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Earnings Transcript for USNZY - Q2 Fiscal Year 2022

Leonardo Karam: Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Usiminas conference call in which we will discuss the results of Q2 of 2022. I am Leonardo Karam, Usimina's IR General Manager. To those who want to follow us in English, you can find the translation of the presentation on the Usiminas' IR website. We also have an interpreter for simultaneous translation, please select the sound channel on the icon on the bottom of your Zoom screen.
All participants are connected on listen-only mode and your questions can be posed in the Zoom Q&A session. This is the icon below on your screen. English speaking participants will also be able to ask their questions directly in this section. This video conference call is being recorded and broadcasted simultaneously through Usiminas' YouTube channel. Please note that this conference call is exclusive for investors and market analysts. Please identify yourself for your question to be answered. And for the sake of time, we ask to limit to 2 questions per participant. Now questions from journalists should be forwarded to Usiminas' Media Relations by phone, (31)3499-8918 or e-mail imprensa@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 highly depend on the performance of the steel sector, the country's economic situation and the international market situations, and therefore subject to change.:
With us today we have the executive management, our CEO, Alberto Ono; Vice President of Finance and Investor Relations, Thiago Rodrigues; Industrial VP, Americo Neto; VP of Corporate Planning, Gino Ritagliati; VP of Technology and Quality, Toshihiro Miyakoshi; Commercial VP, Miguel Homes; the CEO of Mineracao Usiminas, Carlos Rezzonico; the Executive Director of Solucoes Usiminas, Leonardo Zenobio; the Superintendent Director of Usiminas Mecanica, Fernando Mazzoni. Initially, Alberto will begin with a few remarks, soon after Thiago will present the results, then the questions made in the Q&A section will be answered.:
Now I give the floor to Mr. Alberto. Alberto, you have the floor. :
Alberto Ono: Well, Good morning to everyone. I thank all of you for participating in our earnings video conference call for Q2 of 2022. I would like to highlight from our second Q results. Number 1, I would like to mention an evolution in performance in all our business units. Our EBITDA increased 24% this quarter vis-a-vis last quarter, and all units have contributed positively. This is something that I wanted to highlight what is interesting when we see the steel unit.
It's the sales volume in the domestic market which has improved despite all the volatile scenario throughout the quarter. And as a consequence, because of these domestic market and the international market, especially when we see the conflict between Russia and Ukraine has been affecting us in the supply of raw material price, international price of steel logistics. This is a quarter where there was a lot of volatility and challenging aspects. But I believe that we have been successful and we are delivering good results.:
I would like to highlight, during this quarter we have renegotiated our debt. We have dropped our debt. Here we had a BRL 700 million of our debenture that matured in 2023. Our debt has been extended as well. This is interesting because we have a longer term and with lower costs, so this was also interesting.:
Another aspect that I would like to highlight of the quarter was the less payment parcel regarding the dividends of the results of 2021 of BRL 634 million if we add all the dividends that were paid out. Regarding last year's results, I believe we have BRL 2.1 billion as a result. That is the greatest dividend payout for 1 year in our history. So I believe this is a very important point that we should highlight. And I just wanted to highlight that this was realized during the last quarter.:
During the quarter when we also analyzed our ESG initiatives, in our sustainability report regarding 2021 was launched in April. And here you can clearly see all of our initiatives and everything that is being done regarding sustainability in Usiminas. This is a point that is important, and we have been able to demonstrate what we have done throughout Q2.:
And finally, before handing it over to Thiago, yes, we had positive highlights during the quarter despite challenging moments throughout the period. And this is a result of the team's hard work. All teams are totally focused on the performance, on delivering results, and also focused on adapting ourselves to the scenarios because this is a volatile scenario. This is teamwork and with this we have been able to deliver good results. Thanks to the team.:
Thank you very much. I'll give the floor to Thiago. :
Thiago Rodrigues: Thank you, Alberto. Thank you to all that are here. It's a pleasure to be here in my first video conference call together with the executive management. Let's go straight to the presentation.
