Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Usiminas conference call to discuss the full year and the fourth quarter of 2019. At this time, all participants are on listen only mode, and later on, we will have a question and answer session when you will receive further instructions. If you should require the assistance of an operator during the call, please press star zero. As a reminder, this conference is being recorded. I would like to mention that this conference call is being broadcast live on the company's investor relation website at www.usiminas.com/ri. The earnings release and a slide presentation are also available on that site for download. Participants who are listening to the conference in English may also ask questions directly to the speakers.
Before proceeding, let me mention that forward-looking statements are made during the Safe Harbor of the Private Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking statements as a result of macroeconomic conditions, market risks, and other factors. With us today are Usiminas Executive Board, Mr. Sérgio Leite, CEO. Mr. Alberto Ono, Finance and Investor Relations Vice President Officer. Mr. Túlio Chipoletti, Industrial Vice President Officer. Mr. Takahiro Mori, Corporate Planning Vice President. Mr. Kohei Kimura, Technology and Quality Vice President Officer. Mr. Miguel Homes, Commercial and Vice President Officer. Mr. Carlos Rezzonico, Managing Director of Mineração Usiminas. Mr. Ascânio Merrighi , Managing Director of Soluções Usiminas. Mr. Heitor Sakaki, Managing Director of Usiminas Mecânica. Bruno Paulino, Head of Legal Department. Mr. Júlio César Arroyo, Controller, and Mr. Leonardo Karam, Head of IR.
First of all, Mr. Sérgio Leite will make some initial comments, followed by Mr. Alberto Ono, who will comment on the full year and the fourth quarter of 2019 results. After, the entire management will be available for questions and answers. Mr. Sérgio, you have the floor, sir.
Good morning to all of you. Thank you for attending this results conference call for our fourth quarter of 2019 at Usiminas. It is a pleasure to have you all here. We are beginning the year 2020 when we are receiving signals from the market which are very positive in terms of the GDP, of civil construction, of employment rates. We are beginning the year in which a scenario that was signaled to the market is positive.
In 2019, the steel industry experienced an international scenario that was marked by a lot of protective measure in commercial relations and trade relations, an increase in ore, a decrease in steel, where we had a compression of the margins at the international level last year. In Brazil, we experienced a growth scenario of the GDP with a projection that was inferior to that was projected in the beginning of last year and much lower than 2017 and 2018. According to what was announced by the Instituto Aço Brasil, there was a drop in the steel consumption by 3.7% in 2019, and the international factors obviously impact the steel business across the world. We at Usiminas have been working very hard, and we obtained Mineração Usiminas results, which was very positive for 2019.
We had at Soluções Usiminas solutions, very record EBITDA for the year, ever since we created the company. At Usiminas Mecânica, we had a difficult scenario, and we were impacted by this international scenario which compressed much of our margins. There was an action that we carried out in debt management. We managed to renegotiate and roll the debt for a month. We were able to pay up every debt negotiated in 2016 in September, and to reposition ourselves in the market by launching bonds in July and debentures of BRL 2 billion in October. With this, at the end, we had a total gross debt of BRL 5.6 billion, a debt which six years ago was BRL 6.9 billion. Our condition today is much more comfortable, not only in terms of value, but the cost of the debt as well.
In terms of the deadline or the payment terms, we have four years to pay up, and we will pay debentures after October. We have more or less four years with no commitments of debt payment, which was a reduced scenario and very much improved. Today we published a material fact that our net revenue, the expenses of BRL 271 million, was published. That was very important for us to carry out our activities with much more focus on the generation of results. Also in our material fact today, we disclosed our investments guidance for 2020. It's worth noting that in the very challenging years where we were recovering the company, we had a level of BRL 220 million per year for investments, that was 2016 and 2017. In 2018, we increased investments twofold. We went to BRL 460 million.
Last year, 2019, we grew by 50% in terms of our investment levels, totaling BRL 690 million. Now we have communicated to the market our guidance of BRL 1 billion. Now going into 2020 with a more positive outlook, our commitment to the market with investors is to work very hard, the entire Usiminas team, in order to achieve results and of course, face all the challenges that 2020 will also bring. I thank you all for being here. I will now give the word to Alberto Ono, so he can present the results for 2019. Thank you.
