2023-07-28 15:51:06 ET
Usinas Siderúrgicas de Minas Gerais S.A. (USNZY)
Q2 2023 Earnings Conference Call
July 28, 2023, 11:00 AM ET
Company Participants
Leonardo Karam - Manager of Investor Relations
Marcelo Chara - President and VP of Finance and IR
Thiago Rodrigues - VP of Finance and IRO
Miguel Homes - Commercial VP
Conference Call Participants
Presentation
Leonardo Karam
Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Usiminas Conference Call in which we will discuss the results of Q2 of 2023. I am Leonardo Karam, Investor Relations General Manager. Those who want to follow us in English, you will find the translation of the webcast presentation on the Usiminas IR website.
We also have simultaneous translation to the sound channel on the icon at the bottom of your Zoom screen. All participants are logged on listen only mode and questions can be made through the Zoom Q&A session icon at the bottom of your screen. Participants who are listening in English will also be able to ask questions directly on this section.
This conference call is being recorded and simultaneously broadcasted by the Usiminas YouTube channel. Please note that this conference call is exclusively for investors and market analysts. Please identify yourselves so that your question can be answered and for better flow, please limit your questions to two questions per participants. We also request that any questions from journalists be directed to Usiminas Media Relations by 31-3499-8919 or by e-mail imprensa@usiminas.com.br.
Before we proceed, 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 related to its growth potential are forecast based on the management's expectation of Usiminas future. These expectations are highly dependent on the performance of the sales sector, the country's economic situation and the situation of international markets and, therefore, subject to change.
With us today is Marcelo Chara, our President and Vice President of Finance and Investor Relations; Thiago Rodrigues; and Miguel Homes. Initially Marcelo will begin, and then Thiago will present the results after questions will be answered. I give the floor to Marcelo.
Marcelo Chara
Good afternoon. It's a pleasure to be here today. I have been spearheading Usimina since July 4, and I am happy to be here in this transformation process. This is a transformation processes because we are undergoing reforms, which are extremely complex in our Ipatinga plant.
We have carried out a structural change in our blast Furnace 3. Our works are underway. We've changed the fuel system, a number of things. This is a very encompassing restructuring and structured and carried out -- carried out by professional teams. There are also interventions in the steel mills like in the primary refineries and other facilities that we have in Ipatinga.
After these interventions come to and then we will clearly have more production and more competitive production, there will be fuel efficiency, which is connected to our decarbonization agenda and together with our rolling mills of hot rollers we will be competitive in the Brazilian market.
Now speaking of markets, there is a slow demand during the last press conference, I announced this, and we are concerned and we are seeing some factors as the high interest rates, the finished product imports from China that have significantly increased. This causes concern, and we are paying attention to the evolution during the second semester to this point. Therefore, our main point within this stage, in addition to all the interventions, we are developing a strategic plan that is strongly focused to improve operational efficiency of our industrial equipment and our industrial processes and strongly focused on excellence, the preservation of the environment and careful regarding our processes.
We have a positive prospect -- there is a positive prospect for 2024 because we believe that all our interventions in the upstream of the industrial system will be finished, and we believe in Usiminas based on its huge potential -- based on its products of high added value as well as the potential and the ability that our team has and that our company has in all the processes.
Now I would like to give the floor to Thiago. So he can talk about the results of Q2.
Thiago Rodrigues
Marcelo, welcome. It is a pleasure to have you in our conference call. I believe that you will contribute to the growth of Usiminas. Here, we have a brief presentation of our quarterly results, and then we will go to our Q&A session.
Here, we have the highlights of the quarter despite a slowdown in the demand in segments the steel sales volume within guidance is with 972,000 tons recovery of iron or sales volume compared Q1, which was impacted by the rainfalls in the region, and there were scheduled shutdowns and there were 2.4 million tons of iron ore maintaining our guidance in terms of iron ore sales.
Consolidated EBIT of BRL366 million, It was impacted by lower prices in mining and lower cost and greater costs in the steel mill. Working capital, there has been a drop because of lower slab inventories and also there has been a drop in accounts receivable.
The net leverage net debt over EBITDA is 0.38. There were greater margins and more cash consumption during Q1, but we are in a comfortable level. The revamp of blast Furnace 3, as Marcelo mentioned, we are at the right pace, although we have updated the return of the blast furnace in September. And this quarter, we're beginning the work to the -- of the decharacterization of the Samambaia Dam and during the next quarters, we will talk about the evolution of the characterization project.
Now we have the consolidated results to say the net revenue is BRL6.9 billion with a drop -- because of a drop in prices in mining and in steel, which also contributed on a drop of an adjusted EBITDA BRL366 million with a drop in all the business areas that we will see. And there was a net income of BRL287 million.