We start with the highlights of this quarter. We will start with the steel unit sales volume. Here, there has been increase in the domestic market in terms of value. It is important because this is a mix of greater value -- added value that brings more margins. There was a slight drop of 4% that shows a stability on our sales volume. Now when we see iron ore sales, there has been a significant increase vis-a-vis last quarter, strongly impacted by rainfalls in the Southeast regions. But when we see past quarters, these 2.3 million tons represent a very significant volume, which is above average when we compare it to past quarters.:
Now our adjusted EBITDA, as Alberto mentioned, this is a significant value. This has been a good quarter, BRL 1.930 billion with a margin increase of 23%. And then the next slide, we will see an increase in absolute values in all business units.:
Net profit didn't follow the increase of the EBITDA because of the exchange rate variation which affected us in dollars. Here, we have the adjustments, the EBITDA margins per segment. Here are the consolidated results. Here, we can see that the margin has normalized. Here we start with 2021. That was an exceptional year because of the recovery after the worst moment of the pandemic in terms of stock. But this margin of 22% compared to the past is a positive margin.:
Now the steel unit and EBITDA BRL 1.400 billion with the margin around 80%, once again, as we already mentioned this was positively impacted. But the good prices of the period and better sales mix focused on the domestic market.:
Now mining unit, in an absolute terms, there has been an increase in EBITDA due to the volume as we mentioned in the past slide. But with the margin drop mainly impacted because of the cost of export freights. And during Q2, we exported over 90% of our iron ore volume and CFR. Now solution, now in steel transformation, positive effect of the prices of the quarter and the sales mix.:
Now following 2 other financial indicators. Now we go to working capital that had an increase of 14% during this quarter because of the prices of raw material, which affected the entire chain. So the value of finished products impacted accounts receivable and a small part in volume of raw material. Here, we have a whole work in order to drop to our working capital in the upcoming quarters. We cannot forget that there will be an increase in working capital, especially during the last quarter of the year because of the inventory of slabs for the refurbishment of Blast Furnace 3. Here we can see steel inventories, the controls are controlled. And this is around 63 days of inventory, which is very ideal for this moment.:
Now our next slide. Here we have our net debt. When we compare it to Q1 and Q2, there was a cash drop of BRL 1 billion. It's important to mention to the generation of operational cash was positive above BRL 600 million, offset by a CapEx that we have already accelerated. We've seen this. And it mainly impacted by the payment of the complement of the dividends of 2021, which was BRL 1 billion.:
Our debt increased BRL 500 million because of the exchange rate variation, as I previously mentioned. Therefore, we ended Q2 with a net debt of about BRL 450 million. Still it is a comfortable level with an indicator of net debt-over-EBITDA of BRL 0.05. On the lower part, you see the profile of the debt. Here, we rolled over our debt with the 8th emission of debentures, where we use this value to pay the debentures of the 7th emission that mature in 2023. We extended the debt profile and now the maturing dates are between '27 and '28, and this gives us more breadth in order to fulfill our CapEx commitments for 2022 and 2023.:
Now speaking of CapEx. Our next slide shows the acceleration of our CapEx on Q2. This was expected, still slightly below what we had planned. And we do have a guidance of this year's CapEx of BRL 2 billion, and we remain with this guidance. What this means that during the second semester, there will be any event greater increase of the CapEx disbursements, especially focused on the retrofit of Blast Furnace 3 planned for next year.:
Now our ESG agenda. Our targets in details are in our press release and we are on the right path. We've achieved 10% of our goals, 80% in line with planning and 10% need more focus in order to fulfill our target by the end of the year. But this is nothing that concerns us. And here we have a number of highlights. Here, Mineracao Usiminas also received certificate of a de-characterization of its central dam. There was upstream. We no longer have upstream dam and you can see how the area has been re-integrated to nature with over 12,000 seed plant leads of native species. And here during the last quarter, we carried out the third diversity week. This is a program that is already part of the company's culture. We want to promote these, and we mobilized the entire company and virtual and in person activities. We talk about diversity, like race, gender, diversity and other matters.:
Another thing that we would like to say regarding our ESG agenda is the restructuring. So here, now we have a general manager that reports directly to Alberto. That shows the importance that we give to this agenda.:
These are our results. You already had access to them. Now we'll give the floor back to Leonardo so we can start our Q&A session. :
Leonardo Karam: Thank you, Thiago. Now we will go to our Q&A session. Our first question for Miguel regarding steel sales. Edgar De Souza from Itau BBA asked about what will drive the drop of sales volume of steel during the next semester? Because in seasons, the third quarter is the stronger. Could you tell us which sectors are driving the demand? Which are weaker?