Good morning, everyone. I'm going to slide two. This is the steel sales in 2019. Our level was very stable compared to 2018, 4.4 million tons. Domestic market, there was a slight increase, 1% more or less.
Just as Sérgio has said that Brazil faced a challenging scenario last year, our domestic market shrunk. I think it's a very good result. Concerning iron ore sales to your top right, we have a record volume per 1,000 tons over 8.616 million tons, and also record rates over 4.631 million tons in exports, which is also a record, and later on, I'll break this down for you. Concerning EBITDA, adjusted EBITDA, we are slightly below BRL 2 billion for the year, a 13% margin, and net profit BRL 377 million. Going on to the next slide. You can see the evolution of the adjusted EBITDA margin since 2015, almost BRL 200 million. Today, this year, actually, in 2019, we had a recurrence in the math. Adding up the positive and the negative factors here in 2017, we had BRL 150 million. This is a breakdown.
The main non-recurring events are listed here on the slide. In 2019, especially because of the fourth quarter, there was an acknowledgment of credit from Eletrobras, BRL 117 million, and the financial potential is BRL 306 million according to what are stated in the financial statements. Concerning steel units on slide four. Just as Sérgio also has said, we had a year that the margins shrunk across the steel industry. We closed the year with a margin 10% lower than the previous year with an EBITDA rate that was lower as well. The main non-recurring effects are broken down to your right. We had some non-recurring in mining as well, which is what can be seen in the next slide, on slide five.
In the mining unit, Mineração Usiminas, the record volume for sales, and a year in which international prices of iron ore were favored due to events we already know of. This made us attain an EBITDA of BRL 680 million, a better result, the best one of this unit since the unit was created. Going on to steel transformation, Soluções Usiminas, BRL 120 million in EBITDA. It is also the best historical result since the company began operating. Going on to our capital goods unit, which is Usiminas Mecânica. We are still suffering because of the lack of a return on investment, especially in terms of infrastructure in Brazil. This is the third year in a row in which we have a negative EBITDA.
We were able to diminish the losses, but we are still suffering due to the lack of investments. Now we have the results for the fourth quarter of 2019. In terms of Steel Unit sales in thousand tons, we are above 1 million tons. Here, with a reduction in the domestic market, which is natural in terms of seasonality. 2019 was a year in which there was a more typical behavior of seasonality factor. It was a fourth quarter, which was lower in figures compared to the previous quarter. As we see iron ore to your top right, this is also a record, and also a new record in terms of exports volume, more than 1.707 million tons here. In terms of the adjusted EBITDA, BRL 468 million, a margin of 12%, and here very close to what we had in the third quarter.
Concerning net profits, there was a different scenario from the loss to a positive result of BRL 268 million. Going on to the next slide. The opening of the extraordinary events that happened. They are non-recurring events in the fourth quarter, are broken down to Eletrobras credits, as we have already mentioned. In terms of the mining, the main point was renegotiating our lease agreement with a positive impact. Going on to the next slide. The steel unit. Again, you can see the main points here in the EBITDA of the quarter of BRL 184 million. As we can notice, we are still suffering. We have been suffering during the year because of this margin compression Sérgio talked about. The acknowledgement of the Eletrobras credits also with the non-recurring events.
In the mining units, for results, Mineração Usiminas, an EBITDA of BRL 209 million, a margin of 36%, which was favored by the record volume we have attained. In terms of Soluções Usiminas, the steel transformation unit, it is the third quarter in a row in which we had a result above BRL 30 million, and there was an expressive improvement compared to the previous quarter. The capital goods unit was Usiminas Mecânica. As you can see, this area has suffered because of the lack of investment in infrastructure. Going on to other financial indicators. Concerning working capital, we had a drop by 12%, and the main factor in the third quarter were that we had credits for Eletrobras that were launched as revenue at the end, and we received it in the fourth quarter.
