Earnings Transcript for USNZY - Q3 Fiscal Year 2023

Leonardo Karam: Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to Usiminas’ Teleconference where we will discuss the Results for the Third Quarter of 2023. I'm Leonardo Karam, Usiminas’ Investor Relations General Manager. For those that want to follow us in English, we have free translation of the webcast. Presentation is available on Usiminas’ IR Web site. We also have an interpreter for simultaneous translation. Please choose the sound channel on the icon at the bottom of your zoom screen [Operator Instructions]. Please note that this video conference is exclusive for investors and market analysts. We kindly request you to identify yourself for your questions to be addressed and for smoother proceedings. We request you to limit your questions to two part per participant. We also ask any questions from journalist to be directed to the Usiminas’ Media Relations by 313-499-9312 or through the email in imprensa@usiminas.com. Before we proceed, we would like to clarify that statements made during this conference call regarding the company's business prospects as well as projections, operating and financial targets related to growth potential are forward-looking statements based on the management's expectation regarding Usiminas’ future. These expectations highly dependent on the performance of the steel industry, the country's economic situation and the international market situation and are subject to change. With us today is our President, Marcelo Chara; the VP of Finance and Investor Relations, Thiago Rodrigues; VP Commercial, Miguel Homes. Initially Marcelo will start with his remarks. Subsequently, Thiago will present the results. Subsequently, questions from the Q&A session will be answered. Now I hand it over to Marcelo. Marcelo, you have the floor.

Marcelo Chara: Good morning. Thank you very much. Today we're in Ipatinga with Miguel and Thiago. This is the industrial center and here we're following up all of our operations. This has been a quarter mainly concentrated on the pursuit for operational excellence, continuous improvement in performance in all the industrial operations of our Usiminas system. Mainly, we focused on the efficiency of primary areas and we also had the opportunity and we defined important definitions like in coke line three, where that was deactivated and impacted it significantly environmental improvement and cost. We have routines, management routines, focused on more control and the optimization of all the productive resources. I would like to say that we have concluded the re-lining work of blast furnace through our main facility, which defines the productive capacity. Currently, we are carrying out all the necessary tasks in order to begin the operation. And in the upcoming days, we will be able to have the [glow in] or the effective production of the Blast Furnace 3. Now this, as we have changed our productive configuration with the integration of Blast Furnace 3 with this, we will be able to face the major challenges that we have in the market, the Brazilian market, mainly -- well, this is associated to the -- enter of Chinese imports of finished products in the Brazilian market. This negatively impacts all the industrial sector of the country. In terms of comparison in imports still and the apparent consumption of the country, the history of the last decade was 12%. Now, year-to-date, this has doubled the income of imported products accounts for 23%. And what concerns us is that we've seen that these products have present sales value that don't compensate the cost. So we are before [unloyal] competition here. Now we see stability in the consumption of steel in the Brazilian market in 2023. This shows the resilience of the Brazilian economy. The GDP will grow between 2.9% and 3% with high consumption and strongly driven by the [growing] sector, but there is low performance from the transformation industry strongly affected by imports. Now this has dropped 0.7% and there are negative indicators in fixed capital. These indicators impact strongly the steel industry and all its value chain. For 2024 our expectations and as we saw in the last [forecast] result, the growth of GDP will be positive, but half of what we saw in 2022. And it is important to highlight we need to strongly focus on the reindustrialization policies of the country. It's important to make progress in the reforms that are undergoing the Congress and the contention policies against unloyal trade. Just an example, what Europe has done with Safeguard and Mexico and the United States that tax all the steel products with 25%. We have to pay attention to this. This already was initiated by ASSO Brazil with the associates. With that, we participate together with the government and we have to resolve this in the short term to avoid negative impacts in terms of in the industrial activity of the country, that also negatively impacts the generation of highly qualified labor in the industry. I do thank you for your attention. And Thiago, you may continue.