Now per segment, we start with steel units. The sales volume, there is a drop of 6% vis-a-vis the last quarter, but with a better product mix. Therefore, the revenue per ton is stable when we compare it to Q1 despite the drop in prices in a number of segments that we will be able to observe the EBITDA of BRL74 million, a margin of 3% and 7% last year.
This is an important drop with other impacts that we will see in the upcoming slide. Mainly in addition to the effects of price mix and volume and in addition to the effect of price and volume, there has been an increase of 2.4% and the cost per ton, especially at the adjustment the market value, and there has been higher cost in terms of idleness and expenses, we have expenses with idle equipment regarding the blast Furnace 3.
Now Mineração Usiminas, the sales was BRL2.4 million. This is a recovery after the first quarter that was impacted by rainfalls and maintenance scheduled sales. We had an increase of 15% vis-a-vis the first quarter because of greater sales and greater sales with Maritime freight, the EBITDA of BRL147 million. Here, we can see a drop from 32% to 16%. This is not only by the market price, but also because of the price of the freight and the exchange rate in the period.
In Soluções Usiminas, the sales volume was 3% higher than Q1. The revenue per ton of BRL6,910, 4% lower than Q1. Now the EBITDA was practically now because of the value of the stocks that were acquired at higher prices. and result for the automobile industry with the prices updated after the renegotiations are in April.
Now when we see the financial indicators working capital and inventories, working capital dropped with BRL9.4 million, a drop of BRL400 million vis-a-vis Q1 because of the reduction of the slab inventory and also here, we can see the slabs that are directed to the revamp of blast Furnace 3. And during Q3, we will recover our inventory iron or Coke will be seen here.
The CapEx. Here, we're talking about BRL879 million when we see the accrued valiance, we see BRL1.5 billion, in line with our plans. Now regarding revamp a blast Furnace 3, we are also aligned with the revamp of the blast furnace.
Now our cash, there was a drop of BRL992 million -- BRL996 million with working capital of BRL770 million offset of the CapEx of BRL879 million and dividends payout of this is mining, steel unit from 2022 that was distributed this year end-to-end.
Now regarding our net debt, the second quarter was BRL965 million because of the drop of the cash flow, but it was offset by the drop of our debt in dollars. So with this, our leverage went up 0.38x, and the debt profile that will mature in 2026, and we are not concerned about this currently.
So this was the brief presentation of our results, and I will hand it back to Leo so he can begin the Q&A session.
Question-and-Answer Session
Q - Leonardo Karam
Thank you, Thiago. We will start our Q&A session. Our first question is for Miguel. Miguel Daniel Sasol from Itau and Morgan and Carlos De Alba from Morgan Stanley want to know about prices. He wants how -- what is the price of HEP in Brazil, but premium vis-a-vis imported products are at. Now margins are compressed in it is difficult to provide discounts. Carlos De Alba wants to know about the market outlook regarding steel.
Miguel Homes
I believe that your question is important to explain our current scenario in the Brazilian domestic market. The prices have remained relatively stable in the past months despite the pressure of the high amount of imports. It is important to highlight the following. When we talk about a premium we do have a higher premium than they have the historic average.
Now we have to highlight the following the price imports that we see mainly rolling new products that come from China have presented according to reports made by specialized magazines. They present history of negative margin in the last 12 months in the past years. These indicators presented a margin of $50,150 per ton.
Now during the past 12 months, the Chinese steel mills are working with negative margin. So no, we will not follow this trend to operate during long period with a negative margin. because this would be unsustainable.
So this premium is important to analyze because today, this measurement, although it is above average, these are reasonable values when we could adjust -- when we adjusted to positive margins in the market, we feel pressure by prices, the margins are compressed and we see relatively stable prices in the future with no major variations. Any variation should be aligned to variables that will impact the cost being iron ore or coal.
Leonardo Karam
Thank you, Miguel. For you, Miguel, again. We have Enrique Marques from Golden Sachs and Caio Ribeiro, Goldman Sachs, they want to know about the auto industry. What were the negotiations like? Do you have an update? Do we expect for the second semester because we're talking about semestral contracts? What were these negotiations like in July?
Miguel Angel Camejo
Enrique and Caio most of the contracts updated throughout 2023, or semester. Now when the contract ended in July, there have been no changes in the prices for the third quarter. And for -- and for the contracts that mature in September, we are starting the negotiations. This being said, we will not see any changes in the prices for the auto industry on Q3. And as of Q4, we're still in the middle of negotiations.
Leonardo Karam
Thank you, Miguel. Now Marcelo, questions regarding blast furnace. Our investors want to know what the revamp is. We have Itau [indiscernible] Bank of America, Carlos De Alba of Morgan Stanley and Carlos [indiscernible] and Mr. Marcelo from Santander everybody wants to know the revamp evolution and there are more specific question, how will this impact the margin after the conclusion? And when you impact when will it be up and running? Marcelo?
Marcelo Chara
Thank you for your interest. Just for you to give -- just to give you a practical reference, our blast Furnace 3 is like a 30-storey building that has a basement. Yes, it was totally assembled, and we are rebuilding it. And you do this with carbon blocks that were bought years ago, and this is underway, and it's working. Now the body of the blast furnace are the 330 storeys.
Can you imagine that in three segments, the 30 storeys to take away and to place a to put in totally three -- totally new three segments of 30 storeys. We've imported special equipment from Europe in for lifting and we have had extremely complex [indiscernible] and this has been in preparation for months. This has been executed successfully. Can you imagine the top of the building was totally changed.
The upper part of the blast furnace was told modified to incorporate state-of-the-art technology that will allow will allow more efficiency with fuels, especially Coke. Now we have a low distribution system that is amongst one of the most modern in the world now, the regenerators that it is the heating or the cooling system of the building. Here, we have three regenerators with complex structures, and they were replaced.
Totally, the top of the three regenerators have been completely replaced. What do I mean? This work is extraordinary in terms of complexes and it is underway of course, this type of project where you have thousands of people working is complex. But everything is running as expected in this type of project impact.
Well, this blast furnace ended a 24-year campaign at low production levels after the revamp. It will be one of the most modern blast furnaces in the world because here, we have a state-of-the-art technology and efficiency production will increase. and it's going to improve the fuel efficiency. And when you consider that the cost in our industries are closely connected to iron ore and fuel we will see that as we carry out the adjustments in the blast formas, we will see improvement in costs.
Leonardo Karam
Marcelo, just Carlos wants to know -- after -- what is the ramp-up time once the operation begins?
Marcelo Chara
As I already mentioned, here we're talking about industry mature processes, and it can take a couple of weeks. We're not talking about days, and there are very rigorous processes to adjust each one of the new components that are being incorporated. So during the first weeks, we will be able to complete the ramp-up that will be during the month of September.
Miguel Homes
Leonardo, I would like to add something here. Now the impact that we will -- the total impacts of the blast furnace projected on cost, we believe that we will see the results during 2024 because the ramp-up can take weeks or months. So -- and the production goes through the P&L, we believe that we will see the results only in 2024.
Leonardo Karam
Our next question for Miguel. Miguel Barcellos from Santander wants to know what can we expect in terms of volume and prices in terms of flat steel for 2023. Miguel you're muted.
Miguel Homes
Can you hear me? Though we don't announce future events. We are seeing stability as you could see in our guidance. we are prioritizing in our exports, our regional markets, contracts with the auto industry mainly in Argentina, that follows the contracts of our domestic market, there are no price variations for a contractor, and we are -- let -- our exports during the second semester will remain very similar.
Leonardo Karam
Our next question for Thiago. Thiago Ann Hikma from Goldman wants to know about working capital, what to expect in terms of working capital because the revamp will end at the end of Q3.
Thiago Rodrigues
As I mentioned, we dropped our slab inventory, we have iron coke and coal, we will recompose it. There will not be a significant drop in working capital from here on.
Leonardo Karam
There is a group that wants to know about cost, Carlos De Alba, Carlo Greiner from BTG, Marlo [indiscernible] Barcelos from Santander, they want to know what are the cost expectations for steel units and mining. And Caio. He says that the cash cost of steel unit increased significantly this quarter. Will we expect the increase of cost of sold products? And he wants to know if with the drop in prices, we will see negative margins during the third quarter?
Thiago Rodrigues
I think you are going to try. We don't give you cost or result guidance. As I mentioned, that production cost will continue stable at the levels of today. There is no indicator that shows something different, although the cash costs went up during this quarter, it dropped during the last month of the quarter. So their expectation of stability in MUSA, in reality, there was no increase in production, what we had. It was great volume rate sales would see, but this was offset in our revenues. I think I covered everything.
Leonardo Karam
Now from Miguel, Carlos De Alba wants to know about Soluções Usiminas. What can we expect in terms of results during the second semester of this year? How do you see this market? What it is important?
Miguel Homes
The impact of Soluções will be impacted by the adjusted of the volumes of the adjustments of the contracts of the industry contract because 50% of them are focused on the auto industry. We will go back to historic margins, and we've had positive impact because of the revaluation of these contracts.
Leonardo Karam
Thiago, our next question from Vanessa [indiscernible] from Credit Suisse. She wants to know about the tax reform. Can you elaborate if there will be a negative impact from the -- from Article 20? Thiago?