This influenced our working capital, and in the fourth quarter of 2019, also, these credits, BRL 306 million of them, were accounted for as receivables in working capital. So taking that out, our working capital was stable in that period, around BRL 4.2 billion. In terms of the steel inventories, there was a drop in terms of volume and working capital, as you can see. Our inventories are controlled. Our cash position and indebtedness levels, our cash is close to BRL 2 billion, and our net debt, as Sérgio has already mentioned, BRL 3.2 billion in net debt. During the fourth quarter, as we have paid off the remaining debt that was to be renegotiated in 2016 with the resources received from the Eletrobras credit, our gross debt level is BRL 5.1 billion.
This means that even if we have a fourth quarter compared with the previous year-on-year, with a lower EBITDA, our leverage rate is stable. Lastly, the evolution of CapEx. We had a pickup in the fourth quarter, as you have already know. In the fourth quarter, we attained BRL 356 million, totaling for the year, as you can see, BRL 619 million. This is slightly lower than what we had expected in our forecast. Some points we still have to consider that our motives, we had lateness, delays. We had licensing problems, and they affected the development of our investment, especially in mining and other, more connected to delays in projects, but nothing too exceptional, if you look at the entire normal operations for regular course of business. This is the end of the PowerPoint, and now we have a question and answer session.
Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star one. To remove your question from the list, press star two. Please remember that this conference call is only for market analysts and investors. If journalists have a question, please address to our AI telephones 3134998918 or email imprensa@usiminas.com. Our first question comes from Thiago Ojea from Goldman Sachs.
Thank you for the presentation. My first question is in terms of Eletrobras, which you acknowledged BRL 800 million, and now you have a decision which allows you to receive BRL 300 million. When do you expect this cash to come in, and how about the difference of credits? Is there any other amount that you are expecting besides Eletrobras? In terms of the steel industry, we know that it had a more difficult quarter.
How do you see this first quarter of 2020 in terms of demand, the recent price increase that you have announced? Do you think this will be implemented and you will be successful? Could you comment, especially for the car industry, the automakers?
Thiago Ojea, this is Alberto. Concerning Eletrobras credits, what we have acknowledged both in 2018 and 2019 was the unquestionable parts, where we had a court decision which orders Eletrobras to pay us. In 2018, it was a part concerning the Ipatinga plant. In 2019, the Cubatão plant. In both cases, we only had the unquestionable part that was paid that the courts ordered Eletrobras to pay us. We also have ongoing lawsuits in which Usiminas believes that the amount that they own is higher, both in Ipatinga and Cubatão. In these, we inform in our DF, but they are not acknowledged in the final statement.
The precise amount, you can look at our statements and our investor relations, is one that is still being discussed. In terms of this, we believe it is BRL 1.1 billion. That is our interpretation. We are arguing for this, and this is not in the statement. In the statement today, we only have BRL 306 million, which is in the short-term working capital, and we expect this to be received during the course of this year.
Good morning, this is Miguel. Concerning what Sérgio said, the positive expectations for the Brazilian economy, in addition to other indicators such as lower employment rates, lower interest rates, and improvement in investments, lead us to believe everything in terms of demands. The growth for the steel in Brazil should be around 1.5% plus positive. In Usiminas, the goal is to carry on and to continue to be able to meet this growth in demand.
The increases that you have mentioned, the ones that were informed last year, they were implemented in the distribution sector. From now on, we have to monitor constantly the international indicators. When you look at the international indicators, both here in picking other products, you can see a positive trend for two, three months. Obviously, with all the coronavirus situation, this is a little bit different, but it is at a higher level than the international level. Another thing is that the exchange rate has fluctuated in the last two months. We have an exchange rate which is 10% undervalued, and these factors will impact in our pricing. Concerning your last questions with the agreements with automakers, we signed contracts with American and European automakers, and they were closed with a higher price, with a price increase.
Miguel, could you tell us what was this price hike in this sector? Miguel , according to your legal department, do you know when these lawsuits will be concluded?
Well, the pricing, the agreements, because they are yearly, they reflect what happened in the last 12 years and the future expectations. With these variables on the table, we try to keep the levels according to competitive prices, obviously. But if we look at an exact price increase level, our compliance norms in Usiminas were reviewed, and I cannot tell you how much exactly we increased. Concerning the lawsuits in dispute, it is very difficult to say. It should take a couple of years for us to have a conclusion. It is very difficult to forecast, but it is what I can tell you. The undisputable amounts that are owed to Usiminas, we can see is what happened in 2019. We acknowledged them in 2018, and in 2019, we received the amounts, the payments.