Thiago Rodrigues: Good afternoon. So we will start with the results of our quarterly results. Well here, we have the highlights of the quarter. I would like to highlight the steel sales volume slightly above the expectation. This is 1.02 million tons, now they were BRL2.4 million. Now consolidated EBITDA was negative in BRL20 million impacted by the steel segment that we will see in detail. So we also had a strong reduction in working capital and this is an increase of BRL780 million in cash flow and the reduction in leverage was BRL0.21, and as the reinitiation of the Blast Furnace 3 will start in the next few days. Here we have consolidated results and therefore the net revenue continues dropping. 2022, we had very high prices on Q3. The revenue was BRL6.7 billion, 2.5% below the past quarter. Now this drop in price is because -- this is because of the drop in price and this contributed with the drop of EBITDA that was negative BRL20 million. Net income was impacted by the operational and financial results, especially because the exchange rate we had on net loss of BRL166 million. Now when we see the steel unit results, the sales volumes presented an increase of 5% vis-a-vis the first quarter. In the domestic and the foreign market this stood 1.21 million and there was a drop of net revenue. There was because of the drop on price and the worse mix in the exports because that included the sales of plates during the quarter. This impacted our EBITDA. We have a negative EBITDA of BRL251 million and a margin of minus 4% vis-a-vis 3.1% that was last quarter. On our next slide, we will give you more details. It's clear to see what impacted the EBITDA during the quarter. And here we can see that the price mix effect was the main factor, partially offset by lower COGS. Now the COGS drop is because of gains of efficiency during the quarter but because of the mix of sold products. On the other side, the fixed cost of Blast Furnace 3 continues negatively affecting the results. Now on our next slide. We will see [indiscernible] results. The sales volume is stable to 1.391 million tons, net revenue BRL793 million. This is below the last quarter due part to the -- we have more sales with no maritime freight but a worse mix quality. The EBITDA was BRL129 million a drop of 2% with negative impacts, because of the mix and because of the appreciation of the real. This is an impact of BRL10 million in the final result. Now, Soluções Usiminas. On the next slide, our sales volume was stable, 301,000 per ton. Here, the revenue BRL6.775 million, BRL3 million below last quarter and the EBITDA BRL28 million, showing a slight recovery vis-a-vis the last quarter because of the steel. Now our financial indicators, we will start with our working capital and inventory. We are dropping our working capital during this quarter. The effect was very important because of the drop of steel inventories, also plate inventories, because of the overhaul of Blast Furnace 3, but we improved the accounts of suppliers and also advancements from customers. On our next slide, we have our CapEx. The CapEx of the quarter was BRL886 million. This is in line with our plan and we continue with the expectation to end our yearly CapEx within the guidance that we already disclosed, that was BRL3.2 million. Now regarding our cash position. We -- great impact was working capital, 1.544 billion and now we have a cash position, which is sound for the company, highly robust and this affects the indicators that we will see in the next slide, a drop in our net debt. And the maintenance of the leverage index of 0.21, which is extremely comfortable and no changes in our time line of debt -- and our time line regarding the amortization. This was our brief presentation. I will hand it back to Leonardo, so we can start the Q&A session.

A - Leonardo Karam: Thank you, Thiago. Well, we will start now our Q&A session. Our first question comes from a number of analysts. Gabriel Simões from Goldman Sachs, from Bank of America. Everybody's asking thing about working capital. They want to know how much of these changes are result of the drop of the inputs and how much is because of the consumption of plates? And how do we see this in the upcoming quarters if we will seeing more releases in the upcoming quarters? Daniel asks, is this dynamic, is this additional drop of third-party slabs can we see a liberation? And Rosito completes and asks, if this release will be the peak during Q3 in terms of slabs and what can we expect in the future?

