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Edited Transcript of USIM5.SA earnings conference call or presentation 20-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Usinas Siderurgicas de Minas Gerais SA Usiminas Earnings Call

Belo Horizonte, MG Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Usinas Siderurgicas de Minas Gerais SA Usiminas earnings conference call or presentation Thursday, April 20, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ronald Seckelmann

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

* Sergio Leite de Andrade

Usinas Siderúrgicas de Minas Gerais S.A. - CEO, Director Vice-President of Technology & Quality, VP Director of Commercial and Member of Executive Board

* Tulio Chipoletti

Usinas Siderúrgicas de Minas Gerais S.A. - VP Officer of Industrial and Member of Executive Board

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Conference Call Participants

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* Bruno Giardino Roschel de Araujo

Santander, Equity Research - Head of Education and Healthcare

* Carlos De Alba

Morgan Stanley, Research Division - Equity Analyst

* Felipe Hirai

BofA Merrill Lynch, Research Division - MD and Latin America Equity Strategist

* Gabriela Cortez

* Humberto Meireles

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Ivano Westin

Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research

* Jonathan L. Brandt

HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper

* Leonardo Correa

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

* Marcos Assumpção

Itaú Corretora de Valores S.A., Research Division - Sector Head

* Milton Sullyvan

* Thiago Ojea

Citigroup Inc, Research Division - Analyst

* Thiago K. Lofiego

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Usiminas conference call to discuss the earnings of the first quarter 2017. (Operator Instructions) As a reminder, this conference call is being recorded. I would like to mention that this conference call is being webcast live on the company's Investor Relations website, www.usiminas.com/ri. The earnings release and a slide presentation are also available on that website. Participants who are listening to the conference in English may also ask questions directly to the speakers.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking statements as a result of macroeconomic conditions, market risks and other factors.

With us today are Usiminas Executive Board, Mr. Sergio Leite, CEO and Technology and Quality Vice President Officer and Commercial Vice President Officer; Ronald Seckelmann, Finance and Investor Relations Vice President Officer and Subsidiaries Vice President Officer; Tulio Chipoletti, Industrial VP Officer, Takahiro Mori, Corporate Planning, VP Officer; Guilherme Melo, Operating General Manager of Mineração Usiminas; Heitor Takaki, Managing Director of Usiminas Mecanica; and Cristina Morgan, Head of IR. First, Mr. Leite will make his initial comments. And then Mr. Seckelmann will comment on the first quarter 2017 earnings. Then the management will be available for a Q&A session. Now we're going to turn the call to Mr. Leite.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO, Director Vice-President of Technology & Quality, VP Director of Commercial and Member of Executive Board [2]

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Thank you very much. Good morning to each one of you. Ladies and gentlemen, first of all, I'd like to thank you all for joining us in this conference call. Today is a very special day for Usiminas team. 1 hour ago, I met Usiminas team of all our companies, and we are presenting to you positive results for the company that represents the work of Usiminas team in the past 12 months. And the main indicator of the results that we are presenting is EBITDA. In the quarter, we reached BRL 533 million. And in 12 months, we were past BRL 1 billion, which is really important as a result. Notably, if we consider that 1 year ago when we presented the first quarter of 2016 and the accumulated results of the previous 12 months, April 2015 to March 2016, we had negative EBITDA. Usiminas team worked very hard in the past 12 months. Our main focus was to seek for results. And these are the results that we are going to discuss with you next.

First, I would like to talk about the next steps in Usiminas. We are going to continue with this intense work of focusing on results, reducing our costs and making the company more and more competitive, coping with the challenges of the Brazilian market and the Brazilian economy, an economy that's already hit the bottom and is showing the first signs of recovery. It's still small, but in our vision, we believe that we are going into a positive curve for the Brazilian economy. It's still at a very slow pace. We are going to focus our work, the work of our team on pursuing good results. We are starting the second phase of the Group of 10. If you remember, we created that in May 2016. The Group of 10 in this new phase has transcend its work. We have 3 more new executives for the Group. And 1 year ago when we created the Group of 10, we had a single target. And you will remember that we commented about that, which was a management target that is to reach BRL 100 million a month of EBITDA as our average. In the third quarter of that year, we showed that Usiminas teams worked very hard, and we did close that quarter with BRL 308 million in our EBITDA. We are going to continue that job, and we are adding to the work of the Group of 10. Also people management to work very intensively to mobilize those that are responsible for our results, the Usiminas team, focusing on 3 points: basically first, effective and productive use of the time of our people; second, incentives and valuations to our talent; and third, synergy, which is also very important for our team to reach better and better results. We have great challenges. But in our opinion, we at Usiminas, we have a team that is prepared to cope with the coming challenges.

