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Edited Transcript of USIM5.SA earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Usinas Siderurgicas de Minas Gerais SA Usiminas Earnings Call

Belo Horizonte, MG Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Usinas Siderurgicas de Minas Gerais SA Usiminas earnings conference call or presentation Friday, July 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Akikazu Ono

Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board

* Carlos Hector Rezzonico

Usinas Siderúrgicas de Minas Gerais S.A. - CEO of Mineração Usiminas

* Miguel Angel Homes Camejo

Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board

* Sergio Leite de Andrade

Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board

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Conference Call Participants

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* Antônio Heluany Neto

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Daniel Sasson

Itaú Corretora de Valores S.A., Research Division - Research Analyst

* Gustavo Allevato

Santander Investment Securities Inc., Research Division - Research Analyst

* Leonardo Correa

Banco BTG Pactual S.A., Research Division - Research Analyst

* Rafael Cunha

Crédit Suisse AG, Research Division - Research Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for waiting, and welcome to Usiminas conference call to discuss the results of the second quarter of 2019. (Operator Instructions) This conference call is being recorded, and the presentation is followed by slide and is being transmitted simultaneously through the Internet at www.usiminas.com/ri, where you can also attain a copy of the release of the company. Participants who are listening in English can also post 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 forecast are based on the management's expectations 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 international markets and are, therefore, subject to change.

With us today, we have the Executive Direction of Usiminas, Mr. Sergio Leite, Chairman; Alberto Ono, Vice President of Finance and Investor Relations; Tulio Chipoletti, Industrial Vice President; Takahiro Mori, Vice President for Corporate Planning; Kohei Kimura, VP of Technology and Quality; Miguel Homes, Commercial Vice President; Carlos Rezzonico, Executive Director of Mineração Usiminas; Djalma Barros, Industrial Director of Soluções Usiminas; Heitor Takaki, Usiminas Mecânica Executive Director; Bruno Paulino, Legal Director; Julio Arroyo, Director for Controllership; and Leonardo Karam, Investor Relations General Manager. Initially, Mr. Sergio Leite will make his initial remarks. Then, Mr. Alberto Ono will present the results of the second quarter of 2019. At the end, all the officers will be available to answer the questions.

Now I will hand it over to Mr. Sergio Leite.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [2]

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Thank you very much, and good morning to everyone here, and thank you for participating in our conference of the second quarter of 2019. And we, in Brazil, are undergoing a very special moment in our history. As far as we're concerned, the country is preparing itself for taking up on growth, and we expect this to happen in the upcoming 12 months or the quickest possible. During the first semester of the year, we realized intense activity within the preparation of the country for the growth, the pension fund reform is ongoing, the tax reform is being discussed. A number of actions have been carried out in the ministry.

We would like to highlight economy, infrastructure, mines, energy. Therefore, the country is getting ready to take off towards growth. We had a first semester below our expectation with an economy that was practically stable to -- in comparison to 2018. Today, we see good news regarding job generation, the growth of formal jobs. There have -- we had over 400,000 new jobs during the year. Today, the Aço Brasil Institute in a press conference announced the results of the first semester of 2019 and the prospects for the year of 2019.

Now regarding the first semester. We also observed a slight drop in the production of crude steel in Brazil. And according to the consumptions in Brazil for the year 2019, they were lowest, 5% to 2%. This is for the entire year of 2019. And this means that we, from the steel industry, expect the second semester slightly better than the first semester with growth of production, with growth of consumption in steel in Brazil at a level of 4.5% vis-a-vis the same period last year.

Usiminas is presenting to the market today the earnings result of the second quarter in a summarized way. What we can highlight is that all our company, there were improvements regarding the results of the first quarter within our 5 companies. Now in the case of the steel mill. The 3 major levers of our business, we presented an improvement in comparison to the first quarter. We increased our production. We also increased the total sale of our product.

I would like to highlight the domestic market, we increased our sales, 7%. There was an increase in the average price around 3%. We also had a reduction of the cost of the products sold. Therefore, the main levers of our steel mills presented positive behavior.

Now with the consolidation of our final results. We also evolved our EBITDA of 18% when we compare it to the first quarter of BRL 148 million. Now we have an EBITDA BRL 576 million. And we reiterate our commitment to strongly work with all the Usiminas companies regardless of the market scenario. Although during the semester of the year, our expectation is to have an improvement in the economy, in the market.

