Welcome to the Usiminas video conference, where the results for the first quarter of 2024 will be discussed. I am Leonardo Karam, General Manager of IR at Usiminas. To those that want to follow us in English, free translation of the webcast presentation is available on the Usiminas IR website. We also have an interpreter for simultaneous translation. Please choose the sound channel on the icon at the bottom of your Zoom screen. All participants are connected on listen-only mode, and questions can be asked in writing through the Zoom Q&A session. This is the icon below your screen. Participants listening in English can also ask questions directly in this section. This video conference is being recorded and broadcast simultaneously on Usiminas YouTube channel. Please note that this video conference is exclusive for investors and market analysts. We request that you identify yourself so that your question can be answered.
We also ask that any questions from journalists be forwarded to Usiminas Media Relations via email at imprensa@usiminas.com. Before we proceed, we would like to clarify that statements made during this video conference regarding the company's business prospects, as well as projections, operational and financial goals regarding its growth potential are forward-looking statements based on the company's expectations about Usiminas' future. These expectations are highly dependent on the performance of the sales sector, the economic situation of the country, and the situation of international markets. Therefore, they are subject to change. With us today, we have Marcelo Chara, Vice President of Finance and Investor Relations, Thiago Rodrigues, and Vice President of Commercial Area, Miguel Homes. Initially, Marcelo will address his main remarks, then Thiago will present the results. After that, questions from the Q&A section will be answered. Now I hand it over to Marcelo. Marcelo, you have the floor.
Good morning to everyone. It is a pleasure to be here once again with you to talk about Usiminas' performance during Q1 of 2024. We will talk about our progress to gain competitiveness, and we will talk about the expectations for Q2 this year. As we mentioned in the last call, the expectations to reverse our results in our steel unit materialized, and this is thanks to the work and focus on improvement in the past quarters. I would like to thank the performance and commitment of each one of our employees. We are taking strides in a number of fronts. The ramp-up of Blast Furnace 3 continues evolving according to our plans, and we continue to making progress stabilizing our operation with efficiency and cost reductions. We pursue opportunities in all the operations.
`Benchmarks have created action plans in a number of areas to improve the performance and the consumption of our main equipment and also the improvement of productivity. New management routines are underway, and they continue strengthening our focus on industrial processes. An example was the announcement of the decarbonization target for 2030. That is a drop of greenhouse gas effects by 15%. This matter had been assessed for a long period of time, and fortunately, now we've matured this, and now we've defined this target in line with our long-term view. Regarding the markets, 2024 started with a challenging scenario with pressure on imports under unloyal conditions and a complicated economic situation in Brazil. There are positive signals in the automotive area. ANFAVEA projects an increase of 6% in the production of cars of 2024, and during the Q1 presented good sales levels.
We see pressure because of the growth of vehicle imports, which increased 38% when we compare it to the same period last year. There is a strong penetration of import products. We see good opportunities in different sectors where we perform the drop of the Selic rate, the new PAC, the New Industrial Brazilian Plan can drive the infrastructure sector, industry, and civil construction, amongst others. Within this scenario of economics and market, we expect stable sales in steel. The volume of steel imports of Q1 was 18% higher than the past year. This is something that we are paying attention to. March, the highest monthly value since 2010. This is why Brazil should implement measures like in the U.S., Europe, Mexico, Chile recently, in order to foster fair competition. Now in Usiminas, we are mining.
We are stabilizing and for the second quarter, we expect stable sales when we compare it to first quarter. In the long term, we will improve our management model based on operational excellency, interaction with community, with more safety, taking care of the environment, and we want to be better neighbors and approaching more and more our customers. Thank you very much. Thiago can continue with the presentation.
Thank you, Marcelo. Good morning to everyone. We will start our earnings results of the first quarter this year. I imagine that you can already see our slides. We will start a presentation, then we will have a Q&A. The highlight, iron ore. We ended with 2 million tons, slightly above what we expected this quarter, and subsequently, we will comment why this happened.
