Earnings Transcript for USNZY - Q4 Fiscal Year 2022

Leonardo Karam: Good morning, ladies and gentlemen. Thank you for waiting. Welcome to the Conference Call of Usiminas to Discuss the Earnings Release of the Fourth Quarter '22 and for the whole year of '22. I am Leonardo Karam, 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. Choose the sound channel on the icon interpretation at the bottom of your Zoom screen. All participants are in listen-only mode and questions may be asked in writing for the Q&A icon, where you can find below in the bar. Participants who are listening in English may also ask questions using a Q&A function. Today's conference call is being recorded and being streamed through YouTube channel. This is a conference exclusive for investors, market and analysts. Please tell us who you're in your organization so that you can have your questions answered. And please limit to two questions per participant. Questions may by journalists and be submitted to media relations or using media using phone 31-3499-8918 or through email imprensa@usiminas.com. Before moving on, we would like to clarify that forward-looking statements that may be made during this conference call with respect to business prospect, forecast, operational and financial goals of the Company and its growth potential are all based on beliefs and assumptions of the executive board of Usiminas. These expectations depend largely on the performance of steel industry, domestic economic conditions, and the situation of international markets and therefore, are subject to variations. We have here with us today the executive team of Usiminas CEO, Alberto Ono; VP of Finance and IRO, Thiago Rodrigues; Industry of VP, Americo Ferreira Neto; VP of Corporate Planning, Gino Ritagliati; VP of Technology and Quality, Toshihiro Miyakoshi; Commercial VP, Miguel Homes; CEO of Mineracao Usiminas, Carlos Hector Rezzonico; CEO of Soluções Usiminas, Leonardo Zenobio; and CEO of Usiminas Mecanica, Fernando Mazzoni. Alberto will make his initial remarks followed by Thiago, who is going to present the results. Later, questions submitted to the QA and they will be answered. Let me now hand it over to Alberto.

Alberto Ono: Good morning, everyone. I would like to start by thanking all of you for being here with us in our conference call of the fourth quarter '22, and we are also going to go over the results of the full year 22. 2022 was characterized by major volatility, you've all seen how we evolved throughout the years, with some events that we were not anticipating, but they turned out to be a reality. And that impacted not only the steel sales, steel processing and also the economic perspective, which started with the Russia-Ukrainian war. In the first half of the year, we've emphasized that extensively before, but also COVID cases in China and that impacted lockdown and impact of supply chain also the decrease of the development of Chinese economy, and finally, here in Brazil, the elections and the expectations for the election of the new president. It has all resulted in a very volatile complex situation and for Usinas despite all that the results of the year have shown that we have still delivered consistent results. It was the second best result for the past 13 years despite the complex scenario throughout the year, the complex situations represented consistent results. Let me also emphasize that a 2022 was the year in which we celebrated 60 years of our operation in Ipatinga. Being a company for a long time in Brazil, we are now going into a period where the CapEx and the investment is required in renewal of equipment overhauling and so on. It has already been accounted for in the investments that we made in 2022 and the same applies to 2023 as we've already communicated. So, it's important to bear in mind we've been in operation for six years in our main site, which means that we require investments to renovate, realign and recover most of our equipment. I'll say that these are the main highlights that I wanted to share with you. And I'm going to hand it over to Thiago, who's going to talk about the results and our highlights.