Now I'm going to turn the call to our Finance VP to present the results. And then we will come back.

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Ronald Seckelmann, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP Officer of Finance & IR, IR Officer and Member of Executive Board [3]

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Well, thank you, Sergio. Good morning, everyone. You know that you have our presentation on the website, and I am going to start with some volumes results.

We had an increase in sales volumes quarter-on-quarter of 4%. If you see a breakdown, we have iron ore a slight drop, and we an expressive increase in our adjusted EBITDA, reaching BRL 533 million in the first quarter with consolidated margin of 23% and a reversal of losses from the previous quarter of BRL 195 million negative to BRL 100 million positive -- BRL 108 million positive. On the next chart, we have a quarter evolution since the beginning of last year in sales in the domestic and foreign market. You can see that in the domestic market quarter-on-quarter, we had an increase of 1%, almost stable; and an increase in export of 48%, which led to the total of 4% increase in sales volume.

The next slide shows the evolution of our EBITDA and EBITDA margin for Steel. And again here, we're comparing the reported EBITDA -- adjusted EBITDA of this quarter of BRL 465 million with margin of 21% in Steel. But also, we showed what our EBITDA would be in terms of recurring EBITDA that is outside of the nonrecurring events like the sale of energy, sale of assets and other positions. And again, we can see that we had an important development comparing 2 previous quarters reaching BRL 488 million. It is this column in blue to your last that shows what I'm saying.

The next slide shows the quarter evolution of our sales volume in iron ore. Again, sales -- Usiminas sales to third-party domestic market, basically the producers that we work with and export, you see sales to Usiminas quarter-on-quarter did have an increase of 5%. We had a decrease in the domestic market, and we did not have much exports. In fact, we haven't had any since the second quarter last year.

The next slide shows again the evolution of EBITDA and EBITDA margin in iron ore. You see a margin reaching 48%, going back to our historical levels. It's still a bit below, but recovering our historical levels of the past. And finally, EBITDA and EBITDA margin. Again, adjusted numbers in Steel transformation, we're talking about Usiminas solutions that has a strong evolution from 2% to 7%. This is the Usiminas distribution art when we work with smaller clients in the market, showing that the improvement that we have in Steel also followed -- were followed by improvements in our distribution sector.

As mentioned in our release, the next slide shows the evolution of our results in Usiminas Mecanica, weak results, but that reflects the lack of investments that we have in Brazil right now. We do not have investments in infrastructure. Oil and gas is almost at a halt, the same for naval construction. So the results of Usiminas Mecanica, which is the largest capital goods company in Brazil, reflects the moment we are going through.

On the next slide, which show our EBITDA and EBITDA margin, adjusted still our consolidated numbers, so the 2 last columns to the right show BRL 533 million as our reported number with margin of 23%. But again excluding all nonrecurring factors, the sales of energy and provisions, we reached BRL 559 million of what we call recurring EBITDA or clean EBITDA in the quarter. Not very different from the adjusted EBITDA. So we had few nonrecurring, but still higher than our reported results.

The next slide shows how we are controlling our G&A. We are keeping strict control over our expenses and which show very low indicators in these type of expenses compared to our net revenues.

Next slide shows our working capital, again a substantial and constant increases since the first quarter last year that has to do with the prices of raw material, but also reflects a normalization at a new level of our inventories for semifinished product, processing product and finished product. So you can see the evolution of our Steel inventories. Remember that inside our Steel inventories, we have also the inventory of lead that are necessary for the roll -- hot and cold rolling of Cubatão. So I would say that this level that we have a bit more than 60 days that we had in the last 2 quarters will reflect more suitably the new normalized level of Steel inventory that we're going to have in the next quarters, especially because we have to have a higher inventory of flat for the rolling process in Cubatão.

On the next slide, we have our cash position and indebtedness. Again, with favorable evolution, our cash position increased from one quarter to the other. Our growth that went down basically because of digitalization of the Brazilian real, and therefore, our net debt decreased. We have a length of 51 months on average for our debt, both in reais and in dollars, and finally, the evolution of our CapEx quarter-on-quarter. And here, I would reinforce once again something that we have said in previous conferences. Our expected level of CapEx should be about BRL 300 million or a bit higher.

These were the comments I had to mention. And now, I'm going to open for your questions. We are here to answer them. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Felipe Hirai, Bank of America Merrill Lynch.

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Felipe Hirai, BofA Merrill Lynch, Research Division - MD and Latin America Equity Strategist [2]

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I have 2 questions. The first is with regard to prices. We saw that average prices in the first quarter compared to the fourth quarter grew by 9.5%. And I would like to know how much you would believe you are going to have up residual increases for the second quarter and any discounts that may being practiced in distribution? And for cost, I would like to understand the dynamic of the impact of the cost of the coal in the third quarter if you had any impact and if you're going to have some for the second quarter.