In steel sales, the sales volume was 1 million tons, aligned with our expectation. The good news is the drop of COGS in steel mill, 11% of drop of our COGS improving the results of this business unit. The adjusted EBITDA was BRL 416 million, net profits, BRL 36 million, and the cash was BRL 5.7 billion, a leverage of 0.22. The annual EBITDA, this shows the maintenance of good cash management and the company's financial discipline. We disclosed our decarbonization target up till 2030 with a drop of 15% is what we expected, stating our commitment in our care towards the environment and the sustainability of our operations. Now, our next slide. This is the consolidated result. During Q1, the net revenue was BRL 6.2 billion.
This is a drop of 8% vis-à-vis last quarter because of the effects in the mining unit that we will see on our next slide. The adjusted EBITDA of BRL 416 million, a 7% margin. This is a growth of 28% when compared to the last quarter with non-recurring effects and a reflection in better performance of the steel unit. The net income BRL 36 million. There, it was impact because of the dollar appreciation that affected the financial result. Now when we go to the steel unit. The steel sales was stable in the domestic and the international market, even with high volume of imported steel that was subsidized. Marcelo mentioned, but I would like to stress the increase of 18% of the volume of import steel during this quarter when we compare it to the same quarter last year.
We continue with this problem impacting all the steel markets.
Well, we would like to highlight better sales mix, greater focus on products of greater added value. This is an important effort led by the planning and commercial teams to contain the drop of profitability due to the unloyal competition. We have been able to maintain a net revenue per ton that is stable in the market, even with the drop of prices in the automobile sector. We expect to maintain the same sales volume and to maintain a net revenue per ton stable with a better mix between export and domestic market. After two quarters with negative results, the steel unit, not including recurrent effect, now we have positive results confirming the expectations that we announced during our last call. We would like to highlight that BRL 334 million of EBITDA with a margin of 6% is the best recorded result since Q1 last year.
This was before the Blast Furnace 3 refurbishment, and there was a drop here of costs. Here, we see from quarter four to quarter one, we can see a drop in our COGS. The drop of 2%, the net revenue, BRL 113 million. This was the drop of COGS quarter-on-quarter, disconsidering the non-recurrent effects was 8%, and this is due to the gains of the steel production cost with the return of Blast Furnace 3 and lower cost of raw material and slabs purchased. This here represents BRL 350 million in cost decreases. During the next quarter, our expectation is to drop our cost in steel production with the stability and the progress and the stabilization of Blast Furnace 3. The exchange rates and highest price of purchase slabs will maintain a stable COGS per ton or perhaps with a slight drop for the next quarter.
There are also factors, and we depend on the evolution of the quarter, like the development, or to see what is going to happen with the exchange rate. When we see the mining unit, the sales was slightly above reduction in sales volume due to seasonal rains and 9 A.M. less than shutdown, partially compensated by higher lump sales volume. We had 1.962 million tons. This was higher by the seasonal impact. Something that helped us was an additional sales of granulated. These were market opportunities that appeared in the export. In the second quarter, we expect a stable volume vis-à-vis Q1, and the impact on the result is practically due to the net revenue that was BRL 649 million.
That was impacted not only by a lower sales volume, but because of the drop of the iron ore that was 28%, and this affected negatively the price of export prices. Higher sale of granulated. This drop of net revenue, the impact was accountable for the drop of the EBITDA vis-à-vis Q4. The result was BRL 83 million with a margin of 13%. Our financial indicators. The indicators of the first quarter, there was a major impact because of the drop of 4FH operation. We dropped BRL 700 million, our forfaiting lines with the conclusion of Blast Furnace 3 and after a riskier area, our forfaiting operations are back to normal levels. Therefore, we reduce our operations with forfaiting. Working capital, we still see a drop.
Therefore, there was a reduction of BRL 459 million in stock, especially because of steel and raw material, and accounts receivable dropped BRL 129 million. Now working capital increased to BRL 108 million, and this also influenced our operational cash flow and it was negative by BRL 31 million. Now the CapEx was BRL 68 million . Slow for what we have for the year. We calculate BRL 1.7 billion, BRL 1.8 billion , and this acceleration of the expenses with investments will be observed during the second semester this year. Free cash flow ended with BRL -299 million because of the drop of BRL 700 million in our forfaiting. It is important to highlight with this reduction that was on purpose due to the high level of cash and no net debt and financial liquidity.