We believe this will happen in the same period of time for the parts of amounts that are also in dispute.
We now have a question from Daniel Sasson from Itaú BBA.
Good morning, everyone. Thank you very much for the sessions. My first question is for Miguel Homes concerning pricing. Miguel, could you help us to understand what happened in this drop by 5% in price for the domestic market and in the automaker industry, the pricing decrease in general for distributions? How could this help us understand how much we should be thinking of sequential increases in the first quarter compared to the fourth quarter, especially considering an improvement in the overall mix? Could you explain us the mix and pricing components? My second question is about mining, about the renegotiation of leasing agreements and third-party areas. Could you explain and shed more light what is recurring?
Can we think that your costs will be falling BRL 5 per ton, for example, in the future, or BRL 20 per ton in the semester, but you acknowledged this impact for the entire year? Is it reasonable to think of a fall of drop of BRL 5 per ton in 2020, or this will not be recurring? Thank you.
Good morning. I think your question is very important because it should have information to be able to try to analyze what future pricing will be. Of course, the mix impacts the average price. For you to have an idea, a noble product may be 20% to 50% in terms of variation, and this pricing level in a noble product and a more commercial good will impact the average price.
We observed the larger impacts of the average price of the fall in the drop of those average pricing explained by the mix of goods.
Good morning, Daniel. As you said, in the last quarter, we had an impact because of the renegotiations of the leasing agreements, in which we had a cost reversion for the entire year 2019. For the future, what we can expect is we have to follow the historic costs because we do not have the strategic long-term definition as our material has shown. It will depend on the use that we may have for the court agreements that we are paying.
Thank you. Just one follow-up. Miguel, 100% of the price drop has been priced by the mix. You did not have a drop in pricing in distribution. Is that it? I just want to try to understand this better.
Just to clarify, around 90% can be explained by a worse condition of the mix, yes.
Our next question comes from Mr. Leonardo Correa from BTG Pactual.
Hello, everyone. Thank you and good morning. My first point for Eletrobras, just to see if I understood this. What remains that will may come is BRL 300 million. That is the undisputed amount, right? You don't have a period for this, but you'll be receiving this in 2020. The BRL 1.1 billion, which is disputed in court, can take a few years. Is that it? Because I believe this was not 100% clear. I just want to make sure I understand. My next question is, if I look for the next quarter and I'm focusing on the first when I say this.
In the past, you helped us to understand the evolution of the quarter, talking about an expectation of price increase and an expectation of cost decrease. Could you help us understand this now? How much can the price or cost change per quarter? My last question is, according to the lines, focusing on two, on galvanized and in the steel plates , I know they are very different products, but what is the idleness? What is the idleness rate in electroplating or galvanized steel? I would like to confirm these figures with you.
Leonardo, concerning Eletrobras, your understanding is correct. The undisputable rate amount is BRL 300 million, and it will be received during this year. The disputed amounts are still submitted to the courts and depend on the justice system. The last information we had is that it is going to take a couple of years.
In terms of cost expectations for the first quarter, the expectation is that we have a reduction. Again, as Miguel, with our review of compliance norms, we cannot give you the precise number, but the trend is a downward one.
Concerning the pricing, as Alberto Ono said, there is a trend for pricing and a trend for the local level. What happened in the last 60 days that will be affected is that we see an increase of between 8%-12%. If you look at exchange rates, it is also a downward level, and we should look at a positive trend in the local market for the future.
This is Túlio. I am going to talk about our full capacity of our plating units, both AG and HDG, the covered. Therefore, in plated, we are occupying 100% of our capacity.
In terms of the steel plates , we have a lot of steel plates . In Ipatinga, for example, we could increase 400,000 tons in terms of capacity. That is what is available there, without mentioning that we have a [Non-English content] , in Cubatão, that is under capacity. Therefore, we are operating 30% of our capacity that is not being used. We have a lot of availability at disposal.
Our next question comes from Mr. Thiago Lofiego from Bradesco BBI.