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Unidentified Company Representative, [3]

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As for prices, first, we'll still have an impact of price movements engaged in the first and second quarter. So in the second quarter, we are going to have an average price 3% to 5% above that of the first quarter. As for discount, right now, we have no discounts in place. Felipe, as far as costs, this basically with regard to the cost of higher coal prices, we did have an impact in the end of the first quarter. But because it was in the end, it didn't have much impact in this quarter as a whole. We are going to have a greater impact in the second quarter. And by the beginning of the third quarter, that is going to be a bit more normalized. But the impact for the second quarter is going to be 7% to 8%; and then in the third quarter, 2% to 3%. So altogether about 10%. That's not considering the increase of coal prices due to the cyclone in Australia, and that because we are trying to keep out of the impacts of that cyclone, moving some coal accounts from Australia to the United States and trying to cancel some shipments that were already scheduled from Australia. But so far, these are the impacts that we are going to have.

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Operator [4]

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Our next question comes from Thiago Lofiego from Bradesco BBI.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [5]

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First, I have 2 questions. First, I would like you to talk a bit more about the prices that you mentioned to Felipe. So you've said 3% to 5% in the second quarter compared to the first quarter. So you have a residual increase for the automotive industry, I suppose. But is your assumption of a flat price in distribution? And again, if we do the math with your premium, I could calculate about 25% of premium in the domestic market compared to the imports. Is that the idea to attract imports to the country? And my last question with regard to exports, what is normalized level of exports per quarter or per year that you consider from now on? And then thinking of your product, is this more galvanized and cold-roll products? Are you going to continue with this line of products?

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Unidentified Company Representative, [6]

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Well Thiago, first referring to the first point that you mentioned, prices, and as I mentioned, the impacts of one quarter to the others from 3% to 5%, the main factor here is the following. First of all, as we all know, the prices for the automotive industry regards yearly agreements. And for the Japanese carmakers, we have increases up to -- from April to March. And therefore, we have the new increases on the 1st of April. That's why the increase of 3% to 5%. You also talk about distribution and prices in distribution. With regard to distribution, prices in the domestic market follow the references of international market. And when we consider those reference prices of the international market, China has a very big impact as a reference for these prices. So the first point is what you mentioned with regard to price differentials that you call premium, and you mentioned premium of 25%. Depending on how you calculate that, exchange rate, price considered and et cetera, you're going to have a different premium. Of course, we also calculate premium. But I would say that this premium for the main product is between 20% to 30%, which is a high premium, I agree. We always say that with regards to the premium, the balance rate would be from 5% to 10%. When you start to have more than 20%, then you increase the risks of imports. Now this level is influenced by the exchange rate and by the international prices. The exchange rate will not change much as we believe in the coming weeks, but international prices are going down for you to have an idea of the prices in -- from BK in China. We have a significant job in recent weeks. It was $500 a ton, and now it is $435 a ton. So it was a quite significant variation in a short period of time. We are monitoring the variations of international prices. We believe that there is room for an increase in international prices. So right now, our position is the following. We are monitoring and analyzing prices in the international market, the impacts in Brazil, the premiums. As I mentioned, we haven't made any decision with regard to discount. So we are basically following what the market is going to do in the coming weeks. But of course, if it stays at 20%, 30%, this is not a level that is sustainable in the long term. You also asked about exports. You should have noticed, and we mentioned that last year, because of all the unintended process in the United States that hit hot-rolled, cold-roll and heavy plates market, what happened is that we made a movement towards Europe. Today, we are exporting to Europe more than 50% of our total exports. So Europe, the product that is being more competitive is cold-rolled product. And in HDG, we are present in the United States. We have the anti-dumping of HDG, but Brazil is not part of it. It's out of it. So for the U.S., it's basically HDG, but our market now is mostly Europe with cold-rolled products. As for export levels, we are going to be more or less at the same level that we are today, 30,000, 40,000, 50,000 tons. I hope, Thiago, I have answered all of your questions.

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Operator [7]

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Our next question is from Ivan Westin from Crédit Suisse.

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Ivano Westin, Crédit Suisse AG, Research Division - Director of Latin American Metals and Mining Research [8]

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First, I would like to talk about sales volumes in the domestic market. I would like you to break down per product. If you think of heavy plates, you had a substantial decrease quarter-on-quarter and year-on-year. We have a new player in the market, and the demand perhaps will not grow as much to offset the volumes of the competitor. So I would like to know what you expect for heavy plates, if the drop that you had in the quarter is going to show in the remainder of the year? And for the other products, hot-rolled, cold-rolled and galvanized, you had a substantial increase in the domestic market year-on-year. And Sergio, in the beginning, you talked about an ascending curve of our economy at a slow pace, but positive. The volume that you have in the first quarter was even better than we expected. So the delta of volume, is it market share that you're taking from competitors in hot-rolled, cold-rolled and galvanized, or is it due to a recovery of demand? As for volume also, if you allow me, with regard to cash flow, if you have the line of payable, do you have the positive impact of BRL 150 million? I would like to know what your strategy was for the first quarter and what we should expect from now on.

