Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Usiminas' conference call to discuss the earnings results of the first quarter of 2019. At the moment, all participants are connected on listen-only mode. At the end of the presentation, there will be a Q&A session when instruction for participation will be given. Should you need the assistance of an operator during the conference call, please press star zero. This conference call is being recorded. This presentation comes with slides and is being transmitted simultaneously through the internet at www.usiminas.com/ri, where you can also obtain a copy of the release of the company. Participants who are listening in English can also pose questions directly to the speakers.
Before proceeding, we would like to clarify that forward-looking statements made during this conference call regarding the company's business prospects as well as projections, operational, and financial targets related to their potential forecasted growth are based on the management's expectations in relation to the future of Usiminas. These expectations are highly dependent on the performance of the steel sector, the country's economic situation, and the situation of the markets, are therefore subject to changes.
With us today is the executive direction of Usiminas, Sérgio Leite, Chairman, Alberto Ono, VP of Finance and Investor relations, Túlio Chipoletti, Industrial Vice President, Takahiro Mori, Vice President for Corporate Planning, Kohei Kimura, VP of Technology and Quality, Miguel Homes, Commercial VP, Carlos Rezzonico , Executive Director of Mineração Usiminas, Ascanio Merrighi, Executive Director for Soluções Usiminas, Heitor Takaki , Usiminas Mecânica Executive Director, Bruno Paulino, Legal Director, Julio Arroyo, Director of Controllership, and Leonardo Karam, Investor Relations General Manager. Initially, Sérgio Leite will make his initial remarks. Then Alberto Ono will present the earnings results of the first quarter of 2019. At the end, all the executives will be available to answer questions. Now, I would like to hand it over to Sérgio Leite.
Good. Thank you very much. Good morning to everyone. It is a pleasure to be here with you, and I thank all of you for participating in our conference call of the first quarter of 2019. Here, the upper management of Usiminas just held a meeting with all our sites, with over 1,500 employees. As you are aware, after we communicate to the stock exchange market our results, we make a presentation to our employees. As I said in our last call, we ended a Usiminas revitalization process that lasted two and a half years. We saw growing EBITDA for 2016, 2017, 2018, BRL 600 million, BRL 2.2 billion, and BRL 2.6 billion.
Now our focus as of the first quarter of 2019 is to focus all our effort in the construction of the long-lasting effect in our company in all areas. What we are developing in our company has as a focus people, the service to our customers, innovation. This morning, we communicated to the market an important fact. After three years at a level of investment that was below half a billion BRL, we invested BRL 220 million. In both semesters last year, we had BRL 500 million, and this year we announced that we are going to invest BRL 1 billion, 70% of our steel area, focused on the sustainability of our operations and other very important actions to guarantee our long-lasting existence here.
Now, people, that is the main focus of our efforts. Now we are in the third year of development of a project that we started in 2017 together with Fundação Dom Cabral to prepare our leaders, that are 412 people, so that they can lead our teams. We have over 13,000 people. This is together with our suppliers and totaling 21,000 people. We want to constantly adapt ourselves to the new ones and adapt them to the culture of our company and our new business reality. Last year, we had a job rotation process. Now, this process, which started in September last year. Every year we will have job rotation in the company as a rule. The month to carry out this process is the month of September.
Last year, for you to have an idea, in Ipatinga plant, we have our production director and five main executives. In September, we rotated all of these executives. We've had executives that have been for over nine years in the same position, and our view is that our executives should remain in a position between four, six, maximum eight years, but our focus will be between four and six years. Now, in the month of April, we will have an important stage of job rotation. We advanced this because of the relevance of the month of April, and we changed the production directory of Cubatão and Ipatinga to give new dynamic to the business. We are strongly working because we want to practice in the company a culture geared toward customer with all the work of the team because we want to service our customer.