Thiago Rodrigues: Thank you, Alberto. Good morning everyone. Let's go on with our slide presentation, we can go to Slide 2 where we can see the main highlights for the period, something which we have already published in the end of December, which is the minutes now part of the ISE, which is the corporate sustainability index of B3, confirming our commitment with sustainability of operations, something that really makes us very happy. We are the only steel company that it's part of this index. In terms of revenues, we have the second highest annual net revenue in history, BRL32.5 billion. BRL7.7 billion in the fourth quarter, and I'm going to provide further details. In terms of EBITDA, it was also the second highest for the past 14 years BRL4.9 billion in '22, BRL579 million in the fourth quarter. Second highest annual net income in the past 14 years, 2.1 billion profit with loss of 839 million in the fourth quarter due to internal factors that we are going to share with you later. In December, we completed our 9th issuance of debentures BRL1.5 billion with a maturity of up to 10 years, very favorable conditions, so BRL2.2 billion issued in 20 22. Solid cash position of BRL5.1 billion, very comfortable level and net debt EBITDA of BRL0.2 billion, which shows really our solid financial position. And we are going to keep on increasing our slab inventory for the realigning of BF3 as initially planned. Now going to the next slide, we can see the consolidated numbers for 2022. The first chart, we can see still sales of 4.2 million tons, 12% below '21, but still above the period before the pandemic. In iron ore, 8.6 million, within our guidance of 8% to 9% even with problems with supply chain and projection and production in the beginning of the year because of the rain in some of our sites. Now in terms of consolidated net revenue, 32.5 million below '21, but still at very high levels, if we compare against 2018 to 2022. Adjusted EBITDA has presented absolute and marginal drops. Even so, it's the highest of the past 14 years. And this drop was due to effects in steel production and in mining, as we are going to show you later, and net income of 2.1 billion just following the trend of a deterioration of some of the margins. Now in the next slide, we can see consolidated numbers of the fourth quarter. There was a reduction of the main indicators of results caused primarily due to lower volumes and low prices in the steel unit, and we are going to see that specifically in the upcoming slides. So, 7.7 billion net revenue, 9% below the third quarter EBITDA 579 billion with a decrease of 2.3 percentage points. And net income in the quarter, there was a net loss of 839 million including 1.4 billion of the impairment effect. The Company has run some regulatory recovery of some of the assets and due to the high investment levels required for coming years, generated impairment of 1.4 billion in the steel unit and a reversion of an impairment that we had already recognized of 0.3 billion. Now speaking of steel unit, sales volume was higher than the guidance 963 tons, our guidance was 950. We expected that decrease due to seasonality because the last quarter of the year tends to be weaker. The good news is in the internal market, domestic market, we exceed the volume of the fourth quarter of previous year of fourth quarter '21, showing favorable conditions in the domestic market. Net revenue we can also observe a reduction primarily due to prices in the domestic market, the reduction was 5.9%. Adjusted EBITDA had a reduction over the third quarter '22, but we have a positive effect on costs as we can see in the next slide. Here we can see the main reason for EBITDA reduction, which was due to price and sales volumes partially offset by lower costs. There was a reduction of the cost by ton of 6,640 in the third quarter to 6,470 on the fourth quarter. We also had the expectations of decrease of costs due to the cost of raw material primarily does labs and some stability in operational indicators. Concerning Mineracao Usiminas, we close the quarter with 2.2 million tons of sales, the largest volume in the year, quarter-over-quarter. And we can see stability in revenues and EBITDA level reflecting then the market indicators for the period. Usiminas Solutions, Soluções similarly to the steel unit, a lower sales volume over the third quarter '22, but still above the fourth quarter '21 with reductions of revenues and EBITDA, because of lower prices being applied. Now going into financial indicators, working capital, it has presented the stability, just a minor reduction over the third quarter even with the increase in inventory levels of slabs. Because of better control and reduction of inventory especially of gold and caulk, which have really helped us maintain stability levels and also a price repositioning of these materials. Concerning steel inventories as you can see on the right, we have the necessary inventory levels for the shutdown of BF3 we have here the level of inventories as had been initially planned. The next slide shows us the CapEx for the year, consolidated caps of BRL2.1 billion somewhat above our guidance was 2.05. This was due to the activities that are setting motion and the closer we are to the may rally and renovation of the unit more activities are required, so that's expected. During the fourth quarter there were 215 million invested in the renovation of the blast furnace and also in the steel operation 611, so total 611 million invested 1.5 billion or rather 1.1 billion in the other activities of the steel unit 364 for mining. The next slide, we can see the impact it has on cash. Generation of EBITDA improvement of working capital all offset by the CapEx invested in the period. So, we had a 65 million reduction in cash position which has not impacted significantly our results. Now, going into cash position net debt and amortization, we've maintained a very well controlled net debt BRL1.1 billion and the leverage index of point 23 times EBITDA, which is still a very comfortable level for the Company. With the issuance of the new debentures, we have now a maturity that some of the bounds for '24, '25 were extended for 10 more years. So now we are not going to have any significant debts to pay within the next 10 years, which means we can keep on making the investments as originally planned. Now to close I would like to tell you about our ESG agenda. Once again, we were included in the ISE index and the main factors that enabled our inclusion in the index are shown here. We've created the area of risk management and internal controls management. We've also approved our risk management policy and the Company, which helps us with governance giving more transparency and control. We've also evolved in the steel chain project, which includes suppliers and bringing suppliers to be our partners so that we can reach our sustainability goals. We've also completed our Emission Inventory recognized by GHG protocol, and we've also participated in the carbon disclosure project providing all the important information for the industry. For the second consecutive year, we are also part of the carbon efficient index of B3. The next slide shows our ESG goals and our status throughout the year. Most of them more matte, so water recirculation in Ipatinga, contraction of clean energy engagement of the critical suppliers we've scoped three of the climate agenda reached a minimum level of women in our apprentice training groups and execution of our innovation pilots as well as the certification of road laminate still. The other items were not met yet, so GHG inventory, we completed that for MUSA but not for solo sizes immunize. Last time accidents were outside our expected rate, this is something that we have a full commitment with. The general Customer Satisfaction Index was very close to our goal and this is constantly monitored by us and implementation of our environmental compliance program which had some changes to its scope, and we are going to have it completed now in 2023. So that was the overview of our results. And with that, I'll hand it over to Leo so that we can go into the Q&A session.