Thiago Rodrigues: Thank you, Daniel, Gabriel, Guilherme [indiscernible] the amount was major in this quarter because of the consumption of our slabs inventory and the beginning of the operation of Blast Furnace 3. As it still hasn't started, we have been able to better manage the coke and coal inventories. In our view, this quarter was the peak moment of the drop of our working capital. Our expectation is to have more drop next quarter, not as big as now -- be lower because we ended the replenishment of the inventories after the operation of blast furnace. Now the effect price and volume grade or impact on the volume, we had a peak of over 660,000 tons of slabs and with the drop of the slab inventory the effect was on volume. In summary, our expectation is more drops but lower than what we saw this quarter.

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

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

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

Miguel Homes: For the automobile sector, most or contracts are a semester and there is no update of contracts during Q4. For one part of the contract, we expect an adjustment on Q4 of 2023.

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

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

Leonardo Karam: Our next question for Miguel. Gustavo Hwang from HSBC. He wants color regarding how you see the steel demand, the flat steel demand, for Q4 and Q1 of 2021?

Miguel Homes: Well, today, we see stability in the steel consumption. I would say that is highly stable in most consumption sectors. We could highlight some sectors like oil and gas, we have greater levels of bid but there are ongoing projects that will demand more steel in the upcoming quarters, not only Q4 but only Q1 of 2024 and then the agro storage area is increasing and the naval industry for agro and fuel transportation. So by enlarge, we see stability and more stability in consumption.

Leonardo Karam: Going back to costs, we have two questions. One from XP, Bank of America regarding Blast Furnace 3. They want to understand what is the improvement that you expect with the conclusion of the overhaul of the blast furnace? If you could give us an update regarding the overhaul and what level of efficiency do you expect as soon as it becomes operation? Now the inventory of slabs, is it enough?

Thiago Rodrigues: Right now, Lucas, Guilherme, it is difficult to give you an accurate value, because there are a number of factors that affect the production cost. One, the productive configuration that Usiminas will have will depend on the market with the market demand. We do our numbers to see if we continue producing with three, two furnaces, the cost and quality of raw material effects. The cost with all these variables, it is very difficult to see drop. There is high -- we have high expectation as well we believe in a significant drop of cost as soon as Blast Furnace 3 becomes operational. This furnace was operating, it was around 2 million tons and it has capacity of 3 million tons. So we believe that we will increase our product capacity, increasing consumption, gains, diminishment of fixed costs. So we are not going to give you figures. We will just tell you that cost reduction will be important as of the next quarter.

Miguel Homes: I would like to add that as Thiago just mentioned with this furnace, we have a configuration of three furnace. An important fact is that we have carried out significant technological improvements in this furnace. I'm not going to give you details, because this would take a long period of time. This is a furnace that is state-of-the-art furnace, but we have to see the level of imports of steel in the market. Perhaps we won't be able to operate with three full furnaces, because of the record level of imports that has been almost 5 million tons this year at prices with negative margins. So this doesn't only impact the steel industry but also the value chain. Can you imagine what this means? You could -- the product -- the steel products that are coming in from China, they are -- here, we have a deficit of $40 million in our trade balance, so we just carried out a major overhaul. The ramp up will start in the coming weeks in the beginning of 2024. We will clearly see the benefits of this overhaul. But if the level of imports continues this way, we are not only assessing how many furnaces we’ll operate, but we’re re-dimentioning our industrial operation. You also mentioned the importance of the approval of reforms that are undergoing our Congress, I would like to make a brief comment regarding our tax reform. And the report that was announced by the senate recently, we believe that the proposal is better than what we have today. So this proposal is still a significant proposal and the impact will be positive in the economy. By enlarge what concerns us a bit is, number one, when you start, when you establish too many exceptions to the rule, you like the simplification. What concerns us is selective taxes. Selective taxes that may impact inputs from the industry, which generates jobs that goes against the principle of tax neutrality. And when you have a selective tax on fuels and minerals, this can affect the industrial chain as a whole and this affects the competitiveness of the Brazilian industry. This is something that I believe that we should highlight from Marcelo's statement.