Miguel Angel Camejo: Thank you, Leo. I wouldn't say that there is going to be a drop in volume. When we analyze the sectors where we participate, we can distribute it in 3 major markets in the domestic market
When we see the results announced during the last days of important customers of Usiminas in this sector, it is clear to see that these sectors are undergoing a positive moment, not only because of the situation of the Agri business nationally, internationally and export opportunities of the sectors, because of the exchange rate.:
Now distribution, we are seeing certain stability. And distribution is what may suffer for because of the international situation. Because this is an important turmoil with high volatility and high uncertainty because of the war between Russia and Ukraine, the COVID Zero policy of China, the high interest rates at a global level that can impact the ability of consumption and investment, which will impact the economies and also the use of steel at a global level.:
There are sectors that performed positively like the industrial sector. The auto industry is still with uncertainties, but with opportunity, if there is availability of greater volumes of semiconductors and spare parts. And distribution, we have to monitor because of the volatilities and uncertainties in the international market. What is positive is the stability that we see in the domestic market. In terms of demand, some sectors performed better than others, as we have already explained. :
Leonardo Karam: Thank you, Miguel. Now we have a next question for Thiago. A number of analysts want to know about costs. We have Enrique Marcus from Goldman Sachs; Edgar, Itau BBA; Isabella Vasconcelos, Bradesco BBI. And they're asking the following, how do you see the price pressure for the second semester, mainly because of the coking plants, if you will have necessary natural gas? But Edgar says, but raw material like the price of slabs in iron ore have dropped. And Isabella also asks about the outlook of CPB per ton in the upcoming quarters. Thiago, you have the floor.
Thiago Rodrigues: Okay. Thank you all for your questions. Now regarding the cost structure of the company, we expect it to remain similar to what we had last quarter. I'm talking about Q3. The fourth quarter is distant, therefore, it's difficult to talk about it. But regarding our structure, our consumption structure, we expect it to remain like the one of Q2. Therefore, the effects of the coking plants will remain stable during the second semester and the price effect will vary a little bit.
There are raw materials that have a differentiated lead time like slabs. We still -- we will buy them during -- consume them during the third quarter, but they were bought at high prices. We will only see the drop of price significantly during Q4. Therefore, so I believe that we will see a stability in the structure with a variable price in slabs and coke. And we will receive a little bit of this benefit from iron ore. :
Leonardo Karam: Thank you, Thiago. Our next question is about our CapEx. This is for you, Thiago. Here we have from Edgar, Itau; and Ricardo from Morgan Stanley. Could you give us more color regarding the necessary investment to retrofit the coking plant? The expectation of the company is a leaner recovery in the coking plant, or will something impact this normalization?
Edgar says that regarding the CapEx, any update regarding the BRL 1 billion that are BRL 2 billion that is our guidance, that includes the retrofit of Blast Furnace 3. And they also ask about the coking plant, if there is anything we expect regarding CapEx. :
Thiago Rodrigues: Well, our guidance remains at BRL 2 billion. There is no relevant CapEx increase that has already been approved.
Now regarding our coking plants, as we mentioned in our material fact, this is under study. In order to extend the lifespan of coking plant, we're doing preservation works that would be maintenance. That shall gradually put our blast furnaces gradually back in operation. So we are -- we believe that the increase will be linear here. What could take longer to salary the return of the blast furnace would be the shutdown of Blast Furnace 3 here. This will be linear, but with the potential of a more significant return. As of the moment, that Blast Furnace 3 becomes operational as of the second semester of next year. :
Leonardo Karam: Our next question is from Lucas Yang from JPMorgan. It's for Americo. I would like more color about the coking plant. He wants more information regarding the coking plants. And what do we need for this recovery? Americo?