A - Leonardo Karam: Thank you, Thiago. Let's start our Q&A session now. The first question is asked to Miguel by Daniel Sasson with Itau, and he asks you Miguel, what are the results of the negotiation with the automotive? But for contracts being renewed in January, do you have the same expectations for contracts which will be renewed in April?

Miguel Homes: Good morning, Daniel. Good morning, everyone, who is here with us today. The negotiation with, contracts renewed as of January 1st were concluded in the end of December and the results led to 12% price adjustments. It's important to emphasize the duration of contracts. In the Brazilian market, we had been using 12 month contracts. But as of '23, January 1st, now contracts of -- most of those contracts will be six months because of the volatility that we have come across in both the domestic and international steel industry.

Leonardo Karam: Another question to you Miguel about demand in the domestic market, Leonardo Correa of BTG, Carlos de Alba of Morgan Stanley, ask whether you can anticipate any improvement of demand and which are the industries that are surprising in terms of higher demand? Any other comments on selling demands for flat steel?

Miguel Homes: The local demand seems to be stable, aligned with the expectations of growth or evolution of consumption of steel in 2023, disseminated by also Brazil, in its last conference call. We see it stable. We don't anticipate any sector except for oil and gas, which has been developing and presenting important projects of oil and gas for the past 8, 10 months and there are still some ongoing discussions and quotations. So, I would just highlight oil and gas, but in general, we expect very stable demand, similarly to what we have observed in the past six months. So flat demand, in other words.

Leonardo Karam: Miguel, one more for you. Prices in the domestic market, Daniel Sasson of Itaú and Leonardo Correa of BTG, so what were the prices in December as opposed to the average of the quarter? And Leo asks whether it has been difficult to have a price adjustment in this more challenging market?

Miguel Homes: Well, concerning the average price in December in the domestic market was 1% lower than the average price of the quarter, so very much aligned with the average price of the fourth quarter of '22. It's always challenging really to have price adjustments. It requires negotiations, complex negotiations, but we believe that the foundations for price adjustments are solid, are robust, because we are under pressure and the whole steel market globally is subject to pressure and increased cost, especially because an increase of ore and carbon in the past six months. So by having a robust system and by really showing them the increased costs, we've been successful in our price renegotiations.

Leonardo Karam: One more question to you, Miguel. People were asking about exports.

