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 am Leonardo Karam, Usiminas' Investor Relations General Manager. For those that want to follow us in English, we have free translation of the webcast presentation. It is available on 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 posed in writing in the Zoom Q&A session. This is an icon below on your screen. Participants who are listening in English can also pose questions directly in this section. This video conference is being recorded and simultaneously broadcasted on Usiminas YouTube channel. 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 per participant. We also ask any questions from journalists to be directed to the Usiminas media relations by 313-499-9312 or through the email imprensa@usiminas.com. Before we proceed, we would like to clarify that statements made during this video conference regarding the company's business prospect as well as projections, operational, and financial targets related to the growth potential are forward-looking statements based on the management's expectations regarding Usiminas' future. These expectations highly depend on the performance of the steel industry, the country's economic situation, and the international market situation, and are subject to changes. With us today, we have our President, Marcelo Chara, the VP of Finance and Investor Relations, Thiago Rodrigues, and Commercial VP, 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.
Good morning. Thank you very much. Today, we are in Ipatinga with Miguel and Thiago. This is the heart. This is the industrial center. Here we are 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. We also had the opportunity, and we defined important definitions like in coke battery three, where that was deactivated, and it impacted significantly environmental improvement and cost. We have management routines focused on more control and the optimization of all the productive resources.
I would like to say that we have concluded the relining work of Blast Furnace 3 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. This is associated to the entry 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 import steel in 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%. 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 disloyal 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 agro 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 focus result, the growth of GDP will be positive, but half of what we saw in 2022.
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 disloyal trade. Just an example, what Europe has done with safeguard, and Mexico and the U.S. that tax all the steel products with 25%. We have to pay attention to this. This already was initiated by Aço Brasil with the associates, that we participate together with the government, and we have to resolve this in the short term to avoid negative impacts in terms of 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. Thiago, you may continue.
Good afternoon. 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 expectation. This is 1,002,000 tonnes. Now, they were 2.4 million. Consolidated EBITDA was BRL -20 million, impacted by the steel segment that we will see in details. We also had a strong reduction in working capital, and this is an increase of BRL 780 million in cash flow. The reduction in leverage was 0.21, and as the reinitiation of the Blast Furnace 3 will start in the next few days. Here we have consolidated results. Therefore, the net revenue continues dropping. 2022, we had very high prices. On Q3, the revenue was BRL 6.7 billion, 2.5 below the past quarter. This drop in price is because of the drop in price, and this contributed with the drop of EBITDA that was BRL -20 million.
Net income was impacted by the operational and financial results, especially because the exchange rate, we had a net loss of BRL 166 million. When we see the steel unit results, the sales volumes presented an increase of 5% vis-à-vis the past quarter. In the domestic and the foreign market, this totals 1,021,000. There was a drop of net revenue. There was because of the drop in price and a 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 BRL 251 million and a margin of -4% vis-à-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. 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 result. On our next slide, we will see in EAF some results. The sales volume is stable, 2,391,000 tonnes. Net revenue BRL 793 million. This is below the last quarter, due in part to we have more sales with no maritime freight, but a worse mix quality. The EBITDA was BRL 129 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 BRL 10 million in the final result. Now, some solutions in Minas. On the next slide, our sales volume was stable, 301,000 tonnes. Here the revenue per tonne, BRL 6,675 million.
BRL 3 million below last quarter, and the EBITDA BRL 28 million, showing a slight recovery vis-à-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 BRL 886 million. This is aligned with our plan, and we continue with the expectation to end our yearly CapEx within the guidance that we already disclosed. That was BRL 3.2 billion.
Now, regarding our cash position, the great impact was working capital BRL 1,544,000,000, 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. No changes in our timeline regarding the amortization. This was our brief presentation. I will hand it back to Leonardo so we can start the Q&A session.
Thank you, Thiago. We will start now our Q&A session. Our first question come from a number of analysts. Gabriel Simões from Goldman Sachs, from Bank of America. Everybody's asking 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.
How do we see this in the upcoming quarters, if we will see more releases in the upcoming quarters. Daniela asks, is this dynamic, if this additional drop of third-party slabs, can we see a liberation? Josito completes and asks if this release will be the peak during Q3 in terms of slabs and what can we expect in the future.