Americo Neto: Well, thank you for your question. Adding to Thiago's comments, we have 2 technologists that support us with these activities. And there is a third technician that is an expert in assembling coking plants. So basically these are preservation activities. The level of waste was greater, therefore, we needed greater interventions and we had to reduce our coke production. And as Thiago said, we have a plan for both coking plants. And we want the growth to be linear due to the strategy that we have, because they are done through blast furnace blocks. Now when we think about the resumption of Blast Furnace 3, we believe that throughout the period there will be a better evolution during the second semester of 2023.
Leonardo Karam: Thank you, Americo. Now for Miguel. Prices, they're asking about price. Ricardo Monegaglia from Morgan Stanley. Isabella from BBI. She says, what can make the steel price of Usiminas evolve different from the prices announced by consulting companies? And Isabella says, if there is pressure for discounts for distributions after the granted discounts? And what about the premium? And how do we see the premium of national material vis-a-vis imported material? Miguel?
Americo Neto: Thank you, Ricardo, Isabella. This is an interesting question, Ricardo, because in reality, although, we talk about distribution prices and we could think about the sale of more commercial product. The portfolio of our products is the most noble portfolio in the Brazilian steel industry. And this includes distribution, because when we talk about sale to Tier 3 and 4 in the chains of the different industrial sectors, we already include these sales as distribution because there are sectors from the distribution channel that are part of these chains of different industrial sectors. Yes, we may have an average price in the distribution sector slightly above the rest of the market because of the mix of products sold to this sector.
Isabella, regarding premium and discounts, of course, we are observing great volatility in the variables that are part of the premium. We're talking about international shipment. We talk about the exchange rate and international prices. Today when we do our math, we can talk about a premium of around 2% and 15%. This is a premium that we believe doesn't incentivate. Here we see a drop, a gradual drop of imports in our domestic market. There are imports from China that are focused in coated products. And there are projects from the domestic market that are not part of the steel industry. So we expect to continue with the gradual -- we expect a gradual drop of imports in the domestic market.:
Well, pressure is part of negotiation. We have to management. And in Usiminas, we're responsible for optimizing the profitability of our business, guaranteeing the competitiveness of our partners in the domestic market. :
Leonardo Karam: Thank you, Miguel. Next question from Victor Kietzmann from SmallCaps Portal. And this is for Thiago. Thiago, he wants to know about working capital. What is your expectation of evolution of working capital for Q3, discounting the refurbishment of Blast Furnace 3?
Thiago Rodrigues: Thank you, Victor. We have not announced a guidance of working capital. But if you see the values of the main raw materials, I mean, market index since you can see that there has been a drop. Nonetheless as I mentioned a number of raw materials have greater lead time. So once again, we are still receiving and processing the slabs that we bought at a very high price.
So I would say that based on this analysis, I believe that the first impression is that there will be a drop in working capital. But there is this detail that will give more stability to this value. Our prospect is, once again, as prices will drop in the future and subsequently, they will increase because of the increase of more slabs because of the shutdown of Blast Furnace 3. :
Leonardo Karam: Now question from Ricardo Monegaglia from Morgan Stanley. This is the inventories of Blast Furnace 3. Why build an inventory of slabs with the production of slab of Blast Furnace 3, because probably your cost is lower than the cash cost per ton? Miguel?
Miguel Angel Camejo: Ricardo, now because of the schedule and planning of the shutdown of Blast Furnace 3, our expectation is to build the inventory as of the beginning of the Q4 of this year, as you were informed. The expectation -- and Blast Furnace 3 as of October. From here up till the day we will observe the volatility and the evolution from the prices of raw materials that are part of the cost of our own production, and also the evolution of the price of the slab.
Now on the other side, we must understand that the noble mix of Usiminas especially to serve the steel -- auto sector and the industrial sector where we have an added value and this is reflected on our prices and operational margin. This is why it makes sense to have our own production to service these sectors that do not buy commercial slabs.:
Now commercial slabs are -- it's easier to look for them and find them in the market or by third party. And this is more related to the indexes that you see in the international slabs. On one side, we have to see the evolution of the assumption and the product mix of sectors where Usiminas participates. :
Leonardo Karam: Thank you. Our next question for Thiago about proceeds. He wants to know if the company proposes interest of our own capital regarding the results of the first semester. This would be in terms of dividends.