We also had -- on Monday, we received good news in change -- of a change of buyers. There will be a 0.1 improvement in our GDP this year from 0.081 to 0.082. Now what we want to see the change in buyers, and we believe that in the upcoming weeks, in Brazil, we will have perspective based on facts and true probability. And our commitment is to continue working to build results on a daily basis. We want to have innovation in all our areas, trying to improve all our processes and to show results, and first and foremost, to reassure the long-lasting performance of our company. When I say long lasting is built every day, every hour, and this is a very interactive job. Thank you very much for your attention.

Now I will give the floor to Alberto Ono, our Finance VP.

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [3]

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Good morning to everyone. Let's go to Slide #2 to present our results. As Sergio already highlighted, we had an increase of 5% in our steel units, exceeding 1 million tons in the quarter, 7% growth.

In the domestic market, also, we reached almost 950,000 tons in terms of iron ore. By and large, there was a drop of 7%. That was significative because of problems in the foreign market. The sales to the foreign market had a significant drop and the impact from sales because of logistics difficulties, and this is reflected on our figures. But afterwards, all these problems were resolved.

Now when we talk about the consolidated EBITDA, the growth of 18%, we had a significant growth and improvement in margin in compares -- 10.6% when compared to the first quarter and in terms of net income, BRL 171 million as a result.

Now let's go to the next result. Here we're breaking up the 4 past quarters. Here, we have -- when we -- regarding our operating result that there was a recovery as of the fourth quarter when we see the same nonrecurring effects, and now we have BRL 576 million. That is very similar to what we observed for the second quarter of last year.

Our next slide, we would like to show you the steel sales and also showing that the second quarter to '18 to the end year, we had sales above 1 million tons per quarter.

Now our next slide, we will talk about the EBITDA in our steel unit. In case of our steel unit, we're comparing the first quarter of 2019, there was an improvement of 34% in our EBITDA and totaling BRL 404 million vis-a-vis BRL 301 million, an improvement in margin here, 12% of margin vis-a-vis almost 10 -- slightly below 10% in the past 2 quarters.

And now when we go to the upcoming slide, we will talk about iron ore sales. This quarter presented a level very similar to the third quarter of 2018 with a different mix actually. Here, we can see that there was a drop in sales to steel mill units, a drop on foreign sales 21% and third parties increased 30%.

Now when we go to our next slide, now talking about figures of Mineração Usiminas. Here, we have the results. Despite the drop in volume, there is a significant growth in the EBITDA of Mineração Usiminas, this is 24% when we compare it to the first quarter. So we have a significant increase in margin representing, this was because of the increase of prices, and during -- and that started in the first quarter and continued during the third quarter.

Now on the next slide. Here, we have the results of Soluções Usiminas. There was a significant increase in our EBITDA in this unit, 118% vis-a-vis the first quarter, totaling BRL 37 million, that's a margin of 4%. And here, we're at totaling levels very similar to what we observed during the first and -- during the second and third quarter of last year.

And at last, here, we have the evolution of the results of Usiminas Mecânica. Here, we can also observe that within this quarter Usiminas Mecânica despite unfavorable conditions in the market in terms of demand and in terms of infrastructure projects, well, we still were able to balance our company. The last quarter, we were slightly negative in terms of EBITDA, and now we're slightly positive in terms of EBITDA. So we have improved even when we compare it to the second quarter of last year.

Now we will talk about other financial indicators. We will see Slide 11. Here, we can see our evolution in our working capital -- consolidated working capital. Therefore, there has been a significant improvement. This is BRL 500 million and well above BRL 4.2 billion, and this is a result of greater volumes in the quarter at higher prices and what also increased are accounts receivable. But the pressure of the cost of raw material, notably, iron ore and also the cost of slabs. And this is why there was a reasonable increase in our working capital.

When we observe on the upcoming slide, the steel inventory, we can see that there was a slight drop here. Therefore, we can also see that, that is not the stock volume, but yes, the financial impact of the cost.

Now when we go to the next slide, here, we can see our cash position and indebtedness. We continue BRL 5.5 billion at the end of the second quarter, but with a drop in cash position around BRL 500 million, that is the result of the pressure of our working capital. So this is practically what happened, there was a greater investment in terms of working capital during this quarter.

Now the next slide. Here, we have the evolution of our CapEx. Now during this quarter, we exceeded the BRL 100 million. But as we announced during the morning, we were reviewing the guidance of the year for investments because of delays in the environmental licensing of dry piling project as well the -- there was a slower -- a lower rhythm regarding the evolution of the upcoming projects mainly in the steel unit. Therefore, we -- so we are reviewing our guidance from BRL 1 billion to BRL 800 million.

And here, at last, I would like to highlight a number of things. Number one, well, we have been upgraded from our credit rating agencies, global and national. This is a result, of course, of our bond issuance operation. As you already know, our debenture, we issued $750 million that were used for a payment to development banks and Brazilian debenture holders and creditors.

With this, we were able to attain more CapEx flexibility and the exclusion of cash sweep and release of real mortgage guarantees. I believe that it is obvious regarding our debt. This happened during the third quarter, but now there is a new level in terms of liquidity and expectation of amortization of the company for the future.

With this, I end my presentation, and we are at your disposal to answer questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We would like to remind you that this conference call is only for investors and market analysts. Should journalists have questions, please send it to the Investor Relations of Usiminas to 313-499-8118 or the following e-mail:imprensa@usiminas.com.

Our first question is from Thiago Lofiego from Bradesco BBI.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [2]

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Could you talk about the price and premium prospect in the Mexican market in the short term? When we see the second semester, you will have another blast furnace. So this means that you will produce more coils. So I believe that your production of products has increased. So what do you expect for the premium dynamic initially? Do you believe that it is reasonable for a wait -- to wait for a negative scenario due to demand that isn't high? And the second question would be the new galvanized lights. When will this project be approved? And what will be the size of this business?

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [3]

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Thiago, when we talk about price prospects or perspectives in terms of price for the third quarter for us according to our sales, we still expect that in a total mix to have an average price of 2% to 3% increase.

Now regarding the premium. This vary -- this oscillated throughout the quarter. Nevertheless, today, what we can already observe is the premium regarding imported material. And it is around 4%, 5%, okay? Now this is due to the variation of the price of the coil abroad and also depends on the exchange, the variation in the exchange rate and during the past weeks, there was an appreciation of real, and this also affects the calculation in terms of premium. We still have a positive result. This would be around 4% and 5%. Therefore -- and we don't see perspective of negative premiums for the time being, but everything will depend on the market situation.

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [4]

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Could you also -- what about these 4%, 5% of premium that you just mentioned? Do you consider this drop of price that was observed recently? And it was 5% more or less.

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [5]

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Yes. Now this is regarding this week, okay?

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Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director & Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [6]

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Okay. Alberto, can you hear me?

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [7]

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Yes.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [8]

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I'm going to compliment. Today, the level of parity is around 5% and 6%, but all the world's steel industry is receiving pressure to increase price. We, in Brazil, are not in the situation. What we want to do is to look for an improvement in price, regardless of the international situation. We have had very strong movements in local currency in the past 60 days. We're going to monitor the situation of our current currency and the international prices. And we can expect a hike in prices because of the low margins of the worldwide steel industry and iron ore is lower. And we can expect a new wave of increases during the third quarter.

Now regarding parity, we have always informed that our strategy is to be in a level between 7% and 10%. And we believe that this is very reasonable. For the Brazilian market outside of this level, we will do what is necessary to maintain ourselves within this level of parity. Okay. Thank you very much.

Now regarding the new galvanization lineup where we continue carrying out our studies and within our product growth -- project, we're following the market, and we're working to -- and we want the Board to analyze this project in the upcoming 12 months. This is our focus today. Thank you very much.

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Operator [9]

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Our next question from Leonardo Correa, BTG Pactual.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [10]

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Well, my first question regarding market share. In our analysis here, we basically concluded that Usiminas gained and recovered a bit of market share in the domestic market during the third quarter. And please correct me if I am wrong, but the volume of Usiminas grew 7% in the domestic market and when we see the IABr data, the figures were slightly below this. I imagine that Usiminas made a great effort on the commercial side in order to recover their market share throughout this quarter. And now my question is if you are more aggressive in terms of prices than in the past. So this is my first question.

Another point, just something that I would like to confirm regarding your last answer. Are you expecting a price carryover for the third quarter that would be around 2% and 3%? Therefore, you're expecting an increase in price -- average price per ton in the domestic market between 2% and 3%? And what happens regarding cost? What is your expectation of cost increase per ton during this quarter? Because we would like to understand the cost pressure that all the steel industry is suffering. Well, during this quarter, there was a relevant increase in the slab. I would just like to equate this mathematics of this increase, and I would like to better understand the cost trends.

And my last point regarding working capital, Alberto, you mentioned in a number of moments during your presentation, working capital and as a matter of fact it was what absorbed more cash. How does that sustain itself because we're seeing a weaker market? And this is clear, and there had been some changes regarding the price of raw material. So before the situation, what will be the trend during the second semester regarding working capital? Will you recover? I would like to confirm this with you.

