Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Usiminas conference call to discuss the earnings of the third quarter of 2019. All participants are in a listen-only mode. Later on, we will conduct a question and answer session, and instruction will be given for participation. If you should require assistance during the call, please press star zero. As a reminder, this conference is being recorded. This presentation and the slides are being broadcast simultaneously on the internet on www.usiminas.com/ri. You may also get a copy of the company's release. 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 that may be made during this call regarding the company's business prospects as well as projections, operating, and financial targets relative to its growth potential, are based on management's expectations about the future of Usiminas. These expectations are highly dependent on the performance of the steel industry, the country's economic environment, and the situation of international markets, and therefore, are subject to change. Today, we have the executive board of Usiminas. Mr. Sérgio Leite, CEO. Mr. Alberto Ono, Finance and Investor Relations Vice President. Mr. Túlio Chipoletti, Industrial Vice President. Mr. Takahiro Mori, Corporate Planning Vice President. Mr. Kohei Kimura, Technology and Quality Vice President. Mr. Miguel Homes, Commercial Vice President Officer. Mr. Carlos Rezzonico , Executive Director or Managing Director of Mineração Usiminas. Mr. Ascanio Merrighi , Managing Director of Soluções Usiminas. Mr. Heitor Takaki, Managing Director of Usiminas Mecânica.
Mr. Bruno Paulino, Head of the Legal Department. Mr. Julio Arroyo, Controller, and Mr. Leonardo Karam, General Manager of Investor Relations. First, Mr. Sérgio Leite will make some initial comments, followed by Mr. Alberto Ono, who will present the earnings of the third quarter of 2019. Afterwards, the top managers or executives will be available for a question and answer session. We will now turn over to Mr. Leite.
Thank you. Good morning, everyone. Thank you very much for attending our earnings conference call at Usiminas. This is the moment to announce the earnings, as you know that we have a ritual in this company. It starts on the previous day, usually on a Thursday, with the approval of the earnings by our board of directors. Then on Friday at 8:00 A.M., it's communicated to the market, the CVM. We hold a meeting with our employees, where we connect about 1,500 employees of our five companies on 14 sites through a web conference. We present our earnings to our employees. This meeting finished about 15- 20 minutes ago. In the afternoon, we talk to the press. This is the ritual we usually follow.
So in the meeting we've just finished with our employees, our focus was a profound reflection on our results and our commitment with all our employees to work hard from now on to improve our earnings and results. As we present these results to you today, our employees and the top executives have thought about these earnings, and we're committed to improving them on a daily basis. In the third quarter, I have some highlights. The major highlight is about the management of our debt. As you have followed up, in September 2016, we renegotiated our debt. At the time, it was BRL 6.9 billion for a 10-year period with three indicators. In our grace period, in December 2017, a year and three months after the agreement was signed, we started working on the debt.
December 2017, January 2018, March 2018, and March 2019, we started settling that, repaying that debt. In these four moments of repayment, we reduced our debt in about 20%, BRL 1.5 billion in our grace period. Within this grace period, in June, we had a very successful operation, raising $700 million in the international foreign market. Soon afterwards, we changed our debentures. A book building was finished last year on the 16th, and the financial cost was released yesterday. Also communicated that to the market, so we raised another BRL 2 billion. We also had on October 3rd, we had a court deposit in which we got installments of the Eletrobras credits of two lawsuits that are being processed in our judiciary. So we got BRL 751 million that came to our cash on the 14th, this October.
This was used also to repay our debt. So our balance today and everything we did, our financial department did, under the helm of our Vice President, Alberto Ono, who will speak soon afterwards. We achieved, well, our grace period, it finished this September, so just a few days later, we managed to pay off 100% of our debt. We now hired a new debt with new debentures, with a maturity date on 2023, 2024, and 2025. 2026 will be for another four years without repaying our debt. We reduced a debt that in September 2016 was BRL 6.9 million. Now, currently, today, it is about BRL 5 billion, depending on the exchange rate, the valuation of the real, and it may even be lower than BRL 5 billion. This means that with regard to our debt three years ago, we had a reduction of 25%, roughly speaking.
We've also reduced the cost of this debt significantly. So in this operation that was completed in the third quarter, it was highly successful. Another point I'd like to highlight is about our sales record at Usiminas. We've reached the level of 2.5 million tons in Q3. A very important number for us. This would lead to 10 million a year, that would be the pace, and this was the major result for us. A third point I'd like to highlight is that we also closed Q3 with regard to our consolidated cash, and that was the highest level in the last five quarters.