We carried this out without impacting our indicators.
On our next slide, we can see precisely all of these indicators.
Here we have cash, BRL 5.7 billion . This is a solid level. A net debt of BRL 110 million and a leverage of 0.22x the EBITDA of the last 12 months, which is highly comfortable. Our debt profile has no changes, and we are monitoring the market to make the best of the opportunities and see what is the best place to carry out an action regarding our bond that matures in 2026. To conclude, going back to something that Marcelo already stated, our decarbonization plan, our target is to drop 15% of our emissions up to 2030. Divided by our main pillars that are energy efficiency, the use of biomass, an increase of renewable energy, and the optimization of raw materials. Therefore, Blast Furnace 3 provides us a relevant gain in our pathway.
Of course, the other actions will be adopted in the upcoming years in order to deliver our target, that is to reduce carbon emissions. Now, I will hand it back to Leonardo for a Q&A session.
Thank you, Thiago. Now we go to our Q&A session. Our first question is for Marcelo. Marcelo, Caio Ribeiro from Bank of America wants to know about import taxes. He wants an update about possible increase of import tariffs or steel quotas. In what point is this process and what is your expectation?
Good morning, Caio. Here we have public information. I believe this was published one hour ago, and the SECEX issued its technical opinion regarding all points that we have been approaching here, and it is clear and visible the damage that Brazil has suffered due to subsidized imports that mainly come from China.
I do believe that the technical opinion is explicit. This was properly done. We have cooperated very transparently. We have provided information. We have showed that we are suffering because of this, and this technical opinion provides us positive prospects, and we believe that the situation will be dealt with quickly. There is high concern. The damage has been and is still deep. Nonetheless, the expectation with this technical opinion shows the maturity that exists to balance this type of unloyal competition. We just learned that Chile is applying tariffs, and there is also an additional tariff from China steel. This is done by the United States, Mexico, Europe. Everybody is establishing these mechanisms to prevent a flood of unloyal trade. I do trust that Brazil, with the technical opinion of the SECEX, will be able to evolve and go through laws and deal with unloyal competition, which is irrational.
Thank you, Marcelo. Now, moreover, about this matter, Ricardo Monegaglia from Safra wants to know if there is a space to look for higher steel prices in the short term, if we could have the implementation of quotas and tariffs.
As we have demonstrated during the past quarters, not only in the steel mill, the entire chain is suffering because of this great volume of imports under unloyal conditions. In many cases, the price is below the cost. What could happen or what we could expect in the short run would be greater possibilities of new businesses, and we could service them with local production. Of course, we must regulate the margins of the entire margin, and when all these, as the stocks of these products from unloyal competition recedes. This should recede, and together with the chain, we should be able to work with new projects with local steel and added value. This should be the impact in the short term. As steel mill gains scale, the margins will improve.
Our next question. From Caio Ribeiro to Thiago. Thiago, he wants to know about the Compactos project. Any updates or timing to approve the expansion project and the lifespan of this asset and something about the CapEx.
Thank you, Caio, for your question. No, no updates. We continue, as we had already communicated, the MUSA team is making progress in all their studies and the detailed engineering of the project. We have started the environmental licensing processes. In our view, this is a critical path for the decision-making process.
After the approval of the environmental license, I believe that we should be ready to make the final decision on the project. We calculate that this approval will be around mid-2025. It all depends how the state conducts the process. Regarding value, we have not been updated. We must see what is going to happen with the studies and it would be premature to talk about values if the project has not been concluded yet. What we can say in terms of reference of value that was communicated years ago, that was around $1 billion in investments. And we do imagine that when we consider that time has gone by from that period up till the day, there should be an increase. Therefore, a reference of $1.5 billion could be something reasonable, but this is still not a value that has been formally communicated to the Usiminas management.
Our next question, for Miguel. Gabriel Simões from Goldman Sachs wants to know about the automotive. He wants you to talk about the April negotiation with the automotive sector. What about the prices and the terms?