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [11]

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Leonardo, regarding your first question, I would like to clarify the following point. The target of Usiminas is to follow the evolution of the market when we have said longer periods of 6 months, 1 year, we can observe our success regarding our target. Now it is clear that Usiminas will continue being the market leader of flat steel in Brazil.

Now on the other side, I wouldn't talk about aggressiveness. I would say that we are committed with our customers and the partner sectors over long term. We're not only talking about prices, service, development, product, connectivity with customers, a number of strategic strategies to maintain the leadership that we have had throughout the years in Brazil.

Now regarding the average price for the third quarter, you are correct when you talk about 2% and 3% of the average price. This forecast would be maintaining the current situation of the price. If we maintain the current price during the third quarter, the average price will be between 2%, 3% above the average price of the second quarter. As I mentioned beforehand, in our view all the worldwide steel industry is being pressured to the increase -- to increase the prices at the national and at the international level.

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [12]

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Leonardo, now let's talk about costs now. What we can see here, as you already observed in our release, there was an increase of production cost of the first quarter to the second quarter. And this increase of production cost, of course, will affect the cost of the sold product of the third quarter. Now if we calculate that it will be 3% and 4%. This will be the increase. So it's 3% and 4%. The cost of sold product. And this is one of the drivers. As Miguel already mentioned, this doesn't only happen to us. This is happening throughout the world. And what we have here is a greater margin recovery, because the increase of prices, because of pressure on cost. Although within our current prices, we see that there is increase in revenue and there is increase in price of 2% and 3%.

Well, what we are observing here a possibility of a greater hike in prices within the market, not only because domestic reasons, but because the price of raw material is increasing for everyone. Now regarding working capital. We know that there was great pressure during this quarter. So from here on or at least during the third quarter, we'll continue at the level that we have already observed.

Well, unfortunately, we will have a long cash position because of the raw material until the moment there are no trends to drop the prices regarding iron ore. Now when this happens, the effect will be contrary, but we're not observing this for the time being. So at least if the price of iron ore doesn't increase so much because it cost around $120, our working capital will continue at the same level that we observed during the second quarter of 2019.

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Operator [13]

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Our next question comes from Daniel Sasson, Itaú BBA.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [14]

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My first question would be regarding demand. We saw an increase of 7% in the domestic market. Could you -- what is the actual improvement of demand, a sector that is showing that they are recovering more strongly? And what is the restocking effect? During the first quarter, you talked about strong restocking, especially in distribution. This was during the first quarter. If you could elaborate on what is the recovery of demand? What is restock? And how was this restocking in the strong performance within the domestic market? And now in Mineração, we saw the recovery of Samambaia plant during the semester. Could you elaborate also on this ramp up if the production volume is aligned with your expectation before the ramp up? Can we work with that guidance of around the 800 million tons of iron ore this year? These are my questions.

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [15]

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Now regarding demand and stocks, what we can say that the decrease in stocks according to the Inda report shows us that for the fifth consecutive month, the expectation of the institute is a drop of 2.5% of June, a downturn, which is the natural stock level between 3 and 3.5 months. Therefore, regarding the results during the second quarter, we don't see an increase in stock. What we did observe is that in some sectors, in addition to distribution, there was strong adjustment during -- and then it was done during the second quarter and yes, the first quarter. Therefore, the results show demand and nonrecovery of stock. Now there is still a downturn of our stock in the first semester. So the expectation of 3%, 3.5%, I believe that these are reasonable levels of stock for the market expectation.

Now on the other side, what is positive here is that there will be a change in the growth expectations that Sergio mentioned at the beginning of the call. For the first time during the 6 months of the year, there is a recovery of GDP and also the industrial sector and consumption are also recovering because of the Brazilian economic situation and political situation.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [16]

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Thank you, Miguel. Daniel, regarding Mineração after the Brumadinho event all the licenses are taking longer than what it would take in the past, and it's longer than what we expected. So there are delays because of this.

Now regarding the Samambaia plant, that was impacted by the situation. Samambaia will be totally operational by August 15. And this will allow us to increase the production more or less 3.5 million tons between the increase of pellet feed and concentrate.

And now regarding our sales for 2019. Today, we have a plan, a calculation of 9 million tons in sale, with a production of approximately 8 million. It will depend on the licenses that have to be approved for a number of plants that are paralyzed, but this is our projection for the year 2019.