Thiago Rodrigues: Thank you for your question. No, we don't have this -- we don't expect this. We will see the result of the year in order to see what kind of proceeds we will give to our shareholders.
Leonardo Karam: Our next question is for Miguel from Safra. He wants to know about imports. How do you see import penetration and galvanized products? Is the company adopting a different commercial strategy that different from what you've had? Miguel?
Miguel Angel Camejo: Good morning, Vinicius. Thank you for your question. As a matter of fact, imports of coated, they come from China, have increased significantly in the past months. 2021 and the first semester of 2022, we see high imports of coated products. And this -- and here -- and this is caused by the incentives that the Chinese government offers to export these type of products. Here, this, we consider as fierce competition this loyal competition. And we are talking to the government to see what can we do from here on.
Now Usiminas has low share in this commercial segment of coated products. We dedicate great part of our coated products to the auto and the industrial sector. Of course, we also participate in specific projects of power. In reality, the impact of these imports for Usiminas, well, is low. We continue with geared sales and prioritizing servicing, industrial and auto sector, here in Brazil and in regional markets like Argentina. :
Leonardo Karam: Thank you, Miguel. Our next question for you as well, Miguel, about the order prices. Armando Perez, he is an individual and he asks about the price readjustment that you expect in April of '22 -- oh was this implemented in April?
Miguel Angel Camejo: Yes, the increase of price was implemented. That was around 50%, 60% -- and these were readjustment of contracts that were updated in April.
Leonardo Karam: Thank you, Miguel. Next question For Thiago. Thiago, CapEx follow-up. Sydney Nascimento, individual. He wants to know about your planning in order to accelerate the CapEx expenses. Is this concentrated during Q3 or Q4? Thiago?
Thiago Rodrigues: Sydney, I believe the Q4 -- the closer we get to the shutdown of Blast Furnace 3 activities increase, and also the disbursements. Therefore, we will see a growing curve up till Q4.
Leonardo Karam: Thank you, Thiago. Another follow-up regarding steel volume from Isabella Vasconcelos, Bradesco BBI. Could you elaborate, if the guidance of volume for 3Q considers greater drop of export? And is stability a slight improvement in the domestic market? Miguel?
Miguel Angel Camejo: Isabella, we could talk about stability and we do not see major variations in this mix. Certainly, the situation of the Agri business sector and there are also big products of power in oil and gas and renewable. This could be a good scenario for heavy plates. But we understand that we will not see great variations in terms of the sales mix when we compare it to the second semester.
Leonardo Karam: Thank you, Miguel. Next question for Carlos Rezzonico from Leonardo Neratika from Bank of America. He wants to know the outlook of cost per tons in the mining unit in the upcoming quarters.
Carlos Hector Rezzonico: Thank you, Leonardo, for your question. The costs will maintain themselves at the current level. We want to reduce costs. But the actions that will be implemented will not be done in a short-term. This will also depend on the fuel prices, because as you know, one of the greatest cost would be fuel. I'm talking about cost within our operations. I'm not talking about other cost. But these are logistic costs within our operations. I'm not thinking about major variations in the upcoming quarters or months.
Leonardo Karam: Another question, Carlos, about sales volume. Isabella Vasconcelos from Bradesco BBI wants you to elaborate on the outlook of iron ore volume due to the strong performance of Q3 this year.
Carlos Hector Rezzonico: Well, Isabella, thank you for your question. We are trying to improve the performance of our plant. We have been able to achieve good results during Q2. But we did not achieve the performance that we needed. The collapse of the plant impacted Q2. In some areas we are correcting many of these gaps. And for the time being we're maintaining our guidance that is between BRL 8.5 million and BRL 9 million. This, of course, will depend on the market.