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

Miguel Homes: I want to highlight something. There are no current negotiations, there are no contract update. The contract will be updated in January and April. What we are going to do, what we're going to present on Q4 are adjustments or new conditions that are predefined in the negotiations of the past for the contracts in January and April. In this case, approximately one through third of the contracts will receive an adjustment of 5% on Q4. So I believe that now this is clear regarding our contracts. Now the contracts will be updated 40% of the contracts as of January. This negotiation is underway and 60% of the contracts will be updated as of April. These negotiations have not started, but we believe that we will begin this on Q1 of 2024.

Leonardo Karam: Our next question for Thiago. Rafael Barcellos, Santander. He wants to know about the profitability of the steel unit in the upcoming quarter, quarter four. Thiago?

Thiago Rodrigues: Well, as I said, in terms of costs, we see certain stability in comparison to Q3 and Miguel mentioned the difficulty and showed us the sale scenario. Well, we believe that it will be a difficult quarter. We are focused on the future after we go over the cost impacts and in the future -- while we have a future outlook for next year, we believe that quarter four will still be a difficult quarter for Usiminas, according to our expectations, but we have a more positive outlook during 2024.

Leonardo Karam: One more question for Miguel from Daniel Sasson, BBA. He wants to know about the imports. When do you expect to see the drop of steel levels in Brazil, how is the competitive scenario, is there is space to increase prices?

Miguel Homes: In the short term and when we analyze the Chinese situation, we see different variables. On one side, the Chinese production in September significantly dropped vis-a-vis the past month with a drop in production with an improvement expectation of the consumption indicators of their domestic market, especially driven by infrastructure projects and some renewable energy project, we could expect a drop in the upcoming months of Chinese exports, so this diminishes the imports in Brazil. Now the international trend has different dynamic. So until the end of the year, our view, we can expect a drop of steel imports in Brazil. In the middle of all of this, we have a scenario that is a strong unloyal competition regarding imported products coming into the country. And we expect measures in order to balance and minimize the impact of this unloyal trade in all the industry and all the steel chain of Brazil. Regarding a competitive market and increase of price, we will continue monitoring the steel industry. There's strong pressure on cost and this could be reflected in an improvement in margins in the upcoming months following the international and local situation.

Leonardo Karam: Thank you, Miguel. Our next question for Thiago from Rafael Barcellos, Santander. He wants to know about CapEx, Thiago. He wants to know if you could talk about CapEx expectations for 2024?

Thiago Rodrigues: Well, we are in the middle of our budget, so we don't have an approved figure here. But the expectation is lower CapEx than this year. That was an exceptional year because of the Ipatinga plant. We don't have a figure but the expectation of our CapEx is that it will be lower than what we had this year.

Leonardo Karam: Next question for Marcelo [Indiscernible] [Rafael] from [Indiscernible] Capital. She wants to know about MUSA, what about possible projects in iron ore?

Marcelo Chara: Well, iron ore for us is strategic and mainly in MUSA because of the characteristic of the reserve because their iron ore is extremely pure. And our focus in the mid and the long term would be decarbonization and the quality of iron ore is vital. Therefore, it is a priority for us and we want improvements, improving our efficiency, guaranteeing the necessary iron ore for our growth projects. We feel highly reassured and we're going to focus on this.

Leonardo Karam: One question regarding the blast furnace. What about the cost, Paula Athanassakis from RPS Capital. She asks about the cash cost per ton of steel unit, if there will be a drop during Q4 this year? If not, when can we see the efficiency gain after the overhaul in the company results?

Marcelo Chara: Paula, as we mentioned, the expectation is to see the effect as of next year. The cash cost of Q4 should present an improvement of the furnaces in operation today, but worse indicators of blast furnace that will be in the ramp-up stage. We believe that in the mid run, the cash cost of this quarter will be the same or stable to -- and we will see an improvement as of Q1 of 2024.