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Operator [17]

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Our next question from Rafael Cunha, Suisse.

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Rafael Cunha, Crédit Suisse AG, Research Division - Research Analyst [18]

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My question is about our CapEx. I would like to better understand the CapEx review for -- to BRL 800 million, and you talked about the delay in the steel project. I would like to know from you if you could tell us how this impacts the revamp of the blast furnace? And how is this connected to steel and to the blast furnace? And if you could clarify, what the CapEx plan will be for the upcoming years? This will be point number one. And number two, a follow-up regarding iron ore. Is there still an update regarding the sale of a stake of MUSA? And if it's not so, what is going to happen to the mine? Could you update us regarding the breakeven here?

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [19]

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Rafael, now when we talk about CapEx, this drop, a significant part is due to the delay of the dry project. This is a project that was calculated BRL 140 million, and it would become operational during the first semester of 2020. Great part of the CapEx would be realized this year. As it has been explained, we are -- it's taking a long time to receive environmental licenses. So the expectation of the project is that it will become operational at the end of 2020. So this will basically delay this project minimum 1 semester or 2 quarters, but the trend is -- could be higher. This is why the disbursement of BRL 140 million that was going to take place of 2019 was transferred to 2020. This is really the number one.

Now the second question that you asked, we're talking in the case of the steel, there was a delay in other projects, it's not the blast furnace project. The blast furnace project, well, this year was a -- had a very small volume because we just started. Therefore, the expectation of the blast furnace wasn't to have great disbursement and things are according to expectations. I'm actually talking about other projects that are underway in the steel units.

Now iron ore. Before giving the floor to Carlos, we can talk about the divestment of Mineração Usiminas. This is an ongoing process, but still slow after everything that happened after Brumadinho. We have no news for the time being, unfortunately, for you.

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Carlos Hector Rezzonico, Usinas Siderúrgicas de Minas Gerais S.A. - CEO of Mineração Usiminas [20]

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Now speaking about Mineração Usiminas, today, we are doing new production. We're talking about the first 10 years with iron ore and then we would have another stage. And I believe we will not have any problems until 2050.

Now MUSA -- now regarding MUSA stake and the prices that we imagine here, we could talk about $55 level because of the drop of premiums of high-quality products that fundamentally are what we are exporting today.

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Operator [21]

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Our next question comes from Antônio Heluany, Bank of America.

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Antônio Heluany Neto, BofA Merrill Lynch, Research Division - VP & Research Analyst [22]

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And Sergio, could you give us an update regarding the discussions that you have with the new government?

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [23]

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It would be import -- tariffs were discussed. And then they said that this wasn't going to help what IABr is negotiating with the government and what things are under discussing that can result in the improvement next year.

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Antônio Heluany Neto, BofA Merrill Lynch, Research Division - VP & Research Analyst [24]

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And Alberto, 2 follow-ups. One, regarding the slab. Although we see the price of iron ore at a high level, the slab price is at -- the level is $420. This is the export price. When can this benefit your margin? And another question regarding liability management after the bond issuance, will you pay the more expense debts, the ones that were renegotiated in 2015? How much improvement can we expect in terms of your debt after you amortize this part?

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [25]

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Now regarding the interaction of IABr with the Brazilian government, we have interacted through a coalition and Aço Brasil visit. And last year, when we named it industrial coalition, and this coalition gathers a number of very important sectors in the Brazilian transformation industry. And currently, it represents 50% of the GDP of the transformation industry.

We're talking about a number of sectors that we have talked to the Brazilian government since the period of the government transition. So we already started talking with the transition team with President Bolsonaro, Minister Paulo Guedes, Lorenzoni, with Minister Bento Albuquerque. And we started negotiating with them during the last quarter -- last year. And during the first semester, we had more intense conversation. Since the beginning, our position before the federal government and all their team was highly respected. What we talk about is the recovery of the Brazilian economic situation, and there are a number of levers here. We believe that we have to reactivate the industry of civil construction. This lever is very important because it generates jobs in large scale.

Now also actions within infrastructure and also export is an important lever because the transformation industry in Brazil in most of the segments has installed capacity use between 60% and 70%. This provides the transformation industry in Brazil a perspective of increasing its production and almost 50% without the need of investments of the transformation industry is prepared to recover the growth in Brazil. And the Brazil -- and the government is working along these lines. In infrastructure, a number of projects are being implemented. The new gas market is very important in the middle term for our growth. The second point that we set forth that is important for us is the support from the industrial coalition because we need a labor and a pension fund reform. The pension fund reform was approved by Congress at least the first -- at least at the first level. So the pension fund reform is gaining momentum in terms of discussion.

