Good morning, ladies and gentlemen, thank you for waiting. Welcome to Usiminas' conference call to discuss the results of the third quarter of 2021. I am Leonardo Karam, General Investor Relations Manager of Usiminas. For those who wish to follow us in English, we offer free translation on our IR website. There is also simultaneous interpretation. Please choose the language channel on the icon on the bottom of your Zoom screen. All participants are logged on listen-only mode, and questions can be posed in writing in the Zoom Q&A session. That is the icon below your screen. Participants who are listening in English will also be able to ask questions directly in this section. This conference call is being recorded and broadcasted simultaneously through the Usiminas YouTube channel. We would like to highlight that this conference is exclusively for investors and market analysts.
For everyone's convenience, we request you limit your questions to one question per participant. We also request that questions from journalists be directed to Usiminas media's relation by the phone 313-499-8918 or email imprensa@usiminas.com. Before proceeding, we would like to clarify that forward statements made during this conference call regarding the company's business prospects as well as projections, operating and financial targets regarding its growth potential are forecasts based on the management's expectations regarding Usiminas' future. These expectations are highly dependent on the performance of the steel sector, the country's economic situation, and the situation of international markets, and therefore are subject to change.
With us today, we have the executive management of Usiminas, our President, Sergio Leite, the Vice President of Finance and Investor Relations, Alberto Ono, the Industrial Vice President, Americo Ferreira, the Vice President of Corporate Planning, Yoshiaki Shimada, the Vice President Technology and Quality, Kohei Kimura, the Commercial Vice President, Miguel Homes, the CEO of Mineração Usiminas, Carlos Rezzonico, the Executive Director of Soluções Usiminas, Ascanio Merrigh , the Managing Director of Usiminas Mecânica, Fernando Mazzoni, the Legal Director, Bruno Paulino, and the Controllership Director, Julio Arroyo. Initially, Sergio Leite will initiate with opening remarks. Subsequently, Alberto Ono will present the results, then the questions in the Q&A session will be answered. Now I turn it over to Sergio Leite. Sergio, you have the floor.
Good morning to everyone. Now, excuse me, I will take my mask off. We are undergoing a celebration moment.
This is a very special moment for each one of us and our team. This week, we are celebrating 59 years of operations. We started our celebration of the 60th anniversary, six decades of operation. Our research center celebrated 50 years of activity. On the 24th, we will celebrate 30 years of privatization. These are very important landmarks in our history, and this is something that we are celebrating together with the communities where we are present, with our employees, and with their family members. In terms of the results that we will present today, the result of Q3 consolidates the result that we have been building since this first semester. There is no doubt that 2021 will be the best year in terms of results in the 21st century. Today, we are presenting a result of steel mill in terms of EBITDA without including the non-recurrent effects.
This is the best quarterly steel result that represents a landmark regarding what our team has done. Our consolidated cash flow is BRL 7.3 billion, which places us in a debt position that is negative. We are also making progress significantly in our ESG agenda. Alberto subsequently will comment on the seven targets that we presented to the market in the beginning of the year. We're striving positively, and for us, it is important our commitment with climate change, our commitment with decarbonization, pursuing carbon neutral effects, and we are going to intensively work with this target. In the past days, we delivered important results within our ESG commitment. On Tuesday in Ipatinga, within our social commitment, we delivered to the community the Center of Usiminas Memory. This memory center in an icon building in the city of Ipatinga. This is heritage of our city.
This construction from 1959, and it belonged to the company, and it's the Grande Hotel of Ipatinga. This construction was inactive for many years, and now after a refurbishment, it's been delivered to a community as a memory center where we can tell the story of Usiminas, of the Mining industrialization, Brazilian industrialization, the story about Ipatinga, the story of the Steel Valley. We will present to the entire community the art collection that was gathered throughout the six decades of the company's operation. This is something that we will deliver in the social sphere, and we have the social commitment. In addition, we have Fundação São Francisco Xavier, that is the social branch of the company that works with health and education. Undoubtedly, we're a reference in Brazil, and we are a reference in the international level.
