Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to the Usiminas conference call with the results of the second quarter of 2018. All participants are connected on listen-only mode, and subsequently, we will have a Q&A session, where further instructions for participation will be given. Should you need help from an operator during the conference call, please dial star zero. Please remember that this conference call is being recorded. This presentation is accompanied by slides and is being simultaneously transmitted via internet at www.usiminas.com/ri. You can also obtain a copy of the company's release. Participants who are listening in English also may directly pose questions to the speakers.
Before proceeding, I 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 forecast are based on the management expectations regarding 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 international markets, and are therefore subject to change. With us today are Usiminas executive board, Mr. Sérgio Leite, CEO. Alberto Ono, Finance and Investor Relations Vice President Officer. Túlio Chipoletti, Industrial Vice President. Takahiro Mori, Corporate Planning Vice President Officer. Kohei Kimura, Technology and Quality Vice President Officer. Miguel Homes, Commercial Vice President. Carlos Rezzonico, Managing Director of Mineração Usiminas. Ascanio Merrighi, Managing Director of Soluções Usiminas. Juliano Souza, Head of Commercial Department of Usiminas Mecânica. Bruno Paulino, Head of Legal Department. Julio Arroyo, Controller.
Leonardo Karam, Head of IR. First, Mr. Sérgio Leite will make some initial comments. Subsequently, Mr. Alberto Ono will present the results of the second quarter of 2018. Subsequently, management will be available for a Q&A session. Now, I would like to hand it over to Mr. Sérgio Leite . Thank you very much.
Good afternoon to everyone. Thank you very much for participating in this conference call to see the earnings results of the second quarter of 2018. An important point of this conference call, that it's the first conference call that we had with the new management that was elected in May 2018, that was introduced during the initial comments. We're in a very special moment of the company because precisely one year ago, we commented that we became a normal company once again. With a normal company, we have intensely worked with a number of subjects.
We are strongly working with strategic planning, and we continue pursuing better results. Now, regarding our results, if we see the past two years, considering the second semester of 2016, 2017, the first semester of 2017, we have to highlight that in 2016, during the second semester, we totaled an EBITDA level around BRL 300 million per quarter. The next year, because all of the effort carried out by the Usiminas team, we evolved, and we operated at a level around BRL 500 million of EBITDA per quarter. Now, this year, 2018, during the two first quarter, in average, we're operating at a level around BRL 600 million of EBITDA per quarter. So we're totaling an average of BRL 580 million of EBITDA during both quarters.
The group of 10, that is in the third year of performance, has intensively worked pursuing the improvement of our results, mobilizing our entire team, because this is our greatest commitment with our shareholders, market stakeholders, and community. That is to strongly work in order to gradually make progress in the improvement of our results. Today, we are going to present the results of the second quarter. I would like to hand it over to Alberto Ono so he can present our results.
Good afternoon to everyone. First and foremost, I would like to say that it is an honor to be with you to present these figures. Although these figures have been a bit affected by the situation of this quarter, specifically the strike, the national strike of the truck drivers, that unfortunately, although the company tried to reverse the results of this paralyzation, it was still affected in its results during the second quarter. Now, when we go to slide number two of our presentation, it is possible to observe that within the operational indicators, steel sale during the quarter dropped 10%, so we are below the level of 1 million tons. That was a level that we were consistently attaining. The impact of the domestic market, then I will make comments on the other slides.
Now regarding iron ore sales, here you can see that there was a drop. We will also comment on this, but mainly observing the volume of exports. These operational results reflect our financial results, the adjusted EBITDA that had a reasonable drop of 19% from BRL 641 million to BRL 519 million during the second quarter. Also a caveat, we also have a non-recurring effect. That is a provision of taxes from Rio Grande do Sul, and the EBITDA had a loss of BRL 62 million. This impact is observed in the steel mill. We will also see other effects. During the last line of net income, here we had a loss of BRL 19 million, and we had profit BRL 157 million during the first quarter. In addition to this provision of taxes, we also have the exchange variation on our debt.
We reported an exchange rate loss of BRL 150 million, much higher than what was observed during the first quarter, that was BRL 25 million. These two effects of the provision plus the exchange rate variation affected the net profit. The net income that was negative. Without these effects, you could see that we would have had positive income like the first quarter. Now when we go to our next slide, here we are specifically talking about steel volumes. Here you can observe that our pace was above 1 million tons per quarter since the second quarter of 2017.
Unfortunately, with the impact of the strike of the truck drivers, although in our sales, our orders, we expected the level of sales during the second quarter would be similar to that of the first quarter of 2018. We were not able to materialize these results because of logistics. With this here, you can see there was a drop of 9%, and our level was below 1 million tons. Observing that, although we had a logistic problem for shipments and for sales, we were able to maintain our production. Therefore, our gross steel production, although it increased, here we see the resume of the blast furnace within [inaudible] . If you see the production of finished goods, that was stable. That was something that we had predicted in terms of sales volume.
Now, when we go to our next results. Here we have the EBITDA and the adjusted EBITDA margin for the steel business unit. Here you can see the effect of the ICMS of BRL 62 million regarding EBITDA. Our EBITDA was reported in BRL 471 million, and without this non-recurring effect, would be BRL 530 million. The margin instead of 16%, would be 18%. Anyhow, we were able to maintain a pace above BRL 450 million. That was something that we observed in average during the past quarters. Now our next slide here, we are breaking out sales of iron ore. Here you can also see that mainly the volume of the second quarter in exports is where we have more variation. Here we can see a drop of 37% in exports. In reality, what happened is one thing that we expected.
One shipment that was delayed and will only be shipped in July. The expectation would be that shipments would be five vessels and only four vessels received shipments. Now going here, the next slide, we have the mining business EBITDA. Once again, here we have a significant effect on volume compared to the past quarter, and it went from BRL 44 million to BRL 33 million. This in terms of EBITDA. Now, when we talk about our steel unit, Usiminas, the effect of the strike wasn't as significant. We could recover in terms of shipment. Volumes, if you see the volumes of shipments in Soluções Usiminas was higher than that of the first quarter. This is a combination of greater volumes with better prices, and we had a better result during this quarter of BRL 37 million vis-à-vis BRL 29 million the first quarter.
I would like to observe that Soluções Usiminas has had four quarters with ever-growing results. On the other hand, our capital goods unit, Usiminas Mecânica, is still suffering because of the low level of investment in the country. This is where this unit generally performs. In addition to this, during this quarter, we faced a problem. There was a program of wagons, and here we had a EBITDA of -BRL 20 million. The upcoming slide here, we're going to talk about the adjusted and consolidated EBITDA of the past quarters. As Sérgio just highlighted, here we have, during the first semester, we have an average of almost BRL 600 million when we add both quarters and the non-recurring effect. That is a caveat.
Another point that also impacted us was in working capital because of the truck strike. With this increase of 22% of working capital, that was around BRL 660 million. The increase of inventories was BRL 524 million. This increase of working capital is due to the increase of level of inventories and this impacted, because we weren't able to ship the orders and send them to our customers. On our next slide, we are breaking out the steel inventories in tons, and here you can also observe the matter that I just mentioned. Mainly here you can see that there was an increase of 81 million tons, and we expect that during the third quarter, our levels will go back to normal. There was an increase of volume of slabs because all the chain is affected when you have an inventory accumulation.
Our expectation is that this will be reverted during the upcoming quarters. Our expectation is in the upcoming quarter, the working capital will go back to normal levels. Finally, this increase of working capital impacted our cash position. Our cash position suffered a drop. Last quarter it was BRL 1 billion, 563 million. This quarter BRL 1 billion, 104 million. This variation is due to the increase of working capital, and we expect to collect at the end of the next semester. Other effect of this quarter was the exchange rate variation on our debt. The increase of 3% of our growth debt quarter-on-quarter is explained by our debt that is in dollars. Finally, our investments CapEx. During this quarter, we were at a level very similar to that of the first quarter, BRL 67 million vis-à-vis BRL 65 million.
We observed that during the upcoming quarters, we will have an acceleration in investments. What we observe here is a yearly CapEx of around BRL 500 million. That would be the correct level for our activities. With this, I bring my presentation to an end, and we are at your disposal to entertain questions.
Ladies and gentlemen, we will initiate our Q&A session. 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 for investors and market analysts. Questions from journalists should be made to the press department of Usiminas through 3134998988 or imprensa@usiminas.com. Our first question from Caio Ribeiro, JP Morgan.
Good morning to everyone, and thank you very much for taking my question. I would like to understand today how you see strategic or a candidate for divestment, and what is the situation of allocating more capital to maintain the production at the current level during the next years and the Cubatão blast furnace. You are going to expand it to galvanized products. I would like to know what are the priorities, and if you believe that it makes sense to approve one or the other.
This is Alberto. Regarding MUSA, all our assets are constantly being evaluated. What we can say is that any novelty regarding these or other actions on our assets, we will maintain the markets informed. Regarding the Cubatão blast furnace and galvanized products, I believe it is the resumption of primary areas of Cubatão, because we have a new line of galvanization. These are investments that are being assessed currently, are being studied, but for the time being, we have not decided anything. In the company, neither the board, neither the management, have not said anything regarding timing and amount. This will take some time to mature.
Could I also follow up regarding MUSA, if you could update regarding the CapEx that is necessary for this asset? Is there something else that you have to invest to maintain the production at current level?
A CapEx, we already announced this two weeks ago. We are investing, okay, in BRL 170 million in dry stacking because the reservoirs for mining industries are a very complex matter. This has been announced, and I believe this is an investment that we will have for the upcoming year. That is the most significant investment. That would be the dry stacking.
Thiago Lofiego, Bradesco BBI.
Good morning. One would be steel demand for the third quarter. What do you feel from your customers? What are your orders like for the third quarter? I would like to know if the third quarter could be better than the other quarters because of the recovery of lost volumes during the second quarter. If you could talk about pricing. There has been recent increase in distribution, and I would also like to know if there is some initiative for the industries that weren't readjusted during the first semester. What could you expect for your industry from the industry by and large, for the second semester?
The steel Brazilian market is undergoing a very positive dynamic during the five first months. The growth has been around 11% for flat steel. We believe that this growth has varied. The expectations from the Brazilian economy and the steel market are varying for the second semester. Now, vis-à-vis the behavior of the first semester, although there is a perspective of steel growth at a level of 5%, these are the last figures that we obtained. Respectively, we believe that during the second semester, we will have a growth slightly above that of the first semester. Regarding prices, as you are aware, we informed an increase of price that will be applied throughout the third quarter of this year. This increase of price, and we believe that it will be materialized during the third quarter. There is a bit of echo.
It was very difficult to understand the first part of your answer. Could you talk about the potential of improvement during the second semester? Of course, we have the matter of seasonality. The audio isn't crystal clear, so it's difficult to understand and to listen to your answer.
I will answer again. For the second semester, we expect a growth lower than what we had during the first semester of the year. With this prospect of growth of steel demand during the second semester, we believe that 2018, we will have a steel consumption total Brazil that will be 5%. This will be the total result for the end of the year. We believe that our sales will follow up the growth of steel consumption in Brazil.
Thank you very much.
Our next question is in English from Mr. Carlos de Alba, Morgan Stanley.
Yes. Good morning or good afternoon, everyone. Could you repeat again what you mentioned on potential price hikes? There has been some confusion because I think the flat steel producers tried to increase prices in May or early June, or late May, early June, and that was not implemented because of the strike. They announced again price increases in late July, for implementation either in late July or through August. Could you please clarify, what the price increases that have gone through in the second quarter or have been announced in the second quarter and in the third quarter, and when those will be implemented if everything goes well?
Good afternoon, Carlos. During the second quarter, we increased our prices, but at the end of the year, Brazil suffered the effects of the strike, and the market became a bit difficult to accept this increase. We announced this increase, and we are implementing this increase throughout the third quarter of the year.
That increase is 12%, 15%? Can you comment on the increase and if you believe that it will be implemented earlier in the third quarter or throughout the third quarter? Thank you.
The price increase is around 10% for the distribution sector. As you know, we have different sectors. We have distribution sector, we have the automobile sector, and industrial and civil construction sector. For distribution, this will be increased throughout the third quarter. For other sectors, it's going to depend on the negotiation dynamic. Some of them have yearly negotiations, some monthly, quarterly, and these increases will be implemented throughout the third quarter.
Thank you.
Our next question from Leonardo Correa, BTG Pactual.
Good afternoon to everyone. Thank you for taking my question. The first point regarding the export market. This is a very important market to maintain the results of the company. When I see your breakout, it is highly concentrated in players like Argentina, that is 35%, Germany 25%, other major European markets, Spain, Belgium. Now, before this scenario, with protections that are implemented in Europe and a possible slowdown, we've seen the data from Argentina that are way below what was expected. There is also fear of recession because of Argentina. I would like to know from you, what is your expectation in order to sustain the level of exports of Usiminas and how the domestic market is going to shift forward?
The second point here would be schedule during the last quarter has helped us to map the results one quarter ahead, giving us an equation of increase of price versus price of cost. If you could help us to better understand what direction you're following, what is going to happen during the third quarter regarding the increase of price and cost. What I understood from this call, there is a 10% increase. We're not talking about two price increases, and this would be only for distribution. You're trying to implement this during the third quarter. I would just like you to clarify if my understanding is right.
Good afternoon, Leonardo. Regarding export, as you said, Argentina and Europe are our main markets. Now, regarding Argentina, the main sector are the power sector and the automobile sector. For the time being, we haven't seen any difficulties to continue with our level of exports. Now Europe. Europe has presented two months of great uncertainty because the safeguard measures were implemented by the end of June. Although we've had markets with a lot of uncertainty during the past two weeks. But now that the rules are clear, I believe that we will have additional exports, more than what we had during the past month. Now regarding costs. Our expectation of the third quarter is an increase of cost.
It's difficult to know right now because the exchange rate is being volatile, and today, part of our cost is affected by the exchange rate. Sometimes it's higher because of the purchase of slabs. So it's very difficult to know right now, but absolutely, or certainly, the backlog will have an increase in price during the third quarter.
Okay. Thank you very much. Now what about exports of Cubatão? There was an equation, the price of the slabs were too high. You reduced a bit the pace of export of Cubatão because this didn't make sense. I would like to know if you've normalized the situation and if you're exporting more from Cubatão. This was sort of like piggyback on my past question.
Yes. As a matter of fact, due to the Section 232 measure imposed by the U.S., we had contracted markets to sell slabs, but we believe that the market is recovering with more healthier results. I believe that we will be able to recover our exports at very reasonable levels.
Thank you very much.
Our next question from Ivano Westin , Credit Suisse.
Good afternoon to everyone. Thank you for taking my question. Point number one, as a follow-up on the consequence of the strike. Of course, volume and costs have already been commented. This had a reasonable impact on the second quarter. I would like you to tell me what you expect in terms of working capital for the third quarter. My second question would be regarding CapEx. If you could just please confirm what do you expect from the second semester, and if you could please confirm the CapEx?
Regarding our working capital, our expectation is that it will recover during the third quarter. That is around BRL 3 million. This is our view. We are going to have to see what is going to happen with the cost of raw material, because this is part of our inventory, and it also depends on the exchange rate of the dollar. Our expectation is that the great part of this variation of working capital to be normalized during the third quarter. CapEx, we still maintain our expectation of ending 2018 with around BRL 580 million.
Next question from Marcos Assumpção , Itaú BBA.
Good afternoon. My first question, if you could elaborate on your capital goods unit to explain the performance. EBITDA has dropped BRL 15 million quarter-on-quarter, and this was due to the wagon result. If you could explain this better. Second question to Sérgio, if you could elaborate on the strategy for the future for Usiminas. You said that during the past quarters, until last year, the company was restructuring itself and generating positive results. Now you're generating cash, but there is still a perspective of important and necessary investment. How do you see Usiminas five years from now? How do you believe Usiminas is positioning itself for the future?
When we talk about Usiminas Mecânica, we have observed the difficulties of the market for the past two years. We want to at least have a neutral result, and it has been difficult. The result of this quarter shows this, but the gap that we saw, what happened during the first quarter, is that we ended a major project in the assembly sector. After this project ended, we received a significant amount during the past semester, and this, of course, affected the result of Mecânica during the first semester. This result, let's say there would be an EBITDA of one digit. This would be the break-even point. When you see the second quarter, this is a negative effect that we suffered specifically in this wagon project. We incurred in costs higher than what we expected.
In our project, this cost that was higher than what was expected will also be reflected during the third quarter, not in the same magnitude. Anyhow, as we have a very low level of occupation that is 16%-17% of capacity, any variation caused by cost or revenue variation, this affects the results of Mecânica. This is at the level of the operation that is very low. So any variation, this can happen when you end a project and now negatively was affected because of the wagons.
Marcos, regarding our effort, the team's effort of Usiminas for the upcoming five years and our last year, in our vision last year, we became a normal company, and here we resumed everything that a normal company has to do when it comes to strategy. Today we already have a vision for the upcoming five years in terms of what we have to do. The next five years present a challenge. What is the challenge? To improve our results. We operated on 2016 during the second semester, BRL 300 million in EBITDA. 2017, we went up to BRL 500 million, and this year we are close to BRL 600 million in EBITDA. There is a constant challenge to improve our EBITDA, and this is a challenge for the entire Usiminas team.
Now we are improving our processes. The structural matter is something that we constantly see. The increase of our sales is also another effort, not only the domestic but the foreign market as well. Everything is part of the company's dynamic, and we believe that Brazil, although has undergone a catastrophic period in terms of economy during the past five years, these three years were one of the worst recessions that we had in our history. I am talking about 2014, 2015, 2016, and 2017, 2018. Very, very small growth. Way below what we need. But now we believe that our country will grow at higher levels, perhaps 2.5%, although it is not enough. Perhaps we will grow at levels 5%. If we grow in the domestic market in Brazil, Usiminas will grow together. Our plans for the future are investments.
We are analyzing a number of investments I would like to highlight. The new galvanization line. We are operating our three galvanized lines in full capacity. This is a point that we are studying. Another point that is the Cubatão primary areas. We are analyzing the primary areas of Cubatão. When we temporarily interrupted the operation in 2016, we knew that this was a temporary measure, but this was a decision of medium and long-term. Nothing will happen in Cubatão before 2020, and it will depend on the Brazilian economy. This will depend on all the dynamic of the country, because we still do not know what is going to happen because we are undergoing political uncertainty.
Usiminas is prepared for the challenges. Next year, we have a 10 million ton finished product line. What we are going to do is to occupy the installed capacity. Yes, we see the future with positive prospects. Now, for the foreign market, our prospect is that there will be protectionism, of course, unleashed by President Trump in the United States that unleashed a wave of protectionism in Europe. Only Brazil is against this worldwide trend, although we in the steel industry are in favor of free trade. Brazil is being a liberal country within a protectionist world. These would be my comments.
Thank you very much.
Next question from Gustavo Allevato, Santander.
Good afternoon. I have two questions regarding demand. You talk about a marginal acceleration of demand during the second semester. Which industries do you believe will drive this increase of demand? I would like to understand what is a comfortable level for the company for 2019.
The sectors that drive the steel industry: civil construction, capital goods, household appliance, and the automobile industries, they will have a lower growth during the second semester. Although there is growth, the growth will be lower than that of the first semester. Now, regarding the level of leverage, we want to deleverage our company a bit more. The ideal level here would be, we're still assessing actually. For this year, we expect to reduce the leverage level of the company. The intention is to delever the company a bit more.
Next question from Gabriela Cortez, Banco do Brasil.
I would like to know your comment regarding steel imports for the second semester. If you believe that there can be an increase, if there is a drop in the price of the dollar, you will maintain the same levels. I would like to understand how you see the situation. The input during the second quarter was 120,000 tons. What's the current situation?
Levels of the local price with uncertainty regarding the exchange rate dollar real. We expect this level of import to be maintained throughout the year, calculating around 10%-11% on the total consumption of steel of Brazil.
Okay, thank you very much.
Next question from [Newton Sullivan, XP Gestão].
Good afternoon. Thank you for taking my question. Here we like to compare the volumes. I would like to understand a certain point that the volumes that were transferred for the upcoming quarter. I would like to confirm if I am right of when or when you aren't able to ship the product, you lose the sale. I would like to know how you see the market share of Usiminas throughout this context. Because when we see the volumes of the quarter, according to the data that you have disclosed, it seems that this has increased and the domestic demand has dropped 1%. This shows us that Usiminas lost market share and not that we have a bad market because of the strike.
Regarding volumes, as I already mentioned, the volumes that were transferred from the second to the third quarter, yes, we had the orders. The problem was that we weren't able to ship them. The volumes that are being transferred will be part of the third quarter. Now, regarding the sales of the third quarter, as Miguel just stated, there is an expectation that the second semester will have a slowdown in growth when we compare it to the first semester. What the second semester is going to be like, we have to evaluate this more. But volume that was transferred, this will be seen during the third quarter.
Now regarding market share, it is very difficult to make any type of analysis because to follow up market share, well, it is something difficult to do, to have trustworthy figures. I believe that the difficulty is difficult because some publications don't make sense. We can't really say much about this matter. Thank you very much.
Our next question is in English from Carlos de Alba, Morgan Stanley.
Yes, thank you very much again. Just wanted to check, what are the expectations regarding iron ore shipments in the third quarter? Clearly, there was one vessel that sailed until July, was dispatched until July. Do you have already a sense of the number of vessels that you expect to ship for exports of iron ore in the third quarter? If there is any visibility for the fourth quarter, that would also help us. Thank you.
Our expectation is to meet the volumes of the 6.5 million tons. What does this mean? We're going to try to increase our sales. Now, when we think about the vessel that we weren't able to ship last semester because of the strike of the truck drivers. This is our expectation. The market for the time being is solid with no problems, and everything is going to depend on the mine production and also on our shipping system and international shipments that increased a lot in the past time. But this is our expectation.
Got it. Thank you.
As we have no further questions, we bring our conference call to an end. If you have more further questions, our investor relations team is at your disposal. Thank you very much for your participation, and have an an excellent day.