Thiago Rodrigues
Vanessa, thank you. Well, number 1, by and large, or what they are drafting in this reform is positive for the industry. They've made a lot of progress because there is reimbursement of accumulated credits, simplification process at the end of the fiscal war. And Article 20 is an article that puts at risk at the end of the fiscal war because some states or the states to state to create differentiate the taxes for some sectors, all though Article doesn't directly impact the industries in [indiscernible].
There can be a direct impact. We believe that this is a matter that has to be furtherly discussed and to maintain. And to focus on simplification, the end of accumulation and fiscal war, I believe that this article should be rediscussed and this is our position to rediscuss this article to reanalyze it.
Leonardo Karam
Our next question, for Miguel. Renaldo [indiscernible] wants to know about imports. Will Usiminas if the imports don't improve during the second semester?
Miguel Homes
Renaldo, there are different alternatives. One of them to work hand in hand with our market partners, that we don't lose space because of imports and more institutional action that is we have to work with so Brazil to understand what will be the position together with the public organization to balance the situation because to compete with imports with negative margins.
They are not meeting international trade practices. So we have to work hand in hand with our main partners from the domestic market, increasing the quality of our services and going straight to the to the steel producers on the market.
Leonardo Karam
Miguel, another question for you. Prices, [indiscernible] from Capital One wants to know about the differentiation of steel prices to June, and this is important.
Miguel Homes
The average price of the domestic market for June was approximately 3% lower than the average of the quarter. So this -- this is a result of the auto industry contracting because actions in the network and some updates in industrial contracts that follow the trend of distribution prices.
Leonardo Karam
Thank you, Miguel. Marcelo, the next question from Caio Graner. He wants more information. about the revamp up last furnace. He wants to know if the deadline, if you are working. And if -- what about the deadline will it end according to the deadline, what about costs? Are you spending more than what you expected?
Miguel Homes
Thank you, Caio. The 110-day deadline has suffered changes since the beginning because what I mentioned, we had to extend -- there was an extension of the deadline, there was a reduction. Now we've extended it again, but it is aligned and this is expected in a work of this magnitude, we have excellent managers with excellent -- with lots of experience, and they follow everything online and let's say -- and we have adopted contingency measures, and we have adopted contingency preventive measure so that our stocks like and our because we will fulfil our commitments with our customers, and there's no risk here.
Leonardo Karam
So there have been a number of delays that are imaginable, but everything is according to our plan. about the capacity of the blast furnace will they go back to its nominal capacity that was $3 million. What is the run? And at what run rate the blast furnace was operating when it was shut down?
Miguel Homes
It was operating at 60%, 70% of its nominal capacity, its maximum productivity had been limited because it already existed for 24 years because of his heart was hard and we had to preserve its life. After the complete revamp and this is what I mentioned, in my answers, the gain of productivity is significant when we compare it to the nominal capacity.
Leonardo Karam
Our last question, Marcelo, is for you. It is regarding your initiatives as the new company's CEO, Carlos De Alba and [indiscernible] want to know what will be the main initiatives in the short and mid-run. And what changes in terms of focus/strategy with you as a CEO?
Marcelo Chara
Industry excellency is about most importance because this is the basic demand of our customers. Our customers request sophisticated sustainable products. Our shareholders, the community and as we share an area where thousands of people live public authorities, the employees the industrial excellence, excellence performance in the steel industry requires a strong management dynamic that focuses on the variable impacts, and we should take care.
We focus on taking care of the environment what we see and what we don't see because we want to be good neighbors of the surrounding communities, the development of practices or people safety processes, and we have to focus on an agenda that is associated to this type of performance requires granularity and requires the incorporation of management tools so that our teams can fully use their potential in Usiminas the best practices in Usiminas so that we can grow in competitiveness and sustainability.
And there is an important agenda that is industry carbonation. The steel industry impacts between 3% and 4% in the world, 7%, 8%. And the great challenge here is how to reduce the emission of greenhouse gas effects, especially in the production of steel. And in Brazil, the steel industry is highly competitive, and it is strongly concentrated in traditional process and part of our agenda is natural gas.
If we would have competitive natural gas at competitive prices, not the prices that we pay today if we could use the presell gas we could increase the energy interaction with other countries of the region. This would be a combo of the of solutions of policies that could be used in order to use gas as a transition fuel when we think about decarbonization. This is an important matter in our agenda that would be how can we articulate and how can we foster the development of this important fuel.
Leonardo Karam
Thank you, Marcelo. So our Q&A session has come to an end. And we thank you all for your participation. Should you have any questions, our IR team is at your disposal. And perhaps we can answer questions that perhaps weren't answered during our conference call. Thank you very much for participating.
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Usinas Siderúrgicas de Minas Gerais S.A. (USNZY) Q2 2022 Earnings Call Transcript