Leonardo Karam: Now we have our last question for Marcelo. We are going to group a number of people that ask practically the same thing about import tariffs. We have Rafael Barcellos, Santander; Guilherme Rosito, Bank of America, Gustavo Hwang, HSBC; and Matheus Moreira from Bradesco BBI, all want to know about the import tariffs. Your view about the potential increase of import tariffs in Brazil, if we can see that this year, if the 25% that have been mentioned is feasible? And without this increase, is it possible to think about an increase in price in 2024? And Matheus also asks if the evolution of the import of flat steel, what do you expect in the upcoming months, lower domestic prices can prevent the import to increase, or do you believe that we will -- if the Chinese imports will still come in very easily?

Marcelo Chara: Well, let's say, Mexico decides to close or to place tax barriers at 25%, the US 25%, Europe safeguard. As Miguel mentioned, there is a difficult situation in the Chinese market. So where is this finished steel going to go? This is going to the countries that are unprotected. Brazil is the most -- the 10 greatest economies in the world, it's a market reference. They don't -- they can't go to Mexico so they come to Brazil and the competition is unloyal. And why 25% because Europe, because Mexico and U.S. established 25%. So we are not different. If we don't do anything different, they are going to bring steel that doesn't match the cost, the real cost, this is negative. We wanted to hire 600 people this year.We haven't contracted these people because of the number of import. We closed the center in Sao Paulo. So once again, we are concerned -- and also Brazil is adamant regarding this because this impacts labor. Now as of this -- our expectations for 2024 would be cautious follow-up and see -- and how the economic dynamic of the country will develop, the half -- the growth will grow half of 2023, it's important to adopt actions in order to [prevent] greater damage to all the industrial network in the country.When I say the balance of industrialized product has the impact, we're not talking about 5 million this year. You can multiply this by two, we're talking about manufactured products that come with this steel. This is Chinese labor that replaces Brazilian labor. We don't want protection, we want to level the playing field, and we don't want unloyal competition. And I believe that the government has to do something about this.

Leonardo Karam: I said that this is the last question, but we have a last question that is important. Caio Greiner for BTG Pactual asks about the integration with Daniel. What can you talk about the turnaround project and the new company management? Do you have a diagnosis, do you believe that the plant will be CapEx intensive or will be more process/management, Marcelo?

Marcelo Chara: Well, as I have already mentioned that during the three first months, the focus as we are -- you can -- the fact of being in Ipatinga means something, it's not by chance, it's systemic. We are strongly focused on following up the management in detail, with KPIs, with benchmarks and we trust the turnaround of the company, this will take some time. Now human resources that we have in with Usiminas, this is a company that has an extraordinary capacity to develop talent and level of commitment, because they identify themselves with our brand and Usiminas is a market reference in management capacity and our shareholders. We have Nippon Steel with technical capacity. We are reassured and we are within a strong transformation process that is strongly focused on improving efficiency -- intensive CapEx is connected to the agenda that is connected to the environment with industrial efficiency, with sustainability by which what I can guarantee is that the CapEx plan that we expect is strongly linked to consolidating the productive processes in all our productive dimensions, because we want to see how to improve our service level together with our customers, integrating a number of processes that can increase our capacity to service and to show our added value. My message here is we are focused on improving our efficiency and improving our profit to improve our integration together with the communities, taking care of the environment and operational safety and strongly focused on meeting the requirements of our customers. We want to be competitive and close to their needs. We have an encompassing and the challenging agenda. Nonetheless, we are optimistic regarding the evolution. And now we conclude the overhaul of the Blast Furnace 3 and we are within a start-up process.

Leonardo Karam: So now our Q&A session comes to an end. We would like to thank all of you for your participation. Should you have further questions, our Investor Relations team is at your disposal. Good afternoon to everyone.