Ladies and gentlemen, good afternoon. Thank you for holding. Welcome to the Usiminas conference call to discuss the third quarter of 2018. All participants are connected on listen-only mode. Later on, we will conduct a question and answer session, and instructions will be given at the time. 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 also being broadcast live on the company's investor relations website, www.usiminas.com/ri. You will also find the copies of the company's releases. The participants that are listening in English can also make questions to the speakers. Before beginning, let me mention that forward-looking statements that are being made are under the Safe Harbor of Private Securities Litigation Reform Act of 1995.
Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. These expectations depend on future developments of the steel industry and the conditions of the international market. With us today, we have the Usiminas Executive Board, Sérgio Leite, CEO. Alberto Ono, Finance and Investor Relations Vice President Officer. Túlio Chipoletti, Industrial Vice President Officer. Takahiro Mori, Corporate Planning Vice President. Kohei Kimura, Technology and Quality Vice President. Miguel Homes, Commercial Vice President. Cristina Morgan, Finance Director of Mineração Usiminas. Ascânio Merrighi , Managing Director of Soluções Usiminas. Heitor Takaki, Managing Director of Usiminas Mecânica. Bruno Paulino, Head of Legal Department, and Júlio Arroyo , Controller, and Leonardo Karam, Head of IR.
Firstly, Sérgio Leite will make some initial comments, followed by Alberto Ono, that will comment on the third quarter results for 2018. Later, management will be available for a question and answer session. I will now give the floor to Sérgio Leite.
Good morning, everyone. Thank you again for being here in our results conference for Usiminas, which is always, for us, an important way of meeting the market. Today, we have a ritual for the entire day here at Usiminas. In the morning, after we disclose the results, we hold a meeting with our employees. Through video conferences, we connect all our websites in the five companies, and we present firsthand for our employees the results for the quarter. Today is a special day for Usiminas because today we are celebrating 56 years.
This is a moment, our 56th anniversary, and with this meeting today with our employees, we have celebrated this moment. We are always celebrating that today we are launching officially the new Usiminas uniform. Usiminas is now again having a gray uniform, which is a historic color for our 56 years of existence, and the design is now revamped and more adequate to our new times. We are also very happy to present to the market the results, the positive results. We have the best EBITDA results for the quarter since the third quarter of 2010. This result is the fruit of the entire Usiminas team, of the entire team of over 13,000 employees, which we began at the end of the first half of 2016. This is the ninth quarter in a row that we are addressing the market to present a growing result.
As you may recall, in 2016, in the second half, we recorded a quarterly EBITDA of BRL 300 million per quarter. In 2017, we operated the year over BRL 500 million in EBITDA per quarter. In 2018, we are already at a level of over BRL 600 million in EBITDA per quarter. This level for us is very important. We still have a long way ahead, but the Usiminas team is sound, is together, is highly motivated. Today, we noticed the motivation in a very intense way when we were disclosing our results, because this is very important to us. We have a company that happy people work at. They are energetic and are willing to work to generate results. I would like to reiterate our commitment to continue working hard on a daily basis to build better results. Thank you.
I would now give the floor to Alberto, so he will provide you with information on our results.
Good afternoon, everyone. We are going on to the slide with the consolidated results. We see the main indicators. You can see that in these four blocks that we have here, there has been a development, a positive one, and growth compared to the previous quarter. In steel, we have over 1.1 million tons, which is an increase of 19% compared to the previous quarter in the domestic market. In terms of iron ore, has growth, a 2 digit figure, 28%, and we will see further along that this has been a result because of the sales in the domestic market and to steel. This takes us to a new kind of consumption in terms of iron ore.
Adjusted EBITDA, as Sérgio mentioned, it is BRL 703 million, is the best quarter results in the third quarter since 2010. If you consider some of the results we had in 2017, this is 35% higher than the previous quarter. Here you can see now we go from loss to profit in BRL 289 million. You can see the exchange rate, there has been a fluctuation. Therefore, we do not have the negative effects that we experienced in the previous quarter. This is an event of exchange fluctuation. Therefore, it is representing a higher profit. Going on to the next page. We have the evolution of the steel sales in the last five quarters. You can see that the level above 1.100 billion tons is the highest sales volume since the fourth quarter of 2015.
We can see we are at a historic level, which is much higher, and reinforcing the growth of the domestic market in 9%. Now we have on the next slide, the EBITDA and EBITDA margin in steel. In the specific case of steel, the BRL 578 million is the best EBITDA since the second quarter of 2010, eight years ago. It is worth highlighting. Going on to the next slide, we have a breakdown of the iron ore sales. You can see that in the previous quarter, all the kinds of sales to Usiminas, sales to the domestic party, and sales for export have increased. On a total, the increase was 28%, and this combined to a better price internationally and because of the exchange rates, which was better than in the previous quarter.
This means that our EBITDA, which is on the next slide, had a significant increase, hitting BRL 83 million. This is also the best EBITDA in the last five quarters. Going on to slide number seven, we have Soluções Usiminas. This is a quarter that was very strong as well in our unit for steel transformation. It is similar in terms of steel. We have the best EBITDA since the second quarter of 2010, BRL 40 million. Both steel, iron ore, and steel transformation for Soluções Usiminas have collaborated and they expressed a significant result for the consolidated figures. In the next slide, we have Usiminas Mecânica results. Usiminas Mecânica is still suffering the depression that exists today in terms of the investment of capital goods and infrastructures. Combined with this, there is a project that is also having negative results.
This impacted in persisting negative results for this quarter. Going on to the consolidated figures, as mentioned, this is the best EBITDA since the third quarter of 2010, including extraordinary effects such as Porto Sudeste. Again, this is a level which is very specific. Going on to the slide that follows, this is working capital. There is a drop by 5.4% of BRL 3.5 billion. This figure is what we believe that for the level of operations in this quarter, this means we are at a normal and adequate level. Going on to the next slide, we have working capital in steel inventories in thousand tons. This shows you that in this case, although the effects that we had in the second quarter, as we know, we have increased the stock of the inventories in finished goods.
We see a drop by 25%, and then we have now a normality rate. If we compare the inventory with this quarter of the days and inventory of the third quarter of 2017, which seasonally would be equivalent, we see that they are very much aligned. Going on to the next slide, this is our indebtedness with interest. Because of the exchange rate in this quarter was small, we can see that the debt only varied BRL 50 million because of the exchange fluctuation. On the other hand, our cash has increased by almost BRL 600 million because of the operational results, and of course, because of working capital. On the last slide, this is CapEx for the quarter. We had an increase compared to the previous quarter of 34%.
The trend that we believe will continue for the last quarter is that there will be a pickup, as we have seen in the last quarter of last year. Our estimate is that CapEx for the year will be around BRL 450 million. This is the end of our presentation, and we are available for questions and answers. Thank you very much for your attention.
Excuse me, ladies and gentlemen, we will now begin the session of questions and answers. If you have a question, please press star one. To remove your question from the line, please press star two. I would like to note that this teleconference is only for investors and market analysts. If there are questions on the part of journalists, they should be forwarded to the telephone 31-349-989-18 or via email, imprensa@usiminas.com. Please hold.
The first question comes from Mr. Thiago Lofiego from Bradesco BBI.
Good afternoon. I have two questions. One in terms of the price of steel. We see that we have hot-rolled steel at 15%. I would like to understand what level do you think will be sustained in terms of the demand levels that we're having now. If you have a tendency or may be expecting a drop in the fall of the prices. If we look at the prices in China, for example, they are falling, and we see that clients are asking for discounts for the fourth. In terms of price, how are the agreements with the automotive sector? We have heard of an increase of 20%, 30%, but maybe you're not expecting this kind of increase because of the new variables.
The other question is that looking at the cost of the steel production, you had a moment that you recovered. What is the perspective in terms of the price of coal and the high exchange rates? What are your expectations?
Good afternoon, Thiago. I'll start answering your question on price. The first one you said on the price, you maybe remember that in the last call, we expected an increase for the next quarter at 10%. This happened. This was accomplished. For that time, we said that our parity was negative around 5%. After the increase today, we consider that we are at 3%, 5%, 10% level, which we believe is reasonable for the Brazilian market. So our forecast for the fourth quarter will be to maintain the current price level. That's the answer to your first question. Your second question, related to the automotive industry.
We have already announced actions with major automakers, and today our best estimate is to have an increase in 2018. They have started discussing, and our business is expected to grow and to start with new conditions as of next year in January.
Okay, just going back in terms of automakers. You mentioned that the expected increase may be bigger than the increase you have already given in distribution. Looking at the reported figures here and thinking of the fourth quarter of last year until now, we are maybe thinking of an increase of by 20%. I would like to confirm if I understand this correctly.
Yes, Thiago, that's correct.
Yes. Okay, thank you.
Thiago, this is Alberto. Speaking on the production costs, our expectations for the fourth quarter is that they remain stable.
Okay, thank you.
Our next question comes from Leonardo Correa at BTG Pactual. Hi.
Good afternoon, everyone. Thank you. My first point for Sérgio is considering new investments. We see that Usiminas has many options on the table. You have the increase of Ipatinga to take up the operations in Cubatão, plate steel as well. What are all the analysis and what is your preference? In your investment plan, I would also like to explore a little bit more the capacity of galvanized sheets. Usiminas operates lower than its capacity. There is a lot of idle capacity, especially in terms of thick plates, thick sheets. So if Usiminas continues to focus in automakers, does Usiminas have room for growth in terms of volumes of galvanized sheets in 2019? These are my first points.
Lastly, maybe this is a bit premature, this question, but in order for me to attempt to understand this better, we are in the view of a transition of government, and lots of expectations have been on the press, and some figures in Jair Bolsonaro have said that they will open the economy, they will reduce tariffs. I have not seen anything in terms of the steel industry, but I believe that there is always a lot of questions. You have a sector that it is protected in every country. Every country is protecting its steel industry. How do you see our situation? What does Usiminas think and expect in terms of reducing tariffs and opening of Brazil?
Leonardo, good afternoon. Concerning your first question on investments, the important thing is last year when we presented the second quarter results of 2017 in July, we commented in this teleconference that Usiminas was going back to being a normal company. Because of this, because it was back to normal, was the discussion of long-term planning. For two or three years, we were not able to plan long-term. Therefore, one year ago, we took up long-term planning again, investments that you mentioned as the reform of the Alto Forno 3 is an investment which is mandatory. It is an operation which is predicted in the furnaces. You also mentioned the new galvanization line. You mentioned the prior primary lines of Cubatão. All of these are projects being studied, being discussed within Usiminas.
We will not have short-term decisions, and the decisions that will happen will only be in 2019 and very likely in the second half. But the important thing, we are addressing all of these topics. We are studying all of them because they are all based on Usiminas long-term planning. We are working with a projection and a plan of at least five years forward, and all these projects that you mentioned and referred to are in our portfolio, so to speak. In terms of galvanized sheets, we are operating them normally. Electro galvanization is being increased. Electroplating, we are working in three lines. Hot galvanization, electroplating, all of in terms of increasing production. We are prepared to meet the needs of the automakers in this product. So we are ready for growth in the sector. We had a significant growth in the sector in 2017.
We are having a 2 digit growth for 2018, and we are therefore prepared to meet the growth that comes, and we are increasing our productivity. In the long term, a new line will be significant to meet the automakers in terms of long-term needs. In terms of the country's outlook of 2019, and I'm speaking as Usiminas, I'm not speaking as president of Instituto Aço Brasil, this is Usiminas. I will tell you our view about Usiminas. We understand that the country is coming at the end of the cycle, which was very hard on the Brazilian economy. It was a five-year cycle that half of us have faced very harsh recession, the harshest one in 100 years. We have less recession in the two years ago. We've had very, very little growth, insignificant 1%. Therefore, this is nothing. It is insufficient growth.
Our expectation, as Usiminas, is that Brazil will come into a new growth cycle, a significant cycle that we have experienced in the 20th century. This new cycle is important for us to face the several problems that Brazil has. Brazil is a country with a lot of potential, but a lot of needs. We have a very high unemployment rate. We have over 12 million unemployed people, if we consider the official methodologies. But if we look at underemployment, that is 25 million people. The country has to pick up in terms of growth, and the industry has to lead this comeback, and the transformation industry has dropped from 25% of the GDP to 10%. This is insufficient for a country such as Brazil, which is one of the 10 economies in the world.
Our expectation is that the industry is prioritized, and we believe that Brazil is in a rout. You mentioned protectionism, closed countries. Our view is in the sense the world is being protective because of Trump. Trump has taken this line of action to find balance in terms of the competition of China, and this behavior has reacted. A reaction was protectionist. Brazil is liberal. We are also liberal. We are in favor of free trade, of the trade exchanges, but in a very balanced way across the world. However, if the world is protectionist, why should Brazil adopt a liberal approach in its commercial relations? We have to think of all of this, but we have a positive outlook because Brazil does need it and so does the Brazilian people.
Thank you. Could you open up where galvanization is?
We are at the utilization rate, which is full. What we are doing is to increase productivity, and for the automaker sector, we have made things go from other sectors to focus on automakers. But we are operating, Leonardo, three lines at full capacity.
Thank you very much, Sérgio.
The next question comes from Mr. Rafael Cunha, Credit Suisse.
Good afternoon, everyone. Thank you for the questions and answers. If you could clarify a little bit more on cost, especially on products. We have seen the product price in dollars dropping, and because of the BRL, which is stronger, have you any idea in terms of the cost for the impact for the next year? Do you have a plate price that you may inform us? In line with this, what is the outlook for the spreads for hot-rolled flat and plates in your average performance? I think this would help us a lot. Thank you.
Hi, Rafael. The issue of the plate price, this has to do with our operations in Cubatão. What we can comment is, as you have said, we are seeing that there is a fall in terms of the international price. This obviously reflects on the acquisition cost for Usiminas. The BRL coming stronger will help in this, but if the trend is kept, this will show up in the next quarters. But I tend to see that there is the issue of the inventory, and of course, this is gradual. It will not be a direct impact that will be observed because of the variation of the plate price and exchange rate. But there is a trend that we have noticed, and if this trend continues, it will, of course, impact price, especially the Cubatão products.
Okay, thank you.
Another thing, the issue of the spread on plates, in our view, it should be at $50. That is historically and operationally the ideal.
Perfect. Thank you very much.
The next question comes from Gustavo Allevato of Banco Santander.
Good afternoon, everyone. I have two questions. The first one is about the volume of 1.10 tons. How much was the lateness in order to normalize the volume, and what should we expect for this in terms of mining? My second question has to do with steel. How much improvement in volume can we consider a repressed demand, or how much is it in terms of renewing inventories?
Hi, Gustavo. Concerning the volumes in exports, because of the strike of the truck drivers, we had an impact in the second quarter, which was displaced to the third quarter. In the second quarter, we had imports in ships, and in this quarter, we did six ships. For the last quarter, we have four and five. That is our expectations. Imports will be in 2018 at a volume of 3.5 billion tons.
Next question, Marcos Assumpção, Itaú BBA.
My first question is in terms of the recovery of demand. Sérgio, if we have a scenario which is a little bit more optimistic in terms of the growth of the GDP, and if this means that we will have a stronger industrial productivity, what would be, in this context, the best alternative for Usiminas to deal with this demand? It will be around 4.3 million tons. What would be the best structure for you in terms to increase capacity in Ipatinga? Or depending on the plate price, would you use Cubatão more? What are the alternatives for Usiminas to increase its production? A second question. This is for Miguel. If he could talk about the price of Usiminas, how much it increased for distribution and for the industry, comparing the end of September and the end of last year, so we can have an idea. I think this will be good for us to know how prices will be negotiated in the automaker industry.
Your first question concerning the production strategies to cope with the growth that we do expect Brazil will have in the following years. We have in mind that our installed capacity for laminated is 10 million tons. We are operating at 4.5 million a year. That is one point. The second point, we have two calls ago, that considering the equipment that are in operation, we are able to reach a level at plane laminated at 6.5 million, which would be a growth by 50%. This growth would be good if it happened, but I am sure it will not in a short-term period. The other aspect concerning the capacity of producing plates. We are operating Ipatinga at full speed with three high furnaces. It was commented today, it will be, that there is a project studying alternative strategies for the primary areas in Cubatão.
We are only going to make a decision as of next year, and nothing in Cubatão will happen before 2021. Concerning our capacity to meet the needs of the market, we are okay. We have lead ways. Obviously, if the production in Cubatão, we could increase the purchase of plates, both in the internal markets. We have Ternium Brasil, which is our main supplier, but we can also have SP. Therefore, we are okay. We can be supplied. Usiminas is prepared for Brazil to grow in the next five years. On your question on distribution prices, you can see that throughout 2018, it was above 20%. Today, our estimates for adjustments in the automaker industry for 2019.
Miguel, for the industry, was this similar?
Yes, the price operated in the same dynamics. Due to the agreements that we have and the sectors, we have automaker, electrical, and industrial, and there are time differences in terms of the project.
Okay. Thank you very much.
The next question in English comes from Carlos de Alba from Morgan Stanley.
Hello. Thank you very much.
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Good afternoon. [Non-English content] ]. Can you hear me now?
Yes.
Yeah. All right. The question is on capital goods. The business unit continued to suffer in the last two quarters because of the railway program or contract. Can you tell us when do you expect this to be over? When do you see this situation no longer affecting the results? Once that happens, what is your expectation of a normalized EBITDA level, at least in the coming quarters and until Brazil recovery accelerates? Does the company have any preliminary outlook towards 2019, steel and iron ore volumes as well as CapEx and ore cost? Thank you.
Carlos, your first question concerning the capital goods and Usiminas Mecânica, which has presented, in this period, negative results in term of EBITDA. We are at a time on Usiminas that we're looking at the final details of the budget for 2019. For 2019, joining the efforts that we're doing in Usiminas Mecânica in order to make it adequate to increase productivity, reduce costs, and meet the growth expectations for Brazil, we expect Usiminas Mecânica to go and attain a positive EBITDA by next year.
All right. In the fourth quarter, we should no longer see the negative impact of the railway contract?
Carlos, on your question of the next quarter, we may have some relative impact in the fourth quarter concerning the negative results of Usiminas Mecânica.
Thank you.
[Non-English content] Could you please repeat your question on mining? You also had a question on the mining for 2018 and 2019. Wasn't that right?
No. It was not on mining. It was on-
No, I haven't
Any outlook on steel or mining volumes for 2019, as well as CapEx, if there is any preliminary budget or forecast.
Carlos, on this question, our expectations for 2019 in steel, we are exactly at this time developing the budget, so we do not have anything to disclose at present.
All right. Thank you.
Concerning irone o re, we, Usiminas, we have a return of Samambaia Plant that has been approved for next year. We are working for the production volumes for next year, which will affect volume sales, will be higher than the volumes of 2018. We are working on the budget that will be approved by the board at the end of the year, and then we will make official disclosures in terms of the figures for next year.
Right. Thank you.
[Non-English content]
The next question comes from Gabriela Cortez from Banco do Brasil.
Hello. Thank you for the questions and answers, and congratulations on your 56th anniversary. I would like to confirm the volumes for sales of iron ore for 2018 is 2.5 million tons for Usiminas and 3.5 million tons exports. In 2019, this will be higher. The second question, in terms of the comments that Sérgio made of reforming the furnace in Ipatinga, I understand it is mandatory and necessary, but I would like to know until when can this furnace operate before it is stopped for the reform.
Good afternoon. Concerning the figures that you mentioned in 2018, Usiminas buys 2.3 million tons, 2.5 million tons of iron ore of our mining unit. The expectation for 2019, the figures will remain the same.
Concerning the internal market, the domestic market, we have more or less the amounts that will be seen, that it is attached to the foreign market price. We have seen that the prices have affected in the last days. Exports, we will expect, as said before, the volumes of exports for 2018, it will be 3.5 million tons. For next year, we are still discussing the budget, but our perspective is that these figures will be higher, yes. We have to see that we have more room to grow in exports. In the products that we have, we are able to have that they are around in silica and alumina. This is the level that we are going to be able to meet in the import market because we have a high quality of a product. It is concentrated iron ore and a direct relation to the profitability.
Okay, thank you.
Gabriela, this is Túlio. On your question of high furnace, of its useful life. The furnace in normal operation conditions, it has had a normal productive life with a production curve. We estimate that it can operate normally, and this can be maintained in operation until 2021. In 2021, we will be doing the renovation that has already been forecast for, and this will take place in 2021 or 2022.
Thank you very much, everyone.
The next question comes from Marcos Assumpção, Itaú BBA.
Hi, Sérgio. I know that you are in a budget period, so could you give us some guidance in terms of CapEx for the next years? This year, CapEx, the guidance was around BRL 500 million. On the pace you are at, it may be lower, right? Could you give us some more flavor on it? A second question, maybe to Cristina. We would like to understand the part of revenue per iron ore ton, because when we see that the iron ore price went from $50, the average price, to $50 - $62 in a quarter because of the exchange rate, the export price. Could you explain this a little bit to us? Does it have anything to do with quality?
Marcos, concerning CapEx, a normal intake that we understand as sustaining would be around BRL 560 million. Of course, when you are outside sustaining, like a new galvanization line, this amount will be higher. At a normal rate between BRL 560, BRL 600, is the reasonable figure.
Marcos, concerning your question on mining, just as I mentioned, we are able to produce iron ore which is high in iron and low in contaminants. We have great alumina, 0.5%, and we are also able to produce and have a bonification because we have a higher iron ore rate, which is 62%, and we have no penalties because of the contaminants. These bonifications are done on a case-by-case basis per client. We have seen that the mining not only gives us proceeds, but it bonifies high-quality products. This is very good because we are better than China. That, I think, will continue for the next years.
Thank you, Roberta. Thank you. Thank you, Cristina.
Ladies and gentlemen, since there are no further questions, we are now closing this conference call. The IR team is available to assist you if you like. I would like to thank your participation, and have a good afternoon.