Unidentified Company Representative: Isabella Vasconcelos from Bradesco is asking, what are the prices of export of steel have been set quite healthy? What can we expect in terms of volume and prices for the upcoming six months? Exports will be focused on added value products to markets which are more profitable to Usiminas. There is a very important challenge, which is the relining of blast furnace three. So we want to have profitable market for exports. We expect export levels which are stable to the levels that we've had in recent quarters. So focused on automotive industry, we have a very significant share in the region, and also oil and gas projects which are added value products, therefore offering better price margins.

Leonardo Karam: Thank you. And there is one more. To Usiminas Solutions and maybe you can ask another to add. So Soluções Usiminas, Carlos de Alba is asking, what's the outlook for Soluções Usiminas?

Unidentified Company Representative: In terms of sales, we also follow the market. The area of solution Soluções has a sales mix very similar to that Usiminas as holding. So with ads in the automotive industry, according to the last report, there is an expectation of increase in a car manufacturing at 2%. So, we believe Usiminas Soluções will also have increased sales. We expect to have a total increase of flat steel consumed in Brazil. Soluções Usiminas is expected to follow along the natural movement, so Soluções Usiminas holding our focus on added value products on long-term commitments and development of products that can really meet specific market requests.

Leonardo Karam: Thank you. Now one question to Thiago. I'll try to encompass a number of questions. Most are asking about the CapEx guidance that we announced today. Daniel Sasson with Itaú; Lucas Yang of JP Morgan; Rafael Barcellos of Santander; Carlos de Alba of Morgan Stanley; Marcio Farid of Goldman Sachs. They all want to know about the guidance of CapEx.

Unidentified Company Representative: Concerning the increase of CapEx guidance, our expectation was announced of 2.4 last year, and now it's 3.2 billion. That's the CapEx for 2023.

Unidentified Company Representative: Daniel says that the CapEx for the realigning of the blast furnace has not changed. So, he likes to understand whether the increase is just due to maintenance or should we also expect that's going to be carried on in upcoming years? Lucas would also like to know more details about the CapEx and Raphael would also like to have some more details. And also Carlos, they all would like you to elaborate further. Are there more projects then realigning of blast furnace 3, concerning the CapEx new level? And finally, Marcio for reading, just concluding the guidance on CapEx has asked, what would be the CapEx for recurring maintenance from now on, Thiago?

Thiago Rodrigues: Well, thank you for your question, so many questions within one. So let me set the counter and then we can always build upon it. So the first important point is, we talk a lot about the CapEx of blast furnace 3, but there are other relevant investments being made in other operating units of Ipatinga, which are going to take place at the same time as those have the relining of blast furnace 3. For example, maintenance or overhauling in one of our reoperations which sell over 500 million, it has not had any impact in values. What we have had is an increase value of CapEx of palliative, we basically have in the operations of coke they were partial for '22. And that's going to be throughout the whole year. And with this stop for blast furnace in the coke operations, there would be a reduction of the sustained CapEx. And we've reviewed the plan we are maintaining the sustain CapEx at similar levels as we had in 2022. And this has increased the total CapEx of the steel processing. The mounting CapEx is between 801 billion. So in addition to the main shutdowns that I pointed out, some other activities will be carried out at similar levels as in 2022, as we are going to have the shutdown of important pieces of equipment. So by doing that we can take the opportunity and also perform other words once we are going to have enhanced yield and productivity once the blast furnaces back into operation. We've also had some candidates for mining primarily the compact project study and the beginning of the environmental license process and also the plant of the tailings area of salmon bio. It's also going to be a very important point, and it has requested more impact in that and also the Usiminas Solutions, it will have higher CapEx than previous years really maintaining all the different lines and also the all the different added value to our products. Well, I hope it has been enough, please let me know if you'd like to know any further details, Maintenance recurrent CapEx for sustaining and for everyone behind a between 800 million and 1 billion.

Leonardo Karam: That's great. The next topic concerns cost. So Caio, Bank of America; Rafael Barcellos of Santander, asking about cost expectations for upcoming quarters, can you please tell us a little bit about that, especially concerning the realigning of the blast furnace? And how do you expect that cost dynamic?

Thiago Rodrigues: While we don't give any guidance on cost, but what we can tell you is that, the market indications show that, in the first quarter, we expect to have a positive costing bag of raw material. So, slabs and some other raw materials which aren't coming at a lower price in terms of cost than what we currently have. Operationally, we don't expect any significant changes. Just a small reduction by price and operational stability, aware of the fact that, we are coming very close to the realigning of a blast furnace and there might be instability. So, stable cost in the first quarter compared to the fourth quarter 2022.

Leonardo Karam: Thank you, Tiago. The next question is to Carlos. Caio Ribeiro of Bank of America is asking about the guidance of volume of mining. You have announced 8.5 to 9 tons per year. But with the realigning of the blast furnace, do you think that's going to be increased sales to third-party? And if yes, how long can we expect it to extend?

Carlos Hector Rezzonico: Thank you, Caio, for the question. Good morning, everyone. We have been monitoring the variation of demand and what it will mean in terms of the realigning of the blast furnace. So, we are planning our sales based on that as well. There is a very important part of the volume, which is going to be directed to export, primarily concerning the fine or all the granular bulk will be directed to the domestic market and we are also considering sales to this market. The main purpose of Usiminas is not to impact our production, considering the limits that we all have for in terms of increase. That's it, Leonardo. Thank you.

Leonardo Karam: Thank you, Carlos. We were talking about lump, right? Next question to Thiago Lofiego from BTG, he was talking the profitability for the steel unit. Concerning the operational performance of steel unit, is it possible to have profitability over 10% or is EBITDA margin? Or do you anticipate something similar to the fourth quarter '22, which was about 4%, 5%, Tiago?

Thiago Rodrigues: You see, Leonardo, operationally speaking, and cost of production, we don't see -- we don't anticipate significant improvement in the year. It's going to be an atypical year for Usiminas, very important year. We have been preparing for it to resume the operations with our blast furnace at much better condition and that's going to impact our costs in the end of the year. Through the year, we don't anticipate significant changes especially because of costs. Well, the margin may be influenced by the market. We also have a very conservative, let's say, perspective of that has been stable throughout the year. Now, concerning the expectations once the blast furnace is back in operation, we've been making investments not only there, but in also in peripheral operations and some other important equipment of the Company, we are going to recover also the cold side which is extremely important. But once we resumed the operation of the blast furnace, especially beginning of 2024, it will mean increased productivity of at least 20%. So, it does give you the importance of the investments that are being made, and how this is going to a mean a better position of Usiminas as of 2024.

Leonardo Karam: The next question is to Miguel. Rafael Barcellos from Santander is asking about the availability of slabs. And I'm going to combine with a question about slab inventory levels. Rafael said that the price of slab has gone up again in Brazil. So, what about availability of labs in Brazil especially once the CRP was purchased by Arcelor Mittal. And Carlos compliment by saying, how do you anticipate the increase in slab inventory levels for the next two quarters. Miguel?

Miguel Homes: Concerning slab inventory as Thiago pointed out. In the end of December, there were 351,000 slabs in the inventory for the relining of blast furnace 3. We've been of course purchasing and receiving monthly, so until the end of the shutdown, which will be in April, we will need a 450,000 to 470,000 ton inventory level as was originally planned. For the whole operation, we don't anticipate any problems for our preparation before the relining. And now Rafael, the price of slabs has increased in recent weeks, which shows the trend of raw material price especially coal and ore. The slab market quickly shows these changes in cost of steel production. And if we look closely some international consultants, they are showing very critical situations of let say Chinese steel industry which are still not reflecting these costs increasing their prices were 15% or 20% negative margins.

Leonardo Karam: What is being seen today in the slab market should also impact finished product market, if you may compliment Miguel because Carlos asking about the pace of creating the inventory levels for the next two quarters?

Miguel Homes: As we said in the previous call, it usually takes from six to eight months of preparation to come up with our inventory levels in December, there were 350,000. So, more than half is there placed on the site and the other half is part of already contracted agreements. So, from December to April, we will be building the expected level to get to 450,000 to 480,000 tones until the beginning of the relining.

Leonardo Karam: Thiago, the next question by Victor Sanchez of [indiscernible], he asks about MUSA cash position, 5.1 billion, how much is within MUSA?

Thiago Rodrigues: Well, Victor, a bit more than 50% of the cash is with MUSA, 3 billion approximately.

Leonardo Karam: Now Thiago one more question to you. CapEx at MUSA. Isabella Vasconcelos of Bradesco BBI; Marcio Farid of Goldman Sachs are asking whether you can tell us more about the CapEx of a mining of 500 million, which was the guidance? And can you give us any more details about that? Is it maintenance? Is it any specific project of mining?

Thiago Rodrigues: Well, I don't have the numbers, the detailed number, but the year there were 364 million of investments in MUSA. The main difference over the previous year was the operation with the tailing dams some of by, the other part is sustaining and also some compacts that but I would say the main difference comes from the tailing, some of by a tailing dam discontinuation.

Leonardo Karam: Thank you, Thiago The next question is also to you Thiago. By [indiscernible] with XP, he asks about impairment. Can you tell us about the impairment? What was the result to the EBITDA margin combination of manufacturers? How can you explain that?

Thiago Rodrigues: Well, the main difference over the previous year where there was no impairment was the change in market conditions. The results of the year can clearly show the decrease of margin and beginning of '22 to the end of '22. So, a different market situation, in addition to a high level of CapEx you've invested in upcoming years, which meant a reduction of expected cash flow of the Company.

Leonardo Karam: Thank you. The next question Miguel is by Caio Greiner of BTG. He asks about slab inventory. Can you share the average price of the slab once you're creating the inventory levels?

Miguel Homes: So, we have our own production of the operation of the three blast furnaces that are in operation in Ipatinga and also third part purchase. The procurement from third part represents a 60-day between negotiations and receiving. We've been creating our inventory level since the end of the third quarter and we are going to maintain it till April, so the prices have been changing because of market volatility. You can rely on international indicators because we buy slabs. It's a free market. So, we always buy them according to international market conditions. The prices vary significantly, because of volatility. There is a trend of decreased price to December, January and then an increase in prices both of domestic and international market, and this is going to impact our inventories that are going to be composed up to the shutdown in April.

Leonardo Karam: Thank you. The last question is to you, Thiago, about capital structure, [indiscernible] Bradesco. We would like to hear about the expectations about liquidity in this cycle of investment. What would be the minimum cash position that we would consider comfortable? Is there any review in the net leverage or in specific target there? And finally, have you anticipated any opportunities to extend our dollar debt, which is due in December '26?

Thiago Rodrigues: Thank you, Edward. The impact on cash much push out in this will be more stress during the second and third quarter. After the third quarter, when we resumed the operations of the blast furnace and once we start using most of the labs, which were in the inventory levels, there would be an inversion of the working capital. There would be an additional cash need. And then the end of the year, that will go into the expected level, so by doing that, we can certainly deal with the cash needs. We are not considering minimum cash levels. We are not going to get closer to a minimum cash level situation that leverage tends to increase somewhat, but we are not anticipating any indicator of concern. I'd say we are at a very comfortable level in terms of liquidity. Now concerning bonds due in '26, we have been monitoring the market closely. The bonds become [indiscernible] as of June or July this year. We are actively monitoring them, and once we consider it to be the most appropriate time, we will do something about that, but there is no time up to 2026. It's not something which is in our immediate agenda here.

Leonardo Karam: Right, thank you. With that, we close our Q&A session. I would like now to hand it over to Alberto for his closing remarks. Alberto, please.

Alberto Ono: Once again, let me thank you all for your participation and thank you for the relevant questions concerning our results of 2022 and also the outlooks for 2023. I think the main point that was addressed in the questions is, our main focus for the year. It is the investment that we're going to make in our main unit of Ipatinga. And as pointed out by all my fellow officers, it's going to certainly transform our productive unit and take it to a different level in the end of the process. This is the main focus of the top leadership this year. Make sure that all investments that are made in a Ipatinga plant can really impact and be really perceived as of the beginning of next year. So, thank you all very much and have a great day.

Operator: Thank you. If you have any questions, our Investor Relations team is here to support you. Thank you all very much for your participation.