We were able to participate in the construction of the city of Ipatinga, one of the 156 Brazilian cities with over 200,000 inhabitants. In September, we also launched the Libertas Hospital in Belo Horizonte. That will be the sixth hospital of the São Francisco Xavier that will contribute in Belo Horizonte, that will contribute with the entire population of the metropolitan area of Belo Horizonte, with over 3 million people. Now, within our ESG commitment regarding the environment, on November 19th, we will open the dry stacking in Usiminas Mineração . This is a filtering process and dry stacking of residues, and this is state-of-the-art technology because we will not use the last dam of Mineração Usiminas. This is an important moment for Mineração Usiminas, and this shows how we're making progress in our social, environmental, and governance commitments.
We are highly satisfied with the presence of you in our results live from Usiminas as we do every quarter. I will give the floor to Alberto to present in details our results from the third quarter of 2021.
Thank you very much, and it's a great pleasure to be here with you. Thank you, Sergio. Please excuse me, I will take my mask off. Well, now to our presentation. Let's go to slide number two. Here we have the main figures. Here we have steel unit sales. There has been a drop, as we had already mentioned, and it's slightly below the guidance. This is a drop of 10% in terms of volume, more concentrated in the domestic than in the exports market. In the export market, there was an increase of 60%. Here, we're more concentrated in the domestic market.
In terms of iron ore, aligned with our guidance, we have already surpassed 2.4 million tons, 18% higher than the last quarter. Therefore, both in the domestic market and the export market, the EBITDA, we can see a significant drop. You should remember that during the second quarter, we had non-recurrent effects, mainly because of fiscal effects, tax credits that were accounted in this quarter because of the STF. During this quarter, there are less non-recurrent effects. Another point would be the effect of the significant drop of prices in iron ore in the international market. This also affected our figures, although we increased the volume. Also, net profit, there was a drop of 60%. We would like to remind you that during the second quarter, we suffered a significant effect from the non-recurrent effect of the tax credits of over BRL 2.4 billion.
Here we have the effect of the exchange variation that was positive during the quarter, and this benefited the results at BRL 480 million. During the third quarter, the exchange rate effect was negative of over BRL 300 million. We have a non-recurrent effect that is negative of a legal provision of a tax case. Now, when we go to our next slide. Here, you can see the non-recurrent effect on our EBITDA. When we eliminate the non-recurrent effect, the drop is around 16% between Q2 and Q3. Now, legal provisions in the EBITDA is BRL 80 million, and in the result, it is higher because of monetary correction. Now the result of the steel mill unit in case. Well, this was the best EBITDA in a quarter. We surpassed BRL 2.1 billion.
If we eliminate the non-recurring effect because of the legal provision, so we surpassed the EBITDA of Q2 of BRL 2.02 billion, considering the exclusion of the non-recurrent effects, strong forging, a margin of 26%. Then here we have a very positive figure. Remembering that we had this drop in volume during the quarter. So here you have the EBITDA result because of better average prices practiced during the third quarter. So there's an improvement vis-a-vis the second quarter in terms of prices by 14%. Let's go to our next slide now. Well, as I mentioned at the beginning, the price effect, the international prices of iron ore was significant. What you can observe here is a drop of over 50% in our result. Although, you can see that we've had a positive year vis-a-vis the past years.
Therefore, we are back to the level of the third quarter of 2020.
In historic terms, was a very good quarter, although there was a drop in price. Our EBITDA is reasonable in Mineração, but not as significant as we observed as of the fourth quarter of 2020. Now we have our next slide. Here, Soluções Usiminas. Here we have EBITDA. When we eliminate the non-recurrent effects, it's strong. There is a variation regarding the second quarter, over 10%- . But here, Soluções Usiminas also dropped its volume when we compare it to the second quarter, and this is around 12%. This was more affected than volume than in terms of margin drop. When we analyze a margin without recurrent effects, here we have a solid figure. It is an impressive figure when you compare it to the quarters from last year. Our next slide. Now other financial indicators. Number one, you can see our working capital.
We are classifying the tax credits, fiscal things, that are recoverable in the short term. This is why they are part of our working capital. We would like to remind you that they will be converted, but as of the second quarter, this increased our figures. When we exclude these effects, we can see an increase of working capital from Q2 to Q3 of around BRL 1.2 billion, around 20% of growth. Here, there is a lower portion that is 20%, that is connected to steel volumes, mainly. I will show this on our next slide. Mainly, what is important in this variation would be prices, costs and prices. Prices and accounts receivable. This is the material that was sold throughout the quarters. The average prices were 14% higher than Q2 regarding sold products, and here in terms of raw material and intermediary products.
Here we have higher costs of iron ore, something that we have seen throughout the second quarter. We have also seen the increase of slab, and we also have stock and price. When we go to our next slide, there was an increase of 19% in steel stocks. This increase was a one-off event that was a scheduled shutdown in the main roller machine that stopped. There was a disbalance also in slab consumption. There was an accumulation of slabs. Also we had to have stocks for the downstream line. This is why we had higher inventories in this quarter that we will bring back to normal. There has been an increase in steel inventories, but this will be normalized. This is something that explains the increase in volumes in terms of inventories. Our cash position and indebtedness.
As Sergio explained in the beginning, our cash flow is BRL 7.3 billion. This is historic. This surpasses our debt at BRL 1.2 billion. We are net cash at BRL 1.2. The negative net leverage of 0.1x , although there was an exchange rate variation of almost 9% during the quarter, and this is something that affected our debt in dollar. Although this exchange rate variation, the increase of our cash flow was higher, and therefore, there is a significant improvement in our cash position and indebtedness. Here you can see our CapEx that was slightly below last quarter. This is 10% below last quarter, but we still maintain our guidance of BRL 1.5 billion. The expectation now during the fourth quarter is to speed up, and we will achieve our guidance.
This is our last slide of the presentation, and here you can see our goals, our ESG goals. As you can see here, most of our goals are going according to our plan. Here also, we have the accident frequency rate. We are still slightly above what we expected, but we are still striving in order to fulfill our goals. In terms of the dam, and dry stacking and residues, our expectation was to end this during the first quarter, the first semester, second quarter, I apologize, but as Sergio already mentioned, despite the delay, we will deliver this project in November. So, when this dry stacking becomes operation, we will no longer use the last downstream dam. So we will no longer have dams in our operations.
Yellow means that we're a little bit delayed, but the expectation is to deliver this in November. This is where my presentation ends. Leonardo, you have the floor for a Q&A session.
Thank you, Alberto, Sergio. Ladies and gentlemen, we will go to our Q&A session. Our first question from Carlos de Alba from Morgan Stanley regarding the automobile industry. He asked, what is the sector like in Brazil? What is our view regarding this sector, this industry? When do we expect the volumes from the automobile industry to recover? What is our expectation in terms of price increase for 2022? We have more people asking practically the same question. There is an investor that didn't identify himself. He is also asking about the automobile demand and volume and transference of prices of 2022. Rafael Barcelos from Santander also wants details regarding price negotiations with the auto industry. Mr. Correa from BTG wants to know if we know what kind of difference in prices is there. Over to you, Miguel.
Thank you, and good morning. To understand the automobile industry, we have to understand how the automobile industry evolved throughout the quarters this year. If we go back to the first quarter of 2021, there was a production average of 200,000 units during the second quarter. This was around 190,000 units a month. The third quarter presents a production average of around 175,000 units a month. This is a sector that was strongly impacted because of the lack of semiconductors. This is a global situation affecting this industry. According to experts, the normalization of the supply of semiconductors can be expected throughout 2022.
There are experts that say that the normalization will take place during the second semester. Some people that are more conservative say that this will take place after the second semester. According to the last report on ANFAVEA, there's a forecast for two scenarios. There is a scenario more conservative and one more optimistic that talk a total car production of Brazil between 2,120,000 units or 2,230,000 units throughout the year of 2022. This is a growth below what we expect, because this was a sector that was strongly impacted because of the lack of semiconductors. With these production restrictions, we have a low car inventory. This creates opportunities. Usiminas and the car industry is prepared to follow this growth potential and to meet the demand or the backlog of orders that have accumulated throughout the assembly lines in the last months.
When we think about prices, negotiations still haven't started. Around 25% of the auto industries do their contracts in January. 75% will update their contracts in April. The January negotiations haven't started yet. But we have meetings every week. In these meetings, we talk about the different scenarios, both in the global and domestic market, in terms of steel and in terms of automobile. So we see the international situation. We see the situation of the contracts in Brazil. We can see a gap between the current price and the contract prices, above 50%. All of these variables will be taken into account when we renew the contracts, be it as of January or as of April.
Thank you, Miguel. Our next question from Rafael Barcelos, Santander regarding inventories. Miguel, this question is for you. In your opinion, what are the inventory levels in the chain? Have you seen a slowdown in your order portfolio?
The inventories are totally normalized in the industries that consume steel, and what we expect is a typical seasonality of the fourth quarter of the year, as we've seen in the other years. Last year wasn't a typical year. During the fourth quarter, we saw an increase of consumption because of a strong recomposition that was strong from the different chains. We see equipment, machinery with road implementation, agribusiness, construction businesses. These are sectors that have presented slowdown in activity like white line and also steel, and they were impacted by inflation and consumption capacity. There will be a seasonality during the fourth quarter in the domestic market, which is typical in this time of the year.
We have a question from Rafael Barcelos about export. Can you talk about what you expect in terms of export and sales during the fourth quarter, and what is the margin level of your exports?
We communicated a guidance between 1.1 million- 1.2 million tons in sales. We do not announce guidance information, but as we have a typical seasonality in the domestic market, it is logical to think about greater share in the exports and the sales guidance. We are capitalizing import and opportunities in the export market, and in terms of demand, there is international market. If we see strong export storage chain and restrictions towards China, this opens opportunities to other countries. Brazil has an important position. Yes, we are making progress in important businesses with sound margins in the export market.
In natural markets or historic markets where we participated, like Europe or Argentina, but always capitalizing market opportunities in the U.S. and Canada and Latin America, the Pacific side of Latin America, where the past year China had a very important share in the imports of Colombia, Pacific, Chile, Peru, Bolivia. We are capitalizing interesting business in this new market that has production restrictions regarding Chinese exports.
Thank you, Miguel. Isabella, our guidance 1.2 million, and how we see higher exports and the demand in the domestic market. Now for Alberto, we have a question regarding cost. Isabella from Bradesco and Alexandre Torrano, the year outlook of cost per tons for the next quarter. The impact of the high price of coal and the impact on the third quarter and the upcoming quarters.
Isabella and Alexandre, regarding costs, although we don't provide you a guidance, what can we say? Regarding the evolution of cost over the fourth quarter, we believe that we tend to stabilize. I believe that in terms of production cost during Q3 vis-à-vis Q2, the variation was 5%, the pace was higher than 10%, following the rise of iron ore and the exchange rate from Q2 to Q3, we had a lower variation that was 5%. I would say that we believe that on the next quarter, we will see a stability. As you asked, although the iron ore is dropping, and this will be strongly reflected on the fourth quarter, this will be reflected on our costs. There was a significant rise in the price of coke and coal, and this reflects on the international prices and Usinas.
But by and large, between products and inventory in the plant, in the port, and in transit, we have three or four months of inventories. The prices that increased during the third quarter, I believe, will actually impact the production costs during the first quarter of next year. Because between the third and fourth quarter, we will be use the inventories that had already been bought. And with prices from the past, I believe that we will feel the effect as of the first quarter of next year. This doesn't mean that we won't feel anything on the fourth quarter, but we still have three or four months of inventory between plant ports and ships that are in transit. This is what we can say.
So there is a bias of improvement in iron ore, but with coal and coke, it is difficult to say what the final result will be after the first quarter of 2022. What I can say is a trend of production cost stabilization.
We have a question for Miguel from Caio, from BTG, and Carlos. Can you talk about the price carryover? Do you expect an increase of price for industry and distribution? Carlos also asks, what is happening with prices? Are we feeling pressure in order to give discounts to some of our customers?
Regarding the price carryover towards the fourth quarter, we always talk about the average price from September, how it compares to the average price of the quarter. Now the price of September closed at a similar level to that of the quarter.
Therefore, there won't be a carryover of prices towards the fourth quarter regarding the closing of the third quarter. Regarding parity, today, we observe parity that could be between 0% and 5%, depending on the product and how we calculate this parity. Our objective of parity is between 10% and 15%. Today, we are below this parity objective, therefore, this difference between the current parity and our target parity will not exist for a long period of time. I believe we will have a correction until we reach the parity that we expect in the domestic market. Regarding the local prices, we have to understand the evolution of Q3. During Q3, well, we classify the market distribution industry and automobile industry with defined contracts with stable prices until you update the contract. In the case of the industry, there have been price updates according to the contract.
In distribution, there has been stability throughout the third quarter. And there was a price reduction to the distribution sector of around 7% by the end of September. Now, this price discount also followed the market conditions, but with the parity between 0% and 5%, that is below Usiminas parity objective defined for the domestic market. We believe that we will have price stability throughout the fourth quarter, and you have to understand the typical seasonality that we will face during the fourth quarter.
`Thank you, Miguel. Our next question to Carlos Rezzonico , from Leonardo Correa from BTG, Carlos de Alba from Morgan Stanley. What is the break even of iron ore delivered in China, and what is the expectation regarding freight costs for MUSA on the fourth quarter?
Good morning, Leo. Good morning, Carlos. Thank you for the question.
Now regarding the break-even prices, the company has decided not to publish this information because this is sensitive information for the market. We have to consider the following. The break-even situation changes day by day because this does not only depend on the price of China, but other variables. Like discounts that the market provides to the type of iron ore that we are selling as an example, during the last two weeks. The discount, mid-grade, like what we sell, went from a level of $15 to $11. The prices drop, the discounts are reduced. The freight has dropped. A month ago, it was at levels above $45. Today, they are around $28, $29. This value changes on a daily basis. The port costs are also pegged to market prices, but also to shipments. There is a delay of approximately two months to adjust the contract prices.
This break-even value changes day by day and according to market events. What is our expectation regarding freight? A number of circumstances created these prices, but the coincidence of factors, there were longer routes regarding the coal world ships from China. The market always adjusts itself because of the change in these variables, and our expectation of the market is that we will see a drop in the upcoming months. The speed will also depend on how the market reacts. The solution of the problems that took the prices at that level, we expect drops in freight in the upcoming months.
Thank you, Carlos. Our next question is connected to capital allocation, Alberto. Caio Greiner from BTG, and an investor asks any novelty regarding the capital allocation strategy. You have BRL 2.1 billion of net cash. Will you accelerate the payout of dividends or do you plan to carry out an expansion plan? Evandro Musa. The investor wants to know if we expect any payout of dividends that is more aggressive.
These are complementary questions. Thank you, Caio. Thank you, investor. Regarding capital allocation, this will not change in our policy. As we have already informed the market, the priority is to finance our CapEx projects. Number two, considerations regarding our indebtedness, and these are our two priorities. Regarding payout to our shareholders in October, we anticipated the payments because of the results that we observed during the first semester. Something that we have not done for a long period of time. Now, due to the good results, it was possible to advance the payout of dividends. This was an advance. In terms of payout or other policy, for the time being, there is no news. We will continue doing what the company has always done. I have nothing to add regarding this point.
Thank you. Our next question comes from Alan Pereira, [Lincoln and Newey]. They ask: "We would like to know how you see your market regarding the drop of steel production with China. What will happen with the global steel price?" [Lincoln and Newey] asks about the impact of the movement of China in the global market.
Thank you, Leo. These price reductions from China give us great opportunities. We could classify in two opportunities.
Number one, 80% of flat steel come from China. We can replace these exports because of our production capacity of additional flat steel production, something that we are not using right now in our main production lines in Cubatão and Ipatinga. On the other side, the China drop eliminates pressure on the international market. Here we can export to the market, both to Latin America and Europe, and even Africa. This is an opportunity. These are two positive impacts that we could consider. For Usiminas, with the drop of steel production in China, what will happen with the global steel price? To understand what can happen with the steel price, we can see supply and demand. Supply, as you can observe, there is a strong drop of Chinese production. The September data show us a production drop above 20%.
On the other side, China has announced that these production restrictions will be maintained until Q1 of the next year. This generates pressure on supply, and it maintains high prices. Now, demand. The last World Steel report shows a growth of 4.5% of steel use in 2021. What is important of this 4.5% is that the world, excluding China, is growing at two digit. They are growing above 10% in the global consumption of steel, excluding China. This growth above 10% in the apparent steel consumption drives the demand of steel. A strong demand and a stable supply are tending to drop because of the drop of production in China. Here, we believe that the international prices will remain high as we are seeing today.
Thank you, Miguel. We have two questions that complement each other from a person that has not identified themselves. Could you give us flavor regarding the sales volume of the Q3 and also the shutdown that created inventory? They want to know about the steel volume in the domestic market. This drop, if this was disseminated in all the segments, was it more concentrating automobile industry, white line?
Thank you very much, Leo. An investor, when we analyze Usiminas sales during Q3, we have auto industry. In automobile, we talked about the restrictions because of the lack of semiconductors. The drop of production of third quarter vis-a-vis the two quarter was 10%. This drop in the sector that is so relevant for Usiminas impacted the volume during the third quarter.
Now, when we analyze distribution industry and when we see the latest report of the end of the third quarter, we can see that in purchases from the distributors that are part of INDA, there was a drop of 7% in sales when you compare Q3 vis-a-vis second Q. This represents a drop in distribution purchase towards steel. Still, we have industrial sectors that are thriving, like equipment, machinery, agribusiness, electronics, also highway construction, but we do not feel the impact that we felt until the second quarter of this year. Yes, there was normal distribution of this drop throughout the sectors that Usiminas services in the domestic market.
Thank you, Miguel. Our last question from Rodolfo Angele, JP Morgan. Please elaborate on the decarbonization from what has the company done about this, and if there is an initiative for a potential change in the mix of raw material. Sergio.
Thank you, Rodolfo, for your question. As I mentioned in my remarks, when we think about decarbonization, when we think about climate change, this is a theme that is of interest of the world and is strategic for Usiminas this year. We are intensively working on our long-term strategic planning, that is our 2030 vision. In our 2030 vision, we have discussed strongly on the progress of the company, considering decarbonization. The technological impact that we will see in the future regarding steel production during this decade, we will invest and we will develop different process alternatives. We are not seeing any technological alternative of great impact being implemented this decade. This deployment in the operational level and financially feasible will take place by 2030.
We are discussing following up and paying attention to the technological unfoldings and the evolution of the steel production in the future, because in our view, will be stronger in the '30s. The steel industry has a long history, and there were moments of rupture that were important. The major moments of rupture took place last century. It was the steel LD production in the '50s and the '60s. From there on, in terms of technology, we've seen permanent and continuous improvement. The great challenge is decarbonization that will provide rupture in steel production. Here we are discussing this thoroughly. What have we done in the field of decarbonization? This year, we reassessed the inventory of greenhouse gas emissions. This is an important reference for us. The result puts us in a position that is very positive when we analyze the average of the steel industry.
Brazil, in terms of greenhouse gas emissions, has a privileged position internationally. The steel industry in Brazil has a level of greenhouse gas emissions lower than the global average. Therefore, the Brazilian steel mill industry is in a positive situation. What we are going to do throughout this decade is to pursue incremental gains, the greater gains in the '30s. So we are strongly working with energy efficiency. We want to improve our operations in terms of greenhouse gas emissions, and we will continue doing this in the upcoming 10 years. The technological impact will be seen after the '30s.
Thank you, Sergio. We can bring to our end our Q&A session. Sergio, you can make your final remarks. First and foremost, thank you very much for participating in our live result of the third quarter.
It is always an important opportunity for us from the management to have this contact with you, to talk to you. The themes that we have discussed are extremely important and relevant. This last matter allowed us to reflect on the future, which is a challenging future for the steel industry. Usiminas is totally engaged for carbon net in the construction of an environment that is more pleasant and adequate for human beings. Our commitment continues with the market, with you clients, investors, stakeholders, shareholders. Our team constantly strives to improve the results of the company. We've made great progress in the past six years. This year has been a year of record results.
This is a year that with the results of the third quarter, well, we can see this as the best result of the 21st century and the challenges in the future of economic growth in Brazil. We are pursuing products that are carbon neutral for the worldwide community. We are engaged in this process. We have a research center that is the biggest research center of flat steels in Latin America that celebrates its 50 years of existence. We are committed with all the challenges of the steel industry, and Usiminas team is committed to build the present and the future of the company. Thank you very much. It was a great pleasure to be here with you today.
Should you have any questions, our IR team is at your disposal, and we thank you for your participation.