An innovation culture, where we have created an innovation executive group. We had the digital committee in 2017. Last year, we created the innovation committee. We are innovating. We are doing a lot of innovation because through small and major innovations, we will be prepared to build the future of this company. We want to interact more and more with startups because we want to bring new contribution to the company in this world that we're living in right now. In a nutshell, what I would like to convey to the market is the message of the mobilization of the Usiminas team, because we want to continue doing what we have been doing in the past three years. Constant improvement of our results to build the present and the future of Usiminas, and thank you very much to each one of you for your attention.
Good morning to everyone. I would like to thank all of you for participating in our earnings results and to see the figures that you can follow through our webcast. First and foremost, steel unit sales. Our volume was around 1 million tons, very similar to the past quarter. That was the fourth quarter of 2018. In iron ore sales, there was a significant increase of 25%, totaling almost 1.9 million tons during this quarter. We've had a very positive effect in our results. Subsequently, I will show you what happened. The adjusted EBITDA here with non-recurring effects that we had during the last quarter, there was an improvement of 34%. This is a significant result. This comes from our mining unit and net profit that was positive, BRL 76 million this quarter.
Now we go to our next slide. Here we have the evolution from the first quarter of 2018 up to the date. Here we had a margin of 14%. Here we have BRL 488 million of consolidated EBITDA. Once again, here we can see the second quarter of 2018 that was affected by the truck drivers' strike. Here you can see another quarter that had over 1 million tons of the result. The next slide. Here we can see the results of our steel units. The EBITDA was BRL 301 million. That is highly aligned with the results of the fourth quarter of 2018. When we eliminate the non-recurring effects, the margin is very similar. Here you can see our stability in volumes and in results.
Our next slide. Here we have iron ore sales, Mineração Usiminas . This is a record volume when we see the past 15 months. This is the result of the first quarter of 2019, reaching almost 1.9 million tons with a very significant growth in sales to third parties and also in exports. The reflection of this volume increase and better prices that were observed during this quarter resulted in better results in iron ore sales. You can see here we have BRL 76 million in the past quarter. Here we have our steel transformation, [inaudible ] Usiminas. Here is an evolution of 42% with the EBITDA going to BRL 17 million. Although it doesn't appear here, we had a concentrated effect during the last quarter of debts. If we don't consider this provision, the result would be highly aligned with the fourth quarter.
At last, Usiminas Mecânica. Here you can see, although our result is slightly negative in capital goods, there was a recovery in the company. This is a result that presents a neutral EBITDA when we compare it to the past three quarters that were very negative quarters. Now, when we go to our next slide, here we have more information. First, we will talk about working capital that was BRL 3.7 billion. It was BRL 3.5 billion- BRL 4 billion. This is a normal level of working capital for this quarter. Now, in steel inventory, we ended with 699 tons. This level is similar to the second and third quarter last year, reminding you that the fourth quarter, because of scheduled shutdowns of the high furnace and other equipment, there was also a reduction of steel inventories. But now we're back to normal.
The next slide here, too, will show our cash position and in debt net. There was a drop of our debt. We advanced a payment of BRL 326 million to our creditors. So now our debt is BRL 5.5 billion, with a stable cash position that is almost BRL 1.8 billion. Our CapEx of the quarter, BRL 89 million. I believe that this level is still a bit low. Within our project view, as it was announced today, our intention is to have a global CapEx of BRL 1 billion this year. Basically, these would be the main figures, and we are open to answer any of your questions.
Ladies and gentlemen, now we will initiate our Q&A session. In order to pose a question, please press star one. To withdraw your question from the list, please press star two. We would like to remind you that this conference call is only for market investors and analysts. If journalists should have questions, please send these questions to the press department through the phone, 31-3499-8918 or to the email imprensa@usiminas.com. Our first question comes from Thiago Lofiego, Bradesco BBI.
Good morning. I have two questions. The first one will be regarding the steel market. If you could tell us how you see the sales for the second quarter, if there is a higher demand or not. Within the steel segment, if you could talk about cost. What can we expect for the second quarter regarding the cost of slabs and cost of other raw material? Also, Miguel, you mentioned 5 million tons of production. I would like to know if your guidance of 8 million tons- 9 million tons is still valid, and what will be the amount of iron ore that you will buy from third parties.
Good morning, Thiago. This is Miguel. Regarding the market, we have to remember that the beginning of the year came with great expectations connected to the growth of the GDP expectation and the growth and the forecast that the Brazilian economy was going to grow. But throughout the quarter, these expectations dropped. The GDP growth expectation was above 2.5%. Industrial production, the growth forecast was 3% for 2019. The Central Bank of Brazil says that the GDP will grow below 2%, and the industrial growth will be around 2.3%. This drop in the growth expectations did impact the consumption of steel and, of course, on our sales of the first quarter. But I believe that, for example, the automobile industry expects to grow 9%.
Capital goods also expect to grow about 5%. So we believe that the growth in the second quarter will be better than that of the first quarter, but we will keep our eyes on the indicators. I'm going to talk about the costs now. For the second quarter, our expectation for the price of products sold would be a drop of 1% or 2%. This is our expectation of our cost.
Good morning. Your question regarding Mineração Usiminas. Our production that was planned for 2019 had anticipated a production increase throughout the year because of the activation of two plants, that was the Samambaia plant and the Mina Leste. These plants will become operational, and they depend on licenses. As you know, licenses take a bit long because of the situation of the Iron ore, a situation that is saturating the job of the agencies that have to issue this license. But the production volume is considered between approximately 7.5 million tons- 8 million tons, and this will also depend when these other two plants become operational. This is why the increase of production that we will see throughout the year will follow the plan that we had already defined in our original budget.
Miguel, a word about the you said that the second quarter would be better than the first quarter. Do you believe that we would have a consolidated volume above 1.1 million tons, or is it too aggressive?
Thiago, it will also depend on the economic activity. During the first quarter, we observed a significant drop in the stocks of the distribution sector. There was a drop in the inventory, the different areas of the industrial sector. Depending on these evolutions, we could have an interesting growth. Now everything depends on the evolution of the different indicators of the Brazilian economy.
Our next question from Daniel Sasson, Itaú BBA.
Good morning, and for your presentation and for taking questions. My first question is regarding the prices of only the average price dropping 1% quarter-on-quarter. The 1% in average prices, we would like to understand what was the duration of profit and price concession, and where do you see the parity of imports. Today, we have seen some competitors announcing an increase of price in their distribution. Do you believe that it is possible to increase prices when there is a lower demand? My second question is regarding working capital. We have seen BRL 300 million for the working capital. I would like to understand how sustainable is the working capital at these levels, and we should expect some increase in the upcoming quarters.
Good morning, Daniel. Regarding the average price, it is important to clarify that the average price is impacted by three points. The first factor was throughout the quarter, there was an important portion from the distribution center, and this affected 10%. This drop of 10% in the distribution to be added to greater volumes of the quarter was based on this quarter. So this affects the average price of the quarter that was offset, this was offset by the automobile sector. Because of the annual contract, the average price was impacted by the distribution sector drop. Also greater volume with a lower price at the end of the quarter, a worse mix that was more connected to commercial products that have a lower average price.
Regarding your second question regarding the increase of price, we want to increase 10% in the distribution, in the industrial sector as of April 1st. This increase of price is a need because there is an increase in cost, and we have to be competitive with the international market. At the end of the first quarter, we saw a negative parity in the distribution sector, and now we have a positive parity that is equal to 5% more or less.
Regarding the working capital, we see that you range between BRL 3.5 billion and BRL 4 billion because of the volume, the cost of the inventory. So this here is a consequence of goods. In the future, we will remain in this range between BRL 3.5 billion and BRL 4 billion. So I believe that we will work in between these ranges when we think about the upcoming quarters.
Okay, thank you very much.
Our next question from Thiago Ojea, Goldman Sachs.
Good morning to everyone. Thank you for your question. My first question is regarding cash generation. In addition to the working capital that was approached in the past quarter, your CapEx was low. It was BRL 1 billion. Could you explain why the CapEx was so low during the first quarter, and what would be the expectation for cash generation throughout the year, if you have a guidance? Going back to the domestic sales of steel, could you break out for sectors where you have better sectors? The automobile industry stands out, but are there other areas that are better, and are there areas that are very slow right now?
Thiago, Alberto speaking. Number one, regarding working capital. It is cash generation. Unfortunately, we do not give you guidance. Now, when we talk about CapEx. CapEx of the first quarter, this was a reflection of what happened during the fourth quarter. We had a major growth during the fourth quarter, and the projects of the year were a bit delayed during the first quarter, but there will be a catch-up during the year. This is our expectation, and we give our guidance. This is 1 billion BRL. This is almost 70% for steel. Regarding the different sectors, as you know, the automobile industry presented a slight drop regarding the production when we compare it to the first quarter last year.
Capital goods and automobile industry is where Usiminas has strong performance. We believe that we still have opportunities of growth according to forecasts that engage the main players of these sectors. In addition to capital goods and automobile sector, we see construction is very slow, and civil construction is still slow here.
Our next question from Mr. Rafael Cunha, Credit Suisse.
Thank you for taking my question. My first question is a follow-up on your CapEx. Could you elaborate on the 1 billion BRL CapEx? This is regarding the high furnace 3 of the Ipatinga and what percentage is dedicated to the event. If there is an expectation to improve the cost of slabs after the revamp and iron ore. Is there a discussion of a sale of a stake [inaudible] , and what do you think about the life of the mine? I would like some opinion or hear your opinion on what is going to happen.
Rafael, this is Túlio. This year, high furnace 3 impacts BRL 60 million- 70 million. This is amongst the 70% of the steel unit. The other values are strongly impacted by sustaining investments, security, environment, and asset replacement, permanent goods, et cetera. After the revamp, we expect to significantly improve some operating indicators of the high furnace 3, especially when we talk about few that are very important. So we are working because, yes, we want there to be a drop in the price of the slab. I believe that there will be an interest in drop in prices that will be around 5%. This is a cost that is associated to calculate a rate forward.
Rafael, [audio distortion] the analysis for the divestment continues, and this is an ongoing process. This is the only thing that I can say.
Okay, thank you very much.
Our next question from Mr. Leonardo Correa, BTG Pactual.
Good morning. Thank you. My first question. When we see the profitability of the steel unit in the last two quarters, there was a drop of the EBITDA margin below 10%. When we see the evolution of this during the first, second, third quarter of 2018, we were between 16% and 18%. I would like you to elaborate why of this qualitative remark, because what is the direction of this metric for Usiminas and for your recent history, we believe that there is pressure and you have difficulties in explaining all these points. I know that you don't give guidance in terms of margins. Do you believe that we could expect some type of return or, I don't know, this could be a margin of 15% that you delivered throughout some quarters during 2018.
Regarding iron ore, I know that the great jump in EBITDA and the great improvement in the quarter came from iron ore. You grew BRL 120 million quarter- on- quarter. This helped you a lot in your results. There are many variables that are changing, specifically scrap and adjustments in quality. I would like to know what is your breakeven in China. What kind of cost do you have in China? Regarding your CapEx. One point that I would like you to clarify. I know that perhaps you cannot forecast 2020, 2021. You are now seeing there are companies that are not seeing lines of the unit. As very little is being allocated to Ipatinga.
Does it make sense to believe that this BRL 1 billion will be sustainable and this will have a carryover? Usiminas is going to work at a different level, and they will work way above the BRL 560 million, and that this will be a long-lasting activity.
Well, Leonardo, regarding the profitability and our margins, we have to remember that we are exposed to the international market. In terms of costs, iron ore prices. We always talk about parity, price differential. These are the imported products. What we can see is that this evolution follows the international market during the first quarter, specifically of 2018. This was an international quarter where prices deteriorated. This is the international steel prices. This was reverted during the first quarter. The expectation is that if this sustains itself, we will be able to grow. Following the international prices, both in cost and sales of steel. This is our expectation. In a certain way, this is linked to what happens abroad. Answering your question about iron ore.
As you mentioned, there are negative variables, and the positive could be shipment exchange rate. But negative would be the increase of products like fines that we have to buy to complement our own production. Negative point, we have the drop of premium in the international market. I can say that today, in average, the breakeven in China would be around $50.
Leonardo, the last question regarding the CapEx for the upcoming years. Your assumption does make sense. We believe that in the next two years, the level will be very close to what we're showing this year, that is around BRL 1 billion. Although the high furnace, that is between BRL 60 million and BRL 70 million, it will grow, and the total will be around BRL 1 billion a year for the upcoming three years. But I believe that the production of the high furnace is going to increase, and I believe that this is something that we should expect.
Our next question is in English, Mr. Carlos de Alba from Morgan Stanley.
Thank you very much, and good morning. The question has to do with the fuel factors and the prices, and what you expect to realize going forward in the second quarter. We understand that there is a push to increase prices between 10% and 15% in flat products. Can you talk about what are you doing with your clients? If yes, can you confirm that you are also increasing prices around these levels, and what you expect to increase in realized prices for the second quarter?
Could you comment a little bit as to what are the key initiatives management is working on regarding costs or product mix changes, or anything that the company can control from an operating perspective that you believe will improve your margins in steel in the next few quarters? It would be great if you can attach or quantify the potential impact from these initiatives. Thank you.
Good morning, Carlos. Regarding the price expectation for the second quarter, we have to remember, as mentioned, we have an increase of 10% for the distribution sector, and we entered a negotiation with the Asian automobile industry. This new evolution closed at a level that was very similar to the first round of negotiation at the end of last year. This increase in the automobile industry, together with the distribution sector, will increase the average price of the upcoming quarter. This will also impact because the growth is focused on products, more commercial products of lower added value with a lower average price. These two, three impacts possibly will generate today, an average. We believe that we will have between 2% and 3% when we compare it to the first quarter of this year. This would be the increase, 2% or 3%.
Carlos, good morning. Regarding your question of the initiatives that are being realized within the steel unit and regarding cost reduction, what I can say is that there are a number of projects underway which are basically focused on three main areas. One would be the production of Sinter, that is the important part of the metallic load of the high furnace, and this will give us a good result in the short-medium term. The second thing would be, is also connected to fuel. We have a number of initiatives that want to reduce this indicated that strongly impact the use of coke. So we will not have to buy imported coke, and this can impact the short and the medium term.
In the future, we have a number of projects, I cannot mention all of them, in the steel mill, improving the production of a steel mill with more restrictive steel and meeting the market's demand. Also, here in the laminated projects of energy efficiency that are underway. We also have projects to reduce our costs, and these areas are very important for us, and we are focusing on them to reduce all of our costs.
Thank you. Is there an estimated number of the benefits from these initiatives?
Well, generally, we cannot give you this estimate in the meeting because some of our problems are very. Some projects are complex, and we cannot disclose this type of information in a conference call.
Okay, understood. Thank you very much.
Our next question is from Gustavo Allevato from Santander Bank.
Good morning to everyone. I have two questions. The first one would be price. You said after the increase of 10% for distribution, we have a premium of 5%, but with the increase of raw material in the past weeks, do you believe that you will increase prices in May again to offset the increase in cost and to follow the international price? My second question is if you have an update to see the credits to receive from Eletrobras, and do you expect to receive these credits this year from Eletrobras?
Good morning, Gustavo. Yes, we continue monitoring the international prices, and as you said, the last weeks presented a slight increase in prices. What is the current situation and the parity today? Of course, today we could have a forecast of new increases during the year. Of course, these increases will depend a lot on the evaluation of these indicators and the appetite of steel consumption in Brazil for the upcoming months. Gustavo, regarding the Eletrobras credits, as far as we're concerned, what we saw in the fourth quarter is that we will receive this amount during this year.
Okay, thank you very much.
As we have no further questions, we bring our conference call to an end. Should you have any questions, our investor relations team is at your disposal. Thank you very much, and have a very good day.