Thank you. Miguel Homes, if you could comment, after the price increase, I believe that this was what, 10%? What is the discount that you have in terms of domestic steel and imported steel? If you see a discount, is there room for an increase in March? My next question is adding to what Leo said about the steel plates .
How do you see this new demand or this pickup in demand of steel plates ? Do you have a clearer outlook for 2020, or should we expect this to take place? The last thing is, my last question, is how is the issue of expansion and contacts being developed? I know it is still far away, but I believe we should understand what is the expectation concerning this asset.
Good morning, Thiago Lofiego. Concerning the parity, as you have said, concerning the evolution of pricing and the drop in the exchange rates, we are operating at a negative rate because of this low and weakness of the real. Therefore, if 10% is healthy for the local domestic, and we should expect a positive trend in the future. In terms of the steel plates , this is impacted by the level of activity of infrastructure and the naval industry.
And another thing is that we have a higher level of exchange rates, which will affect the future demand. We do not have full data on this, but we also will depend on the projects of the local market. Yes, we can expect growth where we can have specific increase in the next 12 months.
Miguel Homes, again, can I go back to your discount? According my discount accounts here, considering January and midpoint, what I see here is at around 5%. Does this make sense?
Yes, it does make sense, but it can even be a little bit higher.
Okay
Thiago Lofiego, good morning. Concerning the Projeto Compacto, we are working to be on schedule, and for two to three months, we will have to analyze the alternatives and scenarios we are assessing. 2020 will be a year for us to define the final project.
But we are still trying to close this, and this has been asked by the partners, the shareholders.
Okay, thank you very much, everyone.
Our next question in English comes from Carlos De Alba from Morgan Stanley.
Yeah. Thank you very much. Good morning, everyone.
No problem.
I have two questions. The first one is if you can comment on the trends that you see for the steel cost in the coming quarters. We saw an increase quarter-on-quarter, and I just want to see how is it progressing into the first quarter of 2020 and maybe the second quarter, if you have any visibility. The second one, if I may, is related, the automatic price negotiations. What can you tell us as to how those are progressing? On a related topic, what is the expectations for the Argentina auto market that may have an influence in your business? Clearly the price levels are still there, but do you see further declines in the auto sector in Argentina, or do you see more of a stabilization, maybe perhaps a small increase from clearly very low levels? Thank you.
Carlos, about your question, our cost trends for the following quarters, it's difficult to say due to the volatility rates that we are still experiencing. But in theory, for the first quarter, we see a reduction trend. The expectation is that there is a reduction in costs of production compared to the fourth quarter. But for the following quarters, it depends. We see a volatility which is very high, both in terms of the exchange rates and raw material, especially iron ore. Iron ore, we have seen a significant drop in January. It's recovering in February, but this brings it to our attention to see at what level this will stabilize. But the first quarter 2020, our expectation is that there is a drop. The situation in Argentina is very complex. We had an economic scenario that was very complicated, renegotiating the debt that is happening now.
We could expect a first quarter worse than last year, or even it could have a negative impact in the first quarter with a more positive trend in the second quarter. Of course, Argentina is important in our sales, but we are able to offset this drop in this sector, in the auto sector, and in general, we will be able to cope with this. In terms of the automakers, we close agreements, as we said, and we expect to close other agreements with other automakers at the same level that we have used with American and European automakers.
Thank you. Just if I may follow up, how are you offsetting the negative impact of Argentina? Is it just because the Brazilian auto sector is doing better than you expected, or?
In fact, we had a growth last year that was slightly lower than we expected in the beginning of the year. This was impacted by exports. The domestic Brazilian market is doing well. Last year grew above expectations, and this year, we believe that this will offset the drop in exports. The automakers and an entire chain will be looking for other export alternatives to offset the drop in sales to Argentina.
Thank you.
Our next question comes from Mr. Antonio Heluany from Bank of America.
Good morning. My first question for Sérgio. Sérgio, could you comment that discussion on the import fee tariffs, and how do you understand the increase in galvanized steel and how do you plan in terms of approval and also if you have an idea on CapEx. For Alberto, I would like to know, in terms of other expenses, when you have idleness, that this was close to BRL 80 million per year, and now you will need a renegotiation in terms of mining. This is related to Cubatão. So how much of this is recurring? What are figures we should expect for the following quarters?