Another point that we set forth to the government is the economic liberalization in international trade. We're in favor of liberalization. In the case of Brazil, we have to do it after we correct all the asymmetries. We have a number of asymmetries at tax level, financial cost level and in the infrastructure of Brazil that take away all our international competitiveness. We do not have in the case of the industry, and I'm going to talk specifically about the steel industry. The steel industry does not have any type of government subsidies. We -- and we work with international prices.

So -- and when we talk about asymmetries, we're talking about trade with China. China today is a very strong player in the international trade scenario. China is not a market economy, they don't remunerate like the major worldwide economies. They provide a great number of subsidies. The economy and the Chinese industry, the owner is the state, not only the central power, but the provinces in terms of international trade is unbalanced.

Now the United States is facing unbalance in trade matters, and the government was very sensitive in all of these points. And we believe that the government wants to recover the growth of the economy, but they want to eliminate some -- many asymmetries in the Brazil industry.

We export taxes, for example, in the case of the steel industry, when we analyze Reintegra that would be accumulative taxes not recovered. Our industry is at a 7% level. We believe that it should be 5% below the nonrecoverable tax. It was 3%, it was 2% in the past. So we have had frequent meetings with all the agents of the federal government, and I highlight Minister Bento Albuquerque, that was in the Institute Aço Brasil, the Brazilian coalition last week met with Minister Paulo Guedes were interacting and this interaction has been very positive in order to build the Brazil that according to the industry, the Brazil that has to grow, a Brazil that generate jobs and that will resolve the problems. We have to drop the unemployment level that now is about 12%.

Antônio, regarding your question in terms of slabs. During the second quarter, there was a trend to price drop. And in our case, this will impact the production cost of the third quarter. So the expectation is to drop around the cost of the acquired slabs, well, for the third quarter would be around 10%. Therefore, there is a drop in the cost of slabs and now the production cost during the third quarter will be more reflected in our COGS on the fourth quarter.

Now our debt, we have released a new guidance that already reflects the new -- the new view of the company in terms of what we will have in financial expenses from here on, and it is available for you to see.

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Operator [26]

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Our next question from Gustavo Allevato, Santander Bank.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [27]

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I have 2 questions regarding your steel units. I would like to better understand the evolution of the production cost connected to raw material addition to slabs for the third quarter, because there is the high price of iron ore and there is a high of the consolidated production when you compare second and third quarter? Or do you believe that the drop of the price of slabs will offset the increase of other costs? What do you expect for the second semester and the third quarter after a high of 7%? If you could elaborate on this.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [28]

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Gustavo, regarding the production cost for the third quarter, well, we expect a production cost that is stable. There will be a drop in the price of the slab. But on the other side, this -- there will be an increase of the price of the iron ore that happened during the second quarter and part of the third quarter. In July, there was some increase in prices, and this will be reflected on the general production cost. And this is balanced, and the expectation is that we will have a stable cost when we compare it to the second quarter.

Regarding the volume of the second semester. Now based on the report issued by Aço Brasil, our expectation is that it will be slightly superior to the first semester, but the third quarter will be very similar to what we saw during this quarter.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [29]

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Just a follow-up. You said CP stable quarter-on-quarter on COGS. When will you have a high or higher level in comparison to the second quarter?

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [30]

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I think I already answered this question. This will be around 3% and 4%.

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Operator [31]

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Our next question from Carlos De Alba, Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [32]

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I would just like to follow up on Mineração Usiminas. I would like to better understand what are the necessary license to reinitiate Mina Leste operation? And for Samambaia, do you still need a license -- operational license? And my second question would be regarding the volume. This would be 9 million tons of iron ore sales. I would like to know that your assumption for -- to restart this operation is 9 million, is this right?

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [33]

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To start a plant, you don't only need the license of the plant, but if you do not have the license to operate a dam, the plant cannot start working. Our plant -- we have no problems regarding the licensing of the plant. We need other licenses in the mining industry that impacts the Samambaia Plant.

Now your second question about the 9 million tons, they are -- and also Mina Leste, that is 3, 4 years. And we're trying to attain this license for the month of August. And we have mine and plant in Mina Grande.

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Operator [34]

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As we have no further questions, we bring this conference to an end. Should you have questions, the IR team is at your disposal. We would like to thank all of you for your participation, and have a good afternoon.