Thank you, Daniela, Gabriel, Guilherme. Now, 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.
It will be lower because we ended the replenishment of the inventories after the operation of Blast Furnace 3. Now the effect price and volume, greater 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.
Thank you, Thiago. Our next question, it is about prices. There are a number of people that want to better understand this, and I will try to merge these questions because of time. Gabriel Simões from Goldman Sachs, Rafael Barcellos, Santander, Lucas 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-à-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? Finally, Josito from Bank of America wants to know if it will be a downward review in the new contracts in the automobile industry.
Good afternoon to everyone. When we talk about the prices on the end and the expect of Q4, Usiminas does not announce future event. These are prices in the distribution or spot negotiations on a monthly basis. In this 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 is a carryover on the fourth quarter. Now, this is for the distribution sector and the spot market. As we always clarify, the business to automobile industry, one group, as of January, will be updated, one as of April. 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 do not expect major changes in the mix of Q3 vis-a-vis Q3 in the domestic market, but there can be an improvement of mix in exports during Q4.
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, we are negotiating it now. It is too early to give you more 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 volume. The other contracts will be updated in April. We still have not started these negotiation. Usiminas always looks for long-term partnerships. 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 some material as iron ore and coal, we may see an increase in prices of Chinese products. This will positively affect the steel industry globally and in Brazil. Now, a follow-up, because here we have some questions that people didn't understand very well. Can we expect a downward review in the contracts? For the automobile sector, most of our contracts are semestral, and there is no update of contracts during Q4. For one part of the contract, we expect an adjustment on Q4 of 2023.
All right. Thank you, Miguel.
Thiago, we have a number of questions regarding costs. We have Daniel Sasson from Itaú, Lucas from XP, and Mr. Rosito. The cost production that dropped on Q2 dropped 7% on Q3. Costs 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? Lucas Guilhermi asked 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 operations, something that we've seen on Q3.
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 days. The start of our furnace needs more consumption of raw material.
The indicators aren't the best during the beginning moment and during the ramp-up phase, which takes a number of months. So by and large, 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.
Thank you, Thiago. Our next question for Miguel. Gustavo Hwang from HSBC. He wants color regarding how you see the flat steel demand for Q4 and Q1 of 2021.
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 it, but there are ongoing projects that will demand more steel in the upcoming quarters, not only Q4, but only Q1 of 2024. The agro storage area is increasing. The naval industry for agro and fuel transportation. So by and large, we see more stability in consumption.
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 operational. Now, the inventory of slabs, is it enough right now?
Lucas Guilhermi. 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 affects the cost. With all these variables, it is very difficult to see a drop. We have high expectations where 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 a capacity of 3 million tons. We believe that we will increase our productive capacity, increasing consumption gains, diminishment of fixed costs. We are not going to give you figures. We will just tell you that cost reduction will be important as of the next quarter.
I would like to add that as Thiago just mentioned, with this furnace, we have a configuration of three furnaces. An important fact is that we have carried out significant technological improvements in this furnace. I am not going to give you details because this would take a long period of time. This is a state-of-the-art furnace. But we have to see the level of imports of steel in the market. Perhaps we will not 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. This does not only impact the steel industry, but also the value chain. Can you imagine what this means? The steel products that are coming in from China, here we have a deficit of $40 million in our trade balance.
We just carried out a major overhaul. The ramp-up will start in the upcoming 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 will operate, but we are re-dimensioning 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. This proposal is still a significant proposal and the impact will be positive in the economy.
By and large, what concerns us a bit is, number one, when you establish too many exceptions to the rule, 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. When you have a selective tax on fuels and minerals, this can affect the industrial chain as a whole. This affects the competitiveness of the Brazilian industry. This is something that I believe that we should highlight from Marcelo's statement.
Thank you, Thiago. Miguel, once again, let us elaborate a little bit more with the auto industry contract. E.J. Gardi Souza from BB, and Caio from BTG Pactual, they want to know about the negotiations with the autos sector for the April contract that should have been reviewed in October.
