflation, and we have a China with a surplus offering conditions of unfair competition as we saw in the steel area at the global levels. This made us to focus on our exports to the regional market on the one hand and to segments with higher added value. So on the third quarter we focused to automotive sector and also specific projects of oil and gas. This made us to have a better mix of product and obviously product with better added value and with higher prices. We are going to continue this trend for the fourth quarter. We are not going to change the level of exports for the next quarter. Thank you Miguel. The next question is also to you. Caio Grenier with BTG, Leonardo with Bank of America, and Ricardo with Morgan Stanley all ask about prices. They want to know what's the price movement to the industry, ex-auto, meaning without the automotive industry, and if we could see this relevance drop impacting the fourth quarter. And what's the mismatch that could be expected? And Ricardo also asks that, you know, he would like to see the comparison that you always make, how you compare the prices of the third quarter with the average that has been shown in the domestic market. Okay, thank you, Leo. As we always say, the industry prices follow the trend of the distribution. However, with execution time, which is different, of course, the trend or the industry should reflect that trend that is practiced in the distribution sector, but not at the level of the edges that we saw. In relation to the prices for the fourth quarter, as we said, we do not provide any guidance, but the average price of September was approximately 5% below the average price of the third quarter of this year. This is the reference that we can give. Okay. Obrigado, Miguel. Thank you, Miguel. The next question is also to you, Miguel. It's related to demand. is asking, what's the demand like with the slabs and plating? Do you see any investments in the sector for the years to come? First, let's talk about the demand. The demand of the largest labs has been very positive, not only pulled by segments that considering what we saw in the industry for machinery and industrial equipment, but in the past month related to oil and gas equipment. So we have very positive demand for large slabs, especially in Ipatinga, a very high demand in the past year. So the situation is very positive. for the stability of the line and also for the competitiveness of the line. As for the plating products, we see that the behavior has been very positive according to the last report of Anfavia. So there is an expectancy of having a 5% increase. And in addition... Although all the problems we had, all the problems that we had related to lack of parts. So we can see something stable in the auto sector. We understand that this is going to behave the same way in the next comes. And there's an expectation for next year of a growth of 5% for the auto industry. In the construction sector, we see some very positive prospects. We see some data that were maintained stable. And this follows... some products of plated products, which is not as noble. So we continue analyzing all the market opportunities. We have seen that we continue analyzing a new line of coated product, and we are still doing an analysis, and we are likely to have the results in the following months. Thank you, Miguel. The next question is also to you, Miguel. We have Camila with Bradesco and Leonardo with Bank of America. They're asking about volumes. considering the level of prices in the international market. Does it make sense to look for higher volume in the international market? And Camila would like more details in terms of demands and volumes comparing the domestic and international markets. Yes, Camila, beginning with the last question. In the fourth quarter, we are going to have the seasonality, which is typical for this part of the year. So we are likely to have a reduction in consumption in the fourth quarter according to the seasonality of the year. And also that would reflect the collective vacation at the end of the year. We always are looking for new businesses, new alternatives, but the international market situation today suffers a lot of pressure, especially by the surplus of offers out there and the unfair competition that China is putting on us. And this is something that's not likely to continue. That's why we are looking at the local market and the product with high value high added value, and we are looking for the products which have those characteristics that we are not going to look for exports if the margin is not reasonable. America, the next question is to you. Camila Barter with Itaú BVA with Bradesco. is asking about the coking units. How has the productivity of the coking units been progressing? Camila, thank you very much for your question. For the furnaces, which have already been recovered or retrofitted, the productivity curve follows what was expected. The recovery plan will extend to two or three years until all the repairs or all the recoveries have been completed, of course. Thank you, Americo. And the last question is a follow-up by Edgar with BBA, Miguel. The question is the following. Considering the guidance that we provided and when the exports would be stable, The drop quarter on quarter should come from the domestic market only, according to the release. We continue with the same approach. focused on projects of oil and gas. Of course, in the automotive sector, in the regional market, we are going to see the typical seasonality of this time of the year. So we are going to expect some adjustments in some sectors. And as I said, the domestic market will present the typical seasonality, as I said, of lower demand. Thank you, Miguel. So we've come to an end. So we end the Q&A session. So I'll turn the call to Alberto for his final considerations, final remarks. I would only like to thank you for attending our conference call to discuss the results of the third quarter of 2022. And let's wait for the year end. and we hope that we will be able to disclose the better numbers until the end of the year. And this is our mission in the short run. Thank you very much, and see you next time. Thank you, Alberto. We would like to thank everyone for having taken part in this session. And in case you have any questions, the IR team is available to clarify any questions you might have.