Yes, we ended the contracts. The update conditions as of April 1st, these conditions were agreed upon similar terms that we had on January 1st. These contracts represent about 70% of our customers from the automotive customers, and January was around 12%.
Our next question, for Thiago. Working capital. What about forfaiting in the upcoming quarters? How do you see working capital when you think about forfaiting?
Ricardo, we see no significant variations in the upcoming quarters. But the next quarter, this forfaiting reduction was planned. We intended to go back to normal levels. These are the levels before Blast Furnace 3 retrofit. We thought that we could do it in a more diluted way, as the improvement of working capital was better this quarter. We reduced this already to a reasonable level. Today, around BRL 800 million in forfaiting. This is a historically medium level for Usiminas, so I believe that this is at a normal level. Of course, we will have slight fluctuations and variations, but always along these values, that would be BRL 800 million . The working capital expectation is stability, and we will use this to accommodate any relevant oscillations in working capital.
There was a question from Igor. Exactly. Igor Guedes from Genial, so it has already been answered. Thiago, Lucas Laghi from XP wants to know about the free cash flow. Which measures could the company adopt to mitigate the free cash flow effects for the year? Is there flexibility in your CapEx from BRL 1.7 billion to BRL 1.9 billion this year?
Lucas, for starters, we see no need, therefore, our CapEx is stable. The main projects underway are important projects, and we are interested in maintaining this timeline. Once again, the effect on the free cash flow was on purpose because of the cash level and the leverage of the company. Therefore, currently, we see no need for any type of mitigating action in addition to the normal actions that would be control. We control better our working capital, pursuing a gain of profitability and cash generation with our operations.
Thank you, Thiago. The next question here is, here we have Daniel Sasson. Everybody wants to know about cost. Gabriel Simões from Goldman Sachs, Leonardo Correa, BTG. Ricardo Monegaglia, Safra, Rafael Barcellos, Bradesco, Igor Guedes, Genial, Rafael Araujo, Evolve, all want to know about costs. Although the cost of the steel has dropped during the first quarter, what can we expect during the second quarter because a slight increase because of the exchange rate? What also led to a better mix of products, and this reflects on higher price costs with the stability price. Well, if it costs more to produce it, don't you believe that the price should be higher?
This is a complex question with a number of variables. I am going to explain this so that you can understand, and Miguel and Marcelo can jump in. It is important, number ONE, to remember the operational configuration of Usiminas. As I said, today, we produce crude steel in Ipatinga, and we are on our way, or we are there already, of producing all the necessary steel that is laminated in Ipatinga and in Cubatão. We depend on steel slabs that are purchased.
In Ipatinga, we continue with the expectation of cost reduction as Blast Furnace 3 stabilizes itself and as it delivers everything that we expect it to deliver in terms of cost reduction. This expectation is maintained, and we believe that this will, and this is happening. The laminated material that is rolled in Cubatão is purchased. I do not know if you saw the market indicators. We buy slabs at market values. You will see that there was a significant increase in the price of the slab between the end of last year and the beginning of this year. When you see the negotiation to negotiate, to receive it, and to sell it, now this effect will touch the results of next quarter. The negotiation of slab purchases are in dollar. The depreciation also impacts this entry that is cost.
This is the main factor you should. Because of course, the drop of production impacts part of our cost, but not everything. There is another side that is exposed to the purchase of our slabs. We want to stable our volumes, let's say, 1 million by 50,000 million, 1/3 of the sales have a direct impact on the cost, and we have to see also the depreciation. When we talk about margins, a greater mix represents a greater price and a greater cost. This is why we see the possibility of maintaining a net revenue per ton, which is stable, although there has been a negotiation of cost drops in the automotive sector. As we said, if 1/3 of our sales is the automotive sector, 20% would be impacted by 12%, that is being offset by a better sales mix.
In terms of costs of our own production, the ramp-up of our blast furnace is evolving, and it's aligned with our plan. Today, we have a productive setting with both furnaces. Blast Furnace 3 that has already been mentioned, and we also have a smaller furnace. This productive setting is compared to three blast furnaces. With this relining, we've totally updated our operation, and we're already being able to produce in certain periods between 80% and 90% of our productive capacity. This is a positive prospect.
Thank you. Our next question about the same subject, still on the same. Rafael Barcellos wants to know about, historically, COGS follows similar trends. Could you give us details? While this movement didn't take place during the next quarter, can this effect see with a greater lag during the third quarter?
Rafael, the difference between the production setting of Ipatinga and Cubatão and this possibility of the cost of the slab or steel may follow different trends during a period. Although the cost of steel production drops, there will be an increase in the price of slabs. Here you see the difference and a greater detail, and I won't go into the ropes, but the turnover of the inventory in Ipatinga is different from that in Cubatão. These effects are not always matched.
From cost to result, Gabriel Simões from Goldman Sachs wants to know because of the drop of the cost production, we would like to see the stable EBITDA on the second quarter because with this, I believe that you will improve the EBITDA.
According to what I just said, the steel production cost drops because of the stabilization of Blast Furnace 3, but the slabs that will be stripped will increase because of the effect of the dollar. We always have to take into this account 1/3 and 2/3. This is when we use our own production, when we use purchased slabs. Although the production cost has dropped, the increase of the price of the slab offsets. This is why we trend to see a stable cost and not a reduction in our cost.
About mining volume, Gabriel Simões from Goldman Sachs and Igor Guedes say the following, "We expected a lower iron ore volume during this quarter. There is a problem that we didn't see on Q1 with volumes increasing year-on-year. How do you see this, and what are your expectations? Do you believe that you will resolve this during the second semester? I don't know if there is another thing. How this paralyzation of this iron ore treating unit, how did this impact your production?
The volume of the quarter was slightly above as we expected it. This is a quarter always impacted by seasonal rains, which hampers the operation of our plant. We've been able to maintain this volume, in part because of the use of inventory. This was material in our inventory, and there were opportunities that emerged during the second half of the quarter. This was the sale of granulated material lump. That lump that has a lower specification and the market not always is interested in it. An opportunity emerged. The international opportunities emerged to sell this opportunity.
Volumes for the rest of the year. Our view is still lower volume than last year, precisely because of the paralyzation of some areas. The new fronts are within our timeline. Fronts of operation, we will see an improvement of volume as of the second semester, not next quarter, but throughout the year. Our expectation is to have volume levels lower than last year. I would like to highlight the important capacity and flexibility of our team that adapts to market conditions. Mainly what they do is they look for more efficiency in costs to enable operations. This was one of the key factors from our team to leverage this business window that Thiago mentioned. We had positive results. When we take into account the important volatility that iron ore suffered last quarter.
Our next question from Daniel Sasson from Itaú BBA. He wants to know about MUSA prices and how prices impacted the results of the division. Could you tell us how the mechanism prices impacted this? How to see this throughout the year. Is there room for improving the situation?
One, regarding the impact of prices, there was an important drop during the quarter. For exports, the final price of the sale is defined by the month when the material arrives during Q4 last year. We turned with a relevant amount of material in transit, and these prices were remarked during January and February at a lower iron ore price deck. The transit volume was about 100 million tons of iron ore that were remarked in addition to all the material that was shipped throughout the quarter. Material that was in transit during the end of this quarter was around 700,000 tons.
Leo can correct me if I am wrong. But that this was around 700,000. So it is important to bear this in mind. So you see the impact, what was sold this quarter was sold last quarter and was remarked. In terms of quality, during this quarter, there was a lump opportunity sale. This was a material with greater discount. This impact the realized average price. This also depends on the volumes that we will realize during the next semester. The improvement of quality, we expect an improvement of quality once we enter in the new areas, and we will see this stronger during the second semester of this year. During the next quarter, we do not expect an improvement in prices of material sold. I don't know if I answered everything. The volumes are right.
MUSA, Daniel Sasson and Leonardo Correa, they want to know about CPP. The Cost of Production per ton increased 17% quarter-on-quarter. Should we expect an increase of CPP during the second quarter? Cost of Production per ton, how to see the dynamic of cost throughout the year. Leo Correa completes, asking about the China break-even point, if there is space of a drop in the future.
Regarding Cost of Production per ton, there was an increase and part is because of the paralyzation of Termines that has a good processing cost. Once you stop, there is an increase because you are processing material in other area. In addition to the drop in fixed cost, there is an impact in cost because of the geographic situation of the mines and the need of transporting or shipping material.
This is a situation that will not improve significantly during the next quarters. By and large, we see the CPT per ton for MUSA at this level. It may oscillate when ITM comes back to normal activities. Now, break-even. I really did not understand this question. I did not understand the objective of this question. I believe in the possibility of a lower cost that impacts the break-even up until the end of the year. We do not have a strong reduction cost until the end of the year. What affects, actually, sales variation would be the price of iron ore in the market and freight. That has been an important component when we see the margins of our mining unit.
Okay. Thiago. Rafael Barcellos wants to know about costs. He wants a follow-up on the cost question. Can we talk about cost expectations during the second semester?
The second semester is a bit distant to say anything about it. During the next quarter, during the next call, we will talk about our expectations regarding steel production cost. If we are at a level that we consider normal or stable in terms of the cost of steel production, or if we will have an improvement during the second semester. This will also depend on the development of the market prices of the slabs. Currently, it would be speculating. I would be speculating if I would talk about this.
Our next question for Miguel. From Mary Silva from Banco do Brasil. Sales. The steel unit sales per segment in the domestic market, what can we expect for the second quarter?
Greater representation of the automotive sector will continue. Yes, we had a better share of the automotive sector during Q1.
What we have also said that the automotive sales represent 1/3 of Usiminas sales. During Q1, this percentage added up to 35% or difference or variations of one or two points are connected to the dynamic of the inventory of the chain. We could expect, yes, the same share of the automotives sector during the second semester. The distribution, we can maintain 1/3 in the automotive sector, give or take one point. We have the industrial sector. We have spot and the industrial sector. I would like to clarify that we expect a stable sales volume for the second quarter. But yes, we should see the seasonality and the demand of the domestic market and a drop in the export market. We can have better mix export and domestic sales, and we could have domestic sales representing 90% or 95% of our total sales.
Miguel, a question. Exports from the steel unit. Mary Silva is also asking. She wants you to elaborate on the strong increase of the North American market.
Usiminas, we are always looking for business opportunities in the national and the export market. U.S. has import quotas or different quotas for different products that come from Brazil. Throughout the first quarter, we were able to capitalize important businesses that according to the quotas of the American market, every time. Here we have cold coils, hot coils, galvanized products. Whenever it is possible, we will capitalize on these opportunities.
Now, more details about the price dynamic of flat steel after depreciation. Do you expect an increase of price in the upcoming month?
Rafael, yes, the depreciation put pressure on our cost. In addition to the depreciation, there is pressure because of the increase of slab purchase conditions because of the increase of international markets. This determines our prices. There are possibilities of adjusting prices in the upcoming months because of the cost pressure that we are feeling right now.
Thank you, Miguel. Now our last question for Marcelo from Igor Guedes from Genial. He asks. I am going to read it because it is elaborate here. He says that in December, we disconnected Blast Furnace 1 because of the increase of Chinese imports that were stealing our market share. With the ramp up of Blast Furnace 3 and the gradual increase of production, and with the prospect of stable volume, will you decrease utilization rates of other blast furnaces because your competition is laying off personnel and it is disconnecting equipment. Will you do something similar?
Igor, as you just mentioned, we disconnected Blast Furnace 1 because of the flood that we felt of imported steel, and we have evolved in our Blast Furnace 3 ramp-up. We will continue evolving because our objective that has already been tested, the production of two blast furnace, 2 and 3. With them, we can do what we did years ago with three blast furnaces. This is a gain of competitiveness. Of course, we want to capitalize ourselves in the upcoming months. In a nutshell, our objective is to maximize our productivity. We want to improve our efficiency and cost and to be more competitive and to improve our efficiency plan to be more competitive in our market. I would say that for the time being, our vision is to continue growing or increasing our competitiveness, maximizing production and following the market conditions.
Thank you, Marcelo. We are bringing our Q&A session to an end now, and we would like to thank all of you for your participation. Should you have any questions, our team is at your disposal. We wish you an excellent day.