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO, Director Vice-President of Technology & Quality, VP Director of Commercial and Member of Executive Board [9]

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With regard to the domestic market, you first mentioned about heavy plates. Well, in heavy plates, we were the only player in the domestic market -- a domestic maker, of course, there were imports. As we had the second layer last year, of course, this is going to have a position in the market. So the drop that we have compared to the fourth quarter was basically the same drop that we saw when we compare to the first quarter '16. And the trend is to keep up this level. We do not see a reaction in the consumption of heavy plates. And because we have a new player now, we are going to position in the coming months as more or less the same level that we saw in the first quarter. As for sales overall, if you compare the first quarter to the fourth quarter, we increased hot-rolled, we decreased cold-rolled and increased galvanized. What we see in the Brazilian economy is what we have mentioned before. We hit the bottom and we are starting an ascending curve. But this recovery is going to be small. And we believe that in 2018, we are going to have a larger recovery. But in terms of volumes for the domestic market, this is the level we are working with, with slight growth. You've also talked about market share. Today, we do not have market share available to the whole of the market. What we see is that it is basically stable. We are not increasing or decreasing market share. It is stable. What is affecting the market share of the volume as a whole is the volume of imports. If you compare imports with the previous quarter, there was an increase of about 10%. But if you compare to the first quarter of last year, you have an increase of 160%. So the penetration of imports have an impact to all players. It impacts us and other payers in the market. You've also asked about the impact of our cash flow in the increase of short feed operation. Well, the level that we have in the end of the quarter is a bit more normalized. When you compare to the level of last year, we have the same seasonal effect that we had in other lines, including sales. Remember that last year did not close on the 31st of December, it closed on 18, 19 of December. So we had some seasonal characteristics of the month of December that reduced the balance of our operations in the end of the year. And now they're going back to the normal in this quarter, and they should be kept at this level.

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Operator [10]

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Our next question comes from Marcos Assumpção from Itaú BBA.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [11]

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I have a question about your internal goals. Now that you've reached the goal of BRL 100 million of EBITDA a month, what would be your new target from now on? And my second question is with regards to the sales of energy. With the recovery of stock prices, what do you think this line is going to behave like from now on? And finally, if you allow me, your CapEx for the first quarter was quite low compared to any other periods. What do you think this number is going to be like in 2017? Are you going to keep a level that is even below that of 2016?

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Unidentified Company Representative, [12]

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With regard to internal goals, management goals to mobilize our Usiminas team, in the Group of 10, we are now discussing what our main internal targets are going to be like to really work with the whole of Usiminas team. Last year, as you know, we had the target of the BRL 100 million of EBITDA as our monthly average. When we determined the target, people thought that was crazy. But the Usiminas team responded quite effectively. We established the goal on the 30th of May, and the next quarter, we already reached BRL 308 million of EBITDA. For this year, well, of course, the pursuits of better EBITDA continues. But we are discussing what our internal management targets are going to be. And we are expanding this range of goals, because today, we are at a better level than we were last year. Last year, we had a negative EBITDA, and to recover the company, we had to generate results. What recovered the company is the generation of results. Now we are at a different position. With the results that you saw in the first quarter and even in the last 12 months, we are at a level in which we can expand as a company, and we can extend the work of the Group of 10. We want to have 5 targets, one for safety, one for EBITDA that remains also one for cost, revenues and customer focus. So this is basically what we are focusing on. But we're still discussing our new goals for the Group of 10, and I'm waiting for their feedback to move on. I'm sure that later on we're going to be able to comment on the management goals that really represents all the efforts of the Usiminas team.

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Tulio Chipoletti, Usinas Siderúrgicas de Minas Gerais S.A. - VP Officer of Industrial and Member of Executive Board [13]

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Marcos, this is Tulio from industrial area. And to answer your question about energy, as you know, the price of energy in the spot market went up slightly because of the rain period, which was not as wet as expected, especially those rains that are associated to generation of energy. So despite that, we see in the spot market is upward. So possibly, we are going to have results that are no longer negative for the coming quarters because of this offset that we can sell. We can sell the leftovers of our energy in a market that has an upwards trend. This is what we see in the short term. So today, I would say that we are not going to have losses there.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [14]

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And Tulio, does it make sense if we think of a breakