Good morning, ladies and gentlemen, and thank you for waiting. Welcome to the Usiminas conference call with the results of the first quarter of 2018. All participants are connected on listen-only mode. After the presentation, we will have a Q&A session where further instructions will be given to all participants. Should you need the help from an operator during the conference call, dial star zero. Please remember that this conference call is being recorded. This presentation comes with slides and is being transmitted simultaneously 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 ask the questions directly 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's 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 changes.
With us today are Usiminas executive board, Mr. Sérgio Leite, CEO and Technology and Quality Vice President Officer and Commercial Vice President Officer, Mr. Ronald Seckelmann, Finance and Investor Relations Vice President Officer and Subsidiaries Vice President Officer, Túlio Chipoletti, Industrial Vice President Officer, Takahiro Mori, Corporate Planning Vice President Officer, Wilfred Bruijn, Managing Director of Mineração Usiminas, Heitor Takaki, Managing Director of Usiminas Mecânica, Ascanio Merrighi, Managing Director of Soluções Usiminas, Bruno Paulino, Head of Legal Department, Julio Arroyo, Controller, and Leonardo Karam, Head of IR. First, Mr. Sérgio Leite will make some initial comments, followed by Mr. Ronald Seckelmann that will comment on the first quarter of 2018 results. After, the management will be available for the Q&A session. Mr. Sérgio Leite, you have the floor now.
Good morning to everyone. Thank you very much for participating in Usiminas conference call. Our meeting is always a special moment so that we can present to the market the results and to comment on them. Regarding the results of the first quarter of 2018, I would like to highlight some points. Number one would be the EBITDA. We reached an EBITDA of BRL 641 million . This represents a growth in comparison to the fourth quarter of 42%, and this EBITDA is the best EBITDA, excluding the impact of the Porto Sudeste Agreement last year. This is the best quarterly EBITDA in seven years for Usiminas. I would also like to highlight that during the first quarter, we continued with the reduction of our debt. We started the advanced redemption of our debt in December 2017.
$90 million were amortized in December. January, $118 million were settled, and in March, we had a cash-free effect, and we amortized $100 million. These three amortizations, when we compare our debt to the end of the third quarter of 2017 and our debt during the first quarter of 2018, is a drop of around BRL 1.2 billion. I believe this is a reduction of 17% in debt. Another point that I would like to mention is that in Usiminas, we are intensively working. Our teams are totally mobilized. Our teams are encouraged. We are undergoing a very special moment, an internal climate where people feel pleasure to come to work, and people more satisfied and more encouraged, produce more. This is very important.
This result that we are presenting here, that is the best quarterly result in the past seven years, it is a result of the Usiminas team. These three points for us in Usiminas are very important points, and the commitment that I assume with each one of you on behalf of all of our team means that we will continue working intensively. Everybody is extremely mobilized. The group of the 10 continues mobilized, and I believe that these are lively meetings where I participate. Our commitment with each one of you is to work intensively to have better results for Usiminas. I will give the floor to Ronald Seckelmann, that is our Vice President.
Good morning to everyone. Thank you very much for participating. I am going to make some comments, and I believe that you can see it through the site. As always, we start on our first slide with some operating and financial indicators. Steel sales are at the same level than last quarter, 1,089,000 tons. There has been an increase of 3% in domestic sales. Iron ore sales increasing 20%. During the past quarter, we had a growth driven by export. This was strengthened during this first quarter, we will see in detail. The adjusted EBITDA Sérgio mentioned totaled a margin of 20% during the first quarter. At last, we had the reversion of losses, and now we have a profit of BRL 157 million.
The next slide. Here we have the quarterly evolution of our steel sales during the past five quarters. Here we would like to highlight that during the past four quarters, we registered constant growth in sales to the domestic market and a drop in our exports when we see the total sales volume of steel. Now we see the EBITDA margin here. We reached BRL 569 million in margin in steel of 19%. Usiminas is within the ranking of the most profitable companies in the company in this area. Here we see the iron ore sales, and we see a very significant growth in exports during the first quarter. I would say that if we saw the average of these two quarters, and I believe a yearly result would be 6.5 million tons- 7 million tons.
The next slide shows you the EBITDA and the EBITDA margin. Here in mining, practically the same level than last quarter, growing in absolute figures to BRL 49 million, and the margin is around 20%, like during the past quarter. Now we see the evolution of EBITDA and adjusted EBITDA margin of Soluções Usiminas going to BRL 29 million. We have BRL 10 million more in growth, and the margin is 4%. This is something that we expected from a distribution center, from a service center. Here we have Usiminas Mecânica EBITDA and EBITDA margin, positive result because this is the conclusion of the contract of Vale. In reality, these are results that theoretically should have been registered last year, but the conclusion of the contract was now, and this quarter reflects the conclusion of this project.
Here we see the EBITDA and EBITDA margin in consolidated BRL 641 million, representing an EBITDA margin of 20%. When Sérgio Leite spoke about the best result in the past seven years, excluding the second quarter of last year, here you can see with the effects of Porto Sudeste. Last year, we have BRL 750 million. Here we see the evolution of the consolidated G&A. Here the level is 3.2% vis-a-vis the other net income, dropping 5% vis-a-vis the last quarter in absolute values. I can say that our level of G&A under any metric, absolute value per ton, sales percentage, is one of the best, if not the best in the Brazilian and the world steel industry. Working capital going from BRL 2.8 billion to BRL 3 billion is normal working capital.
The part of this growth is due to the increase of accounts receivable that did not increase in terms, but yes, in values reflecting the best values of steel sales. Perhaps in the future, we will have an increase in price of slabs or raw material like coal, but for the time being, we cannot see nothing outside what is common. Here we have how our steel inventories that are very important part of our working capital are totally stable and under control. The next slide shows the evolution of our growth and net indebtedness. What Sérgio mentioned, a drop of BRL 1.2 billion between the end of the third quarter of 2017 and the first quarter of 2018, with no losses in our cash. That is very good.
At last, the evolution of our CapEx. Our CapEx during this quarter is below expectations. We expect to accelerate this in the upcoming quarters because we have new CapEx projects, and our expectation is, at the end of the year, to have a value of around BRL 500 million. These were my comments, and together with my colleagues, we are at your disposal to answer questions.
Ladies and gentlemen, we will start 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 for investors and market analysts. If journalists have questions, please send them to the press department of Usiminas through 3134998918 or the following email, imprensa@usiminas.com. Our first question from Ivano Westin , Credit Suisse.
Good morning, Sérgio , Ronald, the rest of the team. The first one would be regarding the cost in steel use, 1875 tons , and the increase of 6% quarter-on-quarter. One would be the cost of the slab. What do you expect in terms of the evolution of cost of slabs if there is a trend to have a greater pressure or if you believe that you will be able to transfer the price to offset the pressure of cost? I would like to know how you see the evolution of the metal spread during the third quarter. My second point would be regarding a discussion from the past regarding the blast furnace in Cubatao.
Throughout the last years, you said that the strategy would buy slabs from the market. Today, we have a cost that is slightly higher than what was initially expected regarding slabs. I would like to know if you are thinking about reconnecting the blast furnace in Cubatao and if there is a range of slab price that would encourage you to reignite the blast furnace.
I am going to start with the primary area of Cubatao. When we decided to disconnect temporarily the primary area in January of 2016, our view was to disconnect it for five years. This was temporary, and we have always mentioned that the resumption of the primary area of Cubatao undergoes. For that, we need a robust recovery of the Brazilian economy, and this hasn't happened. Last year, we grew a little bit. This year, the exportation between 2%-3%. Now we have seen in the last six weeks in the Focus Report from the Central Bank of Brazil that there is a cooling down. It was 2.0%, now it's 2.75%. What I can tell you is that this matter is an important matter to us. We constantly analyze this matter, but today there is no perspective in resuming the primary area of Cubatao.
At least for three years, we have to study this, and the Brazilian economy must recover for this to happen. Throughout this week, we resumed the Blast Furnace 1 of Ipatinga . This operation represents a 20% growth of slab production. This is our situation. Now, the situation regarding the cost of the steel mill, you mentioned the cost of the slab. We are in a moment where the cost of the slab, in many moments, is above the price of the Chinese reference in the international market. In our view, because of Section 232 to the slab market, that is a demanding market. It is strongly influenced by what will happen regarding Section 232. It is clear today that there are three markets that offer slab. One is the Brazilian market with elevated prices. This would be around $600/ ton.
Because of the undergoing negotiations between Brazilian and U.S. government. Another market that is a market that involves more Russia [Past] prices $570- $580 a ton. The third market, that is the iron slab market, and I believe that the market is at a level between $500-$540. So our prospect regarding the price of slab in the international market is a small buyer.
When will we have this drop?
Well, this is a great question that we have because the market suffers pressures from demand more than in supply of pressure.
Now, the drop of prices of slabs that you expect, I know you tried to transfer the price to the distribution as of June. Could you comment on this, and how much metal spread do you expect?
What we are following constantly is following the market dynamic in terms of the international price that impacts the domestic market and seeing the exchange variations. In our view, probably it will be possible to have a change of prices and distribution because of the increase in price in the international market that right now presents a slight growth. It was BRL 570, and now it is above BRL 580. On the other side, the price differential that I always mention, that you call premium. The premium currently is around zero. That is the level that allows us to change prices. In our view, the expectation is that in June, if there is a slight high in the international market and with a stable exchange rate, BRL 3.30, BRL 3.40 that we have observed, I believe that we will decide to increase prices in the domestic market.
Can you quantify this increase? Would it be reasonable to expect a premium at 10%?
Ivano, 10% is too much. I am going to tell you that it would be, in our view, 5%. 10% is too much.
Thank you very much.
Next question from Mr. Leonardo Correa, BTG Pactual.
Good morning to everyone. Thank you for taking my question. Number one, regarding prices and prospects for results during the second quarter. During the past quarters, you indicated how much could be the price carryover quarter-on-quarter. Many things were announced during the first quarter regarding price increase. The three major steel consumers, most of this was implemented during the first quarter, the price increases 8% quarter-on-quarter. So what else can we transfer? What else can we expect in carryover for the second quarter? If you could talk about cost pressure so we can understand the EBITDA evolution quarter-on-quarter. My second quarter regarding volumes.
You mentioned that we are observing a slowdown in some data. Slowdown regarding expectation. Within your data, we still cannot see weak data because they are very strong. What is the demand scenario for you for the second quarter? Thank you very much.
Okay, Leonardo. As you mentioned during the past earnings call, we forecast what may happen regarding price variation. What I can say is that the expectation would be an average price variation during the second quarter between 3% and 5%, and closer to 5% when compared to the first quarter. In other assessments, in terms of cost, our expectation is that the cost will continue aligned. Our average cost, COGS, will be aligned with the price variation. Therefore, we would maintain our margins. Regarding volumes. Our expectation for 2018, that is Instituto Aço Brasil expectation, we are working with an expectation of growth of 7%.
This would be for flat steel Brazilian consumption. Within this expectation, during the second semester will continue the growth of the first semester. Obviously, during the past five quarters, quarter-on-quarter, we have presented a slight improvement and we will continue on this path. I would like to say that we will be aligned in terms of volume. So stable volume quarter-on-quarter within the domestic market, yes.
Okay, this is clear. Thank you very much.
Thank you, Leonardo. Our next question from Thiago Lofiego, Bradesco BBI.
Good morning to everyone. Two questions. Going back to the slabs and the Ipatinga blast furnace, when will it make a difference in your steel production cost? My second question regarding investments, if you have normal maintenance CapEx, that something that you will see during the next two years, what could be your next investments in terms to grow more? Perhaps a new galvanizing unit, something to supply more to the automated industry, and if you could say something about the Blast Furnace 3 in Ipatinga, what the timing will be.
I will talk about your first questions, the impact and reflection of the resumption of the Blast Furnace 1 of Ipatinga. We will feel the real effects of the additional production of Blast Furnace 1 during the fourth quarter this year. I will explain why. The blast furnace was resumed in the beginning. In June, we will stop the big Blast Furnace 3. It will go through a scheduled intervention of 11 days. Part of the production of Blast Furnace 1 will replace what will not be produced by Blast Furnace 3 from Ipatinga. When we go to the fourth quarter, the additional production of almost 2,000 tons a day of Blast Furnace 1 will be felt. Now, everything will be absorbed by the production of Usiminas plant. We will be able to increase the level of production of lamination. What about purchase slabs and own slabs in our mix?
We have 30% purchased slabs, 70% own slabs in the consolidated results of both plants. This will depend a lot on the evolution of the price of the slab. Probably throughout the second quarter, there will be no significant change in this result. Perhaps we will see a drop of purchased slabs during the third quarter and the fourth quarter. It is still too early to give you any type of forecast.
Now about slabs. You mentioned an increase of 3% quarter-on-quarter. If we see the current price of slabs in the market, if the price continues in this level with no impacts of costs, do you believe that the cost of the second quarter shows us the reality?
If the price of the slab is maintained, this makes feasible some businesses, like the export business, as we only buy slabs in Cubatao. When we have a feasible sales business, what happens, we will now realize some businesses, and we will reduce the volume of purchase of slabs. You asked about relevant investments in the upcoming years. As a matter of fact, what we are studying is a third line of galvanization. We started in a very preliminary fashion to assess the partial resumption of the primary area of Cubatao. These would be the two new investments that we are evaluating, and a third galvanizing line does not mean growth, but yes, having a greater mix of products. The resumption of blast furnace 1, and this would represent the replacement of purchased slabs by own slabs.
You spoke about the Blast Furnace 3 of Ipatinga. This is a retrofit, and this is something that is expected. I believe that this will not happen before 2021, and we are assessing the evolve for the retrofit of the Blast Furnace 3 Ipatinga, going back to a new plant of galvanization and to reignite the blast furnace. If the board approves the investment by the end of this year and the beginning of next year, these two investments would take two years to deploy. We are talking about investments that will deliver results as of 2020, 2021.
What about the CapEx range here?
We are working on this right now. We don't have this.
Thank you very much. I would also like to thank you for your help during the past years.
Thank you very much.
Thank you, Thiago. Our next question, from Marcos Assumpção , Itaú BBA.
Good morning to everyone. Sérgio, a question regarding the slab spread. What will be the break-even production of slabs in Cubatão? When you have slabs available in Ipatinga to send to Cubatão, how much will this logistic cost to send slabs from Ipatinga to Cubatão? Last year, it wasn't very competitive, but now with the spread of low slab prices, perhaps it makes sense. At last, if you could comment on the pros and cons of making a great refurbishment on the Blast Furnace 3 of Ipatinga or a partial retrofit. Is there a possibility of a partial retrofit in the Blast Furnace 3 of Ipatinga to extend its life?
Okay, regarding the spread. Here you mention the spread. In our view, to enable the transformation of slab in BQ, the spread that is balanced is between the price of reference of BQ from China minus the price of the slab. Let's say FOB Brazil. Brazil is one of the great slab producers, of $50. So this is a spread that is a balanced spread for us so that we can carry out this operation. In the past weeks, we found negative spreads. The slab Brazilian price was above the BQ price. Now, regarding the increase of slab production in Ipatinga, is that we want to laminate them, to machine them.
Ronald mentioned something that is very important. The retrofit will not take before 2021. At least three, four years. Number two, we are studying this subject, just starting to study it. It is too early to position ourselves regarding what is more convenient, a partial retrofit or a full retrofit, so that it can work for other 20, 25 years. Everything will depend on the economic analysis. To see the feasibility of these two options, we have to be advanced in terms of basic engineering and in terms of equipment.
Perfect. Just to clarify something. So today with a negative spread, it wouldn't make sense to have finished products, finished slabs in Cubatão. So this trend will not continue. The price of the spread will increase, and it makes sense to maintain your operation, because today it wouldn't make sense to have finished slabs in Cubatão, and you could close the operation.
In Cubatão, we have three operations. An operation that deals with the domestic market, a second operation that sees the north and northeastern market, and then when we see the existence of the port. A third operation that is of exports. So with this spread, that is negative when we see the price of Brazilian slab, if we see Iranian and Russian price, it is below the break-even of $50. The export operations have been suspended. We expect an impact of three months here. This unbalanced situation, this in terms of the economics, this unbalance won't last for a long period of time, but at least during three months.
In three months, this will impact the exports of the third quarter. We are not going to export. Finished products, finished slabs will be for the domestic market. Marcos, another thing. You spoke about the break-even of Cubatão. The break-even of Cubatão was 100,000 tons per month in the past. The efforts to reduce conversion costs in Cubatão already brought this break-even to 18 million tons, and we want to drop this 80,000 tons.
Okay. Thank you, Sérgio. Thank you, Ronald . I would like to thank you once again for all the support that you have given us, and lots of success and good luck in the challenges that come ahead of you.
Thank you, Marcos.
Ladies and gentlemen, as we have no further questions, we bring our conference call to an end. Should you have any questions, the IR team is at your disposal. We thank you for your participation, and have a very good afternoon.