From now on, in addition to what I've already mentioned of our commitment as employees in this company to work hard to improve our results, we'll also work hard on having an increasingly more solid and higher cash. So these were the points I'd like to highlight. Now I'd like to turn it over to our Financial Vice President, Mr. Ono. Thank you for your attention so far.
Good morning, everyone. Let's start our presentation, our conference. Let's go to slide one. So we have our steel sales, steel unit sales, which are stable with regard to the previous quarter. The domestic market of very low variation. Exports had a slight decrease that was caused by a late loading at the turn of the quarter, which was planned but did not take place. We're also expecting a quarter boarding that we're expecting to be higher than that. As Sérgio said, we had a significant increase in volumes with regard to quarter two, especially for exports, where we doubled our volume.
We exceeded 1,300,000 tons of volumes, exported tons, and that was another record for Usiminas. As for the adjusted EBITDA, we had a drop of 23%, BRL 441 million, with a huge impact, as we said before. In the previous quarter, it was greater than the expected number with regard to the increase of the cost of products that were sold, which I will comment later on, as a result of increase in iron ore and the exchange rate fluctuations during the quarter. This leads to the exchange rate variation and our debt, which was dollar-denominated, which increased in quarter three, and we issued bonds. So in this quarter, we had a net loss of BRL 139 million. The effect of this exchange rate fluctuation on our debt and our earnings in net terms was BRL 286 million.
Moving on to the next slide. We now have our EBITDA in the previous quarters. As we said, there was a drop with regard to quarter three 2019. The margin, about 11%. Next slide. We now show our steel production volumes, both domestically and abroad. So domestically, we are stable with regard to quarter two. But generally speaking, when you consider domestic and foreign sales, we are still on the level of 1 million tons in the quarter. Next slide. It shows clearly the effect about margin compression as a result of the increase of the cost of the product that was sold affecting our steel production with an EBITDA of BRL 213 million. That was lower than BRL 404 million in the previous quarter, and the margin fell from 12% to 7%.
Next slide. We now have, as we've already mentioned, there was a significant volume in Mineração Usiminas with a total increase of 38% against quarter two, and an increase of over 100% in our exports. Next slide. Although we had this significant increase in our exports in Mineração Usiminas, the result was basically aligned with quarter two, with lower margins caused by a lower cost during this quarter, which was a consequence of lower premiums in this quarter, our quality premium. Next slide. We now show Soluções Usiminas earnings. The EBITDA was slightly lower than quarter two 2019, with a reasonable margin of 3%. Finally, our Usiminas Mecânica, that's our capital goods unit. Unfortunately, we have a negative EBITDA, and this was a result of a lack of investment demand, which is still occurring in our domestic market.
Next slide. About other indicators. First, consolidated working capital. So we have an isolated increase in quarter three of 16% in total, caused by the credits from Eletrobras. So we now, rather than long-term assets, we have now short-term assets. Also, as a result of the expectation of receiving these credits, which did occur after the end of the quarter in October. Without this item, we would have a reduction of our working capital of about BRL 200 million. Next slide. Steel inventories. We have a 15% increase, and this was caused, as we mentioned before, by the delays in our exports loading and shipping at the turn of the quarter. Also with our plate inventory. Seasonally, we had a peak of plate inventory, but that will be absorbed in quarter four. Expecting that at the end of quarter four, we will have normal levels.
Next slide. We should remember that our third quarter position is previous to what happened in our debt, as Sérgio mentioned. There is this increase, as we can see, of BRL 400 million. Well, BRL 50 million, slightly more than that relative to our gross debt. This was a result of the exchange rate fluctuation. We have now a higher debt in dollars. When we look at our net debt, it was reduced in about BRL 200 million in spite of this increase, because we had more cash to owe BRL 8 billion. The next slide. This is our CapEx. Our CapEx increased relative to the previous quarter. That is over 40%, following this increasing trend, as we mentioned. Meeting our guidance of BRL 800 million.
Next slide. This is our debt profile at the close of quarter three. When compared this to quarter two, when you take our bond issue that took place in June, well, this leads to a change in our debt profile. Although we seem to have a reduction in our duration of debt in our domestic market, now the debt line in dollars increased significantly. Finally, on the next slide, we now show you an audited pro forma relative to our debt after the developments that took place after the close of a quarter, as Sérgio mentioned. Both the issuing of debentures of BRL 2 billion, as well as the use of funds of Eletrobras credit that was used for paying off our debt.
There was this reduction in our debt, of our total debt, with a new debt profile. In the next four years, our expectation or projected paying off is really low. Only in 2022 that it will continue. With a lower cost associated with it. This is the end of my presentation. We are open to your questions.
Ladies and gentlemen, we will now start our Q&A session. To ask a question, please enter star one. To take your question off the list, type star two. This conference call is just for investors and market analysts. Questions that may be asked by journalists should be sent to media relations of Usiminas at telephone +31 3499 98918 or the email imprensa@usiminas.com. Our first question comes from Daniel Sasson, Itaú BBA.
Good morning, everyone. Thank you for the Q&A session. Thank you for your presentation. My first question about your price prospects of steel price in domestic market in quarter four. Can you discuss parity and the average steel price as being below historic prices of imported steel prices? How can you compare distribution prices to the prices for the automotive industry? You may have difficulty negotiating with the automotive sector at the end of the year. My second question is about import duties.
We've seen recent stories in Valor Econômico newspaper, a proposal to reduce import duties of steel from 12% to 4% in the next few years. It needs to, of course, be approved by all Mercosur members, but it seems to be a risk in a very short run. It doesn't seem to be a risk, but it may have an impact on our domestic steel prices. Can you talk about your expectations about this development? Thank you.
Good morning. As for your first question, let's answer them. Our price expectations and parity. The current price situation in the local market, we have positive parity about 3%-5% as a result of our goals of having parity between 5% and 10%. We have an increased price window, and this will take place throughout quarter four. As for seasonality and the impact and the increase of our debentures and of sales at the end of the year, the impact on average price will be much lower than parity. It's slightly lower than 5%. We're implementing this increase of 5%, and this will take place from now to the end of the year. This about your first question. As for the car and the automotive industry, we have annual contracts. Unlike monthly prices in other industries that are defined at every moment.
For annual contracts, there will be renegotiations in the next few weeks. There's usually a fixed price for the entire year, and it should be, in our view at least, it should reflect an evolution of costs throughout the year. We had significant increase in the price of iron ore and coal. The expectation of international price is increase the margins for the whole world. When we look at the situation worldwide, and then we see what has been going on, we're just seeing in the third quarter a significant change. When you look at the situation worldwide, we saw increases in different steel companies, and there was action taken that led to international price to increase significantly in 2017 and 2018. Prices for annual contracts, they have to reflect the evolution of our prices with reasonable margins for the domestic market.
Thank you, Miguel.
Miguel, with regard to your second question about import duties, the common external duty. Since the transition at the end of the year after the second round of the elections to Bolsonaro administration, Brazil, we've been talking to the Brazilian government, with the economic team, as well as the chief of staff team, and even President Bolsonaro himself about this topic. Economic liberalism and trade liberalism. But in Brazil and in steel, we are in favor of economic liberalism. However, for us to practice economic liberalism in Brazil in its essence, when you consider import duties, not only for the steel industry, but many other economic segments, there should be equal trade relations. Even the PEC is a result of this imbalance in trade relations. Our commitment is to evolve over time to a reduced duty as a result of economic liberalism.
But then we also need corrections or adjustment to ensure that we remain competitive, not only the steel industry, but the whole transformation industry in Brazil. That also affects the tax reform, our taxes today. It affects our competitiveness not only domestically, but also when we export. So we are working hard with the economic team. We have a coalition of many segments of the industry. We have been talking to Minister Paulo Guedes, and this is on the government's agenda and also on our agenda. This will take place in the long run, but we want a lot of measures being adopted to correct these asymmetrical trade relations.
Thank you very much.
The next question comes from Thiago Lofiego, Bradesco BBI.
Good morning. I have two questions. Can you give us an upgrade about the Mineração Usiminas' potential investment and then liability management? What are you expecting after all these movements? Can you also give us analyzed figures? Is there anything else that is relevant that you are expecting to take place on this front? Thank you.
Good morning, Thiago. As for the investment in the short run, we will keep investing strongly, considering improving our processes. As we said in many different opportunities, we will also be working on our dry stacking, which is also important. Now, about the long run, however, we have not defined how we will proceed. We have been working on this, considering alternatives to solve or make sure that the operation will continue from 2024, 2025 onwards, considering industrial treatment. So far, we can only discuss a short-run investment. There is a lot of internal investment to recover these areas and the creation of investment in our dry stacking project.
Now, Thiago, with regard to our interest savings with regard to the EBITDA, we will also use our guidance in the next year. As for general cost, generally speaking, we are expecting a reduction of 80- 100 basis points relative to the cost so far.
Perfect. Thank you.
Our next question comes from Caio Ribeiro, Credit Suisse.
Good morning, everyone. My first question is about your galvanization conditions about which you have been discussing. Are you still considering conducting these projects? Do you want to continue moving on? How about steel demand? Can you talk about your expectations in terms of steel demand in the next year, and what is the expected growth rate?
Thank you. Well, Caio, with regards to galvanized steel, we keep studying the situation to define the type of equipment to be used as well as market interpretation. The projections for this year in terms of growth, well, the automotive industry, these expectations were not met. You look at ANFAVEA figures, for instance. So the market growth numbers should be reviewed, and as a consequence, the need for investment should also be reviewed. Our investment timing needs. In the next 12 months, we are expected to reach a decision with our board of directors. Okay?
Caio, with regard to steel demand expectations, we should also discuss this. Until September, according to the latest report, we have seen a drop in the use of steel, about 2%. So it was below our expectations at the beginning of the year. But we have positive indicators with regard to the previous year. This was explained by our inventory adjustment, both in terms of redistribution and also because of the many industries that use apparent steel in Brazil. Next year, we're expecting a growth rate of about 2%. As a result of this GDP growth and this recomposition of our inventory throughout the entire steel chain, we can expect a growth of apparent use of slightly above 4%.
That will depend on economic development of this country, the economic environment, the performance of different industrial sectors, and the possibility of Brazil having other export destinations that might affect steel production and exports.
Thank you. Very clear. Thank you.
Our next question will be asked in English. Carlos de Alba, with Morgan Stanley.
Yes, hello. Thank you very much. My first question has to do with investments. The run rate, even though it accelerated in CapEx in the third quarter, is still way below the BRL 800 million that you guided for the year. How do you expect the fourth quarter CapEx number? If you have an early guidance or indication for 2020, that would be very useful. Then maybe complementing the prior answer on the galvanized line, one of your competitors in Brazil is also planning on potentially installing a new galvanized line. Do you think that there is room for two lines in the country or just one? If one makes a decision sooner than the other company, then the window will be closed for the latter.
Finally, just a clarification on the Eletrobras credit. Is it right to understand that you already collected this almost BRL 100 million in October, and that was applied to repay debt? Do you expect any more moving parts on this Eletrobras situation, or that was it, and it concluded the ongoing litigation that you had? Thank you.
Thank you, Carlos, for your questions. The first question about our CapEx pace for quarter four. We are still keeping the guidance of BRL 800 million for the year cumulatively. We're expecting to have BRL 450 million, BRL 500 million. There will be a large concentration in quarter four, and this is already underway. In our view, as we had in quarter four last year, we'll have a speeding up of our pace. We will be aligned with a guidance of BRL 400 million for the year. As for 2020 investment, we're still working on the scenario for that year. As we said before, there's a recovery of our investment levels.
This year, our guidance will be BRL 800 million, but we can't provide you with a guidance for next year. Not yet. But in the projection that we released in the second quarter, we said about BRL 1 billion for the next two years. BRL 1 billion each year for the next two years. This is all I can give you right now, okay?
Thank you.
As for the new galvanization line, you were asking if there was room for another new line in the Brazilian market. Well, I think it depends on how this line will be designed. In our case, for instance, it will be designed to meet the automotive market preferably, but it is also flexible enough to meet the needs of other markets. So increased volumes of galvanized steel, although this is, of course, a high demand of the automotive market, it is not exclusive to this market. Other markets also need galvanized steel, including civil construction or building construction, which is also increasing its need for galvanized steel. When you consider products that are exported in Brazil, a large part of them are of galvanized product. So there may be room for more lines, an additional line, because there is this potential of export substitution.