He wants to know, what is the dimension of this review for Q4? This is regarding the high volume that you mentioned.
I want to highlight something, that there are no current negotiations and no contract update. The contract will be updated in January and April. What we are going to do, what we are 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-third of the contracts will receive an adjustment of 5% on Q4. I believe that now this is clear regarding our contract. 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.
Okay. Thank you, Miguel. Our next question for Thiago, Rafael Barcellos, Santander. He wants to know about the profitability of the steel unit in the upcoming quarter four. Thiago.
Well, as I said, in terms of costs, we see certain instability in comparison to Q3. Miguel mentioned the difficulty and showed us the sales scenario. We believe that it will be a difficult quarter, but we are focused on the future after we go over the cost impacts and, well, we have a future outlook for next year. We believe that quarter four will still be a difficult quarter for Usiminas, but according to our expectations, but we have a more positive outlook during 2024.
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 a space to increase prices in the short term?
Daniel, when we analyze the Chinese situation, we see different variables. On one side, the Chinese production in September significantly dropped vis-à-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. The international trend has a 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 is strong pressure on cost, and this could be reflected in an improvement in margins in the upcoming months following the international and local situation.
Thank you, Miguel. Our next question for Thiago Rodrigues from Rafael Barcellos, Santander. He wants to know about CapEx, Thiago. He wants to know if you could talk about CapEx expectations for 2024.
Well, we are in the middle of our budget, so we do not have an approved figure here, but the expectation is a lower CapEx than this year. That was an exceptional year because of the Ipatinga plant. We do not have a figure, but the expectation of our CapEx is that it will be lower than what we had this year.
Next question for Marcelo. Rafael Araujo from [Devo Capital]. He wants to know about MUSA. What about possible projects in iron ore?
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 project. We feel highly reassured, and we are going to focus on this.
Thank you, Marcelo. 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 result?
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 3 that will be in the ramp-up state. We believe that in the mid-run, the cash cost of this quarter will be the same or stable too, and we will see an improvement as of Q1 of 2024.
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 a potential increase of import tariffs in Brazil, if we can see that this year, if the 25% that have been mentioned, is this feasible? And without this increase, is it possible to think about an increase in price in 2024? Matheus also asked 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 the Chinese imports will still come in very easily?
Well, let us say Mexico decides to close or to place tax barriers at 25%, the U.S. 25%, Europe safeguards. As Miguel mentioned, there is a difficult situation in the Chinese markets.
So where is this finished steel going to go? This is going to the countries that are unprotected. Brazil is amongst the 10 greatest economies in the world. It is a market reference. They cannot go to Mexico, so they come to Brazil and the competition is disloyal. And why 25%? Because Europe, because Mexico and U.S. established 25%, so we are not different. If we do not do anything different, they are going to bring steel that does not match the cost, the real cost. This is negative. We wanted to hire 600 people this year. We have not contracted these people because of the number of imports. We closed a center in São 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 how the economic dynamic of the country will develop. The growth will grow half of 2023. It is important to adopt actions in order to prevent greater damage to all the industrial network in the country. When I say the imbalance of industrialized product has the impact. We are not talking about BRL 5 million this year. You can multiply this by two. We are talking about manufactured products that come with this steel. This is Chinese labor that replaces Brazilian labor. We do not want protection. We want to level the playing field, and we do not want unloyal competition. I believe that the government has to do something about this.
Thank you, Marcelo. I said that this is the last question, but we have a last question that is important.
Caio Greiner from BTG Pactual asks about the integration with Daniel. What can you talk about the tunnel turnaround project and the new company management? Do you have a diagnosis? Do you believe that the plan will be CapEx intensive, or will be more process/management? Marcelo.
As I have already mentioned, during the three first months, the focus. The fact of being Ipatinga means something. It is not by chance. It is 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. Human resources that we have in Usiminas, this is a company that has an extraordinary capacity to develop talent and level of commitment because they identify themselves with our brand. 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. 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, on 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 challenging agenda. Nonetheless, we are optimistic regarding the evolution. Now we conclude the overhaul of the Blast Furnace 3 and we are within a startup process.
Thank you, Marcelo. 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. A good afternoon to everyone.