And what I mean, I'm not talking about price conditions from China, but I also refer to something that could happen with freight, with logistic, what can happen with discounts. Discounts have increased significantly in the last month. If market conditions maintain themselves at the current level, our guidance will be maintained. Now if this changes, we will have to analyze what is the best scenario for our production. :
Leonardo Karam: Thank you, Carlos. Our next question is for Miguel, regarding Solucoes, Leonardo Neratika from Bank of America. He asks what can we expect regarding margins in the transformation segment from here on? Miguel?
Miguel Angel Camejo: Leonardo, obviously, we've seen an ideal result in Usiminas -- Solucoes Usiminas in addition to everything that was done in efficiency, productivity and performance of our plants. And the front service centers and solutions, there is a positive impact because of the increase of price in the domestic market and the impact on results because of the cost of inventories. Now after the positive cycle of price increase, we can expect the return of the normalization of the business characteristic that has service centers for automobiles and industry and one other thing toward distribution.
Leonardo Karam: Thank you, Miguel. Our next question for you, Miguel. This comes from Arthur Biscuola from Santander. He wants to know about the demand. How is Usiminas' order book? Are there signals of a slow down? Miguel?
Miguel Angel Camejo: Arthur, as we already mentioned, we are seeing certain stability in the consumption and demand of the domestic market in addition to volatility uncertainties and turmoil in the international market. This stability is an important thing in the domestic market because of the behavior and the resiliency that we see in many industrial sectors. We talk about the auto industry, we believe that there are opportunities. If there is an improvement in availability of spare parts and components that would be positive for the internal demand.
And for Usiminas' order book, in addition to these sectors we see a positive scenario for different projects that are being carried out of the second semester connected to energy projects in the sense. We do expect a positive scenario for heavy plates during the second semester and this will provide us opportunities of sale. So the message is, we do not see a slowdown. We are seeing certain stability of the consumption and demand of steel in the internal market. And yes, there are opportunities that we could leverage from here on. :
Leonardo Karam: Thank you, Miguel. Our next question from Arthur Biscuola, Santander is for Thiago. He wants to know about potential galvanized line. If the company consider it even if there is a slowdown in demand from the domestic market?
Miguel Angel Camejo: Well, alternatives to improve Usiminas is mix. We're always looking for them and we're always analyzing these points. And a galvanized line would be one of these options. Now this, we cannot decide this based on a scenario of mid-term cost. We have to see long-term demand. Nonetheless, this being said, Usiminas always assesses different alternatives. But for the time being, we have nothing to mention regarding this matter.
Leonardo Karam: Thank you, Thiago. Carlos, volumes and prices -- from Mosa, provision of volume of iron ore was in transit between the second to the third quarter. Could you say something about the provisional price?
Carlos Hector Rezzonico: Now speaking of volumes that remained in transit and haven't been hedged or don't have established price, we're talking about 500,000 tons at an average price of BRL 118. This is the only information that I could give you right now.
Leonardo Karam: Thank you, Carlos. Our last question for Miguel. Miguel, Luis Bridge from Meta Asset. He wants to know more about prices. I would like to know what is your expectation for the average steel price traded on Q3 vis-a-vis the second quarter of 2022?
Miguel Angel Camejo: Luis, Usiminas does not announce future events. But what I can tell you to calculate future price is the average price of June is in line with the average price of the quarter. On the other side, of course, there were discounts that were done or given throughout the last part of the quarter because of the evolutions of the variables that impact the price. This is for distribution. Now industrial sectors, they update their contract according to the characteristic of each one of the contracts and sectors. And the auto sector maintains fixed prices because of their contracts.
Leonardo Karam: Thank you, Miguel. Well, our Q&A session has come to an end. I would like to hand it over back to, Alberto, for his final remarks. Alberto, you have the floor.
Alberto Ono: Well, I would just like to thank all of you once again for participating in our video conference call. And we expect to see you during our next earnings conference call. I would like to highlight that we are facing a challenging scenario internally and domestically, but our team is doing its best to deliver the best results.
Leonardo Karam: Thank you, Alberto. Well, we thank all of you for your participation. Should you have doubts, our Investor Relation team is at your disposal to answer any questions.