As for your question about Eletrobras' credits, there are two lawsuits underway, and the money that we were paid for our Ipatinga and the Cubatão plants. So what we were paid were with the Ipatinga lawsuit. But this is just one part of this lawsuit, which is in controversy. Now, there is another installment, another part that is being discussed in courts, in the judiciary. As for the Cubatão plant, the situation is still the same. So the money that we received of BRL 751 million, and this took place in the fourth quarter of last year. That is when the money was recognized, and there was a monetary adjustment of the amount. But this refers to just one part of one of the lawsuits that is being processed in courts. Everything is being discussed in court.
The remainder of the merits of the Ipatinga lawsuit and the entire merits of the Cubatão lawsuit, we are still waiting for them. We have expectations, or we have lawsuits that are in the courts. We are expecting to get more funds from these additional credits.
Thank you.
Our next question is from Gabriela Cortez of Banco do Brasil.
Good morning, everyone. How are you? My first question is about [mining Mineração Usiminas]. Although you have had record levels in iron ore, the result was a little effaced or by freight costs and so on and so forth. What are your expectations for the next quarters? How can you improve these results considering all these costs? My second question is about the blast furnace at Ipatinga. How have you been investing amounts, and what are your expectations in terms of downtime as this year? Some players also shut down their blast furnaces, and the return on these operations took longer than expected. These are my two questions. Thank you.
Good morning, Gabriela. What we consider EBITDA margin, this is a result of some events that including the ramp-up of one of the plants. In the ramp-up process, the quality is lower. At the same time, we also used some space in this plant that were idle to make some products using inventory materials, low-quality materials. This led to a sales mix with lower prices as regards the previous quarter. To this, we should add our increase in prices and the premiums that dropped as a result of a surplus of high-quality products on the marketplace.
In this situation, in this quarter, our margin fell. Now, for the future, we have high-quality products that will be sold in the next few months. We have a standard product. This rate is expected to improve, and the margins will depend on prices and premiums and freight. Our expectation for the last quarter is to improve these figures.
Gabriela, as for your question about our Ipatinga blast furnace revamping, the amount is being released, BRL 1 billion 234 million. Our expectation of downtime is about 110-120 days. As for the other revamping or restructuring, we've been. I couldn't give you all the figures, but our reform is rather extensive in terms of what will be done to the equipment, all the changes. So we're expecting 110-120 days downtime.
Thank you.
Our next question comes from Marcio Farid, JP Morgan.
Good morning. Thank you for your questions. I have two brief questions. First, in terms of cost. We saw some aggressive moves in raw materials this year. What can we expect for quarter four and then for next year with regard to steel making cost? There were also some higher contingencies for labor this quarter. Can you maybe explain if you have more recurrent patterns? Was this a one-off situation? What was the origin of these contingencies?
Marcio, as for costs, our expectation is next year, it's still hard to say. I can discuss quarter four. We're expecting stability both in terms of production costs and sold products. This is what we're expecting. There were strong moves in the second quarter that had consequences for the third quarter. Now, in Q3 and the beginning of quarter four , there's more stability in costs. So for quarter four , both in terms of production costs and CPV, we expect to have stability. As for contingencies. You mentioned labor contingencies. There were also civil law contingencies, and they go hand in hand, and they were a consequence of an extensive review of many lawsuits that are underway.
Older lawsuits, some more recent lawsuits. Others were older. So we needed to review them all. They're not recurrent. Again, they're one-off. They're kind of isolated events. So no, they're not recurrent.
Thank you so much.
Our next question is from Antônio Heluany , Bank of America.
Good morning, everyone. My first question is a follow-up of the local market question. So what's the market in terms of competitiveness? I didn't understand what you said about expected prices in quarter four . Maybe you could explain that again. My second question is about steel. How do you see the export scenario? What's the margin levels with the current exchange rate and prices? What do you expect for 2020? Thank you.
Good morning, Antônio. As for quarter four prices, we released this increase of 5%, and this is a result of the exchange rate and international prices. We're expecting this to happen from the present to the end of the year. As a result of the seasonality of quarter four , the impact of average price will be really low. As for the exports market, as you said. When you consider the situation in exports market, it's a little complicated. Some markets, they have a similar situation in terms of the world steel production margins. We're not looking at sales opportunities. So considering these margins and the cost of purchases of steel plates, we can generate value and add value in our negotiations. So we're keeping export levels between 2,000 tons, like in the last quarters.
Thank you.
Excuse me. If there's no further question, we close this conference call. If you have any questions and queries, our IR team is ready to answer your question. Have a great afternoon. Thank you