Antonio, concerning the import tariffs, this is a topic which is on our agenda, us in the steel industry.
We have been working and talking about this with the federal government through IABr. This topic, there is a federal government commitment with us that as we go, if we have a higher liberalization of the economy, there should be a solution of non-autonomy of what exists in Brazil because of the, what we call Custo Brasil, Brazil cost. This is a topic that has been being developed well, and we believe there will be a reduction in fees. This will come together with the fiscal reform, with the improvement of infrastructure, a reduction of costs, and it's an action that the government is working with in order to give the Brazilian industry more competitiveness, not only the steel industry, but all Brazilian industry, and to cancel distortions when you analyze trade relations across companies and countries. Concerning galvanized steel, we are still studying this.
This is also on our agenda. We do not know yet when the decision-making will take place. We are following the domestic market, what is taking place in the domestic market. We are looking into it, but we do not have a decision-making pipeline yet.
Concerning other expenses, there are two points I have to make. One is that yes, you are right. A great deal of the issue here is related to the weakening of the assets that are stopped at Cubatão, are not being used, and some other assets are reduced, and this depreciation has been reduced because some of them have been depreciated.
Another point, and you mentioned this a bit, is connected to Mineração Usiminas, because today, reminding what I have said is that you're retaking up activities in Mineração Usiminas, which is the Samambaia unit, and this happens in the third quarter, and it operated in the fourth quarter at full capacity, and it has prior assets which were inactive. So we see that there are entries. There is a reduction in depreciation. There are some adjustments that have been made. And you will be able to look at this better after the next quarter, which is the first quarter of 2020, to see the level of this line. There have been these movements, therefore, in the last quarters, and that is why these variations occurred.
Okay. Thank you. Thank you very much, Sérgio. Thanks, Alberto.
Our next questions come from Rodolfo Angele from JP Morgan. Good morning, everyone.
Thank you for having me. I have two questions. The first one is from mining. You sold more than production in the last two quarters. How is your inventory rate? What can we expect in terms of production and sale for Usiminas? Another thing for Sérgio or Miguel Homes is, you commented during the call that we have good conditions in place to improve demands, such as low interest rates and other more optimistic figures. So what do we need to have a better or an outlook of demand higher than the 5% that IABr mentioned? Is it more of the same, or are we waiting for a pickup in the economic activities?
Good morning. Our inventories. Mineração Usiminas has taken advantage of market actions that enabled us to sell inventory that we had for a number of years.
Therefore, taking advantage of favorable market conditions, we tried to sell these materials and therefore reducing our inventories significantly. Today, we are now trying to recover just a bit of this inventory because of operation conditions, but not significantly. Another thing, it was an opportunity, and this can be seen in the figures, where you can see the difference between sales and production.
Concerning demands, there are factors that may have a higher impact than what we are forecasting today for Instituto Aço Brasil. There was a drop in 2019. This could present a better behavior for 2020. The improvements in this sector, generating more employment to make consumption pick up, and this could positively influence in the purchase of new cars, of white lines, products which influence in the consumption of steel. The agro industry is also important together with the civil construction industry because of capital goods.
They were below the rates that were expected for last year. Therefore, both industry, agriculture could impact in the 2020 demands as Instituto Aço Brasil has forecasted.
Our next question comes from Mr. Gustavo Allevato , Itaú Asset Management .
Good morning, Alberto. I have a follow-up on Eletrobras. Just to clarify, the part that was not disputed, the undisputed part may take a couple of years. I would like to understand if you think that this amount can be anticipated with a discount for this year still.
Gustavo. Well, this disputed amount that may take a few years to be solved in court, of course, we will analyze every opportunity that takes place. If we need to monetize this or give a discount to receive, we may do it. This is an issue that depends on the discount rates and the expectation of the assessment.
Because even if we consider the amount, if it is BRL 1.2 billion, this is still disputed. The court has to decide. So the assessments influence a lot in terms of the final amounts that you could expect. Obviously, if we consider opportunities that are interesting to us, we will definitely take them into consideration.
We are now closing the Usiminas conference call. If you have any questions, our RI team will be available. Thank you very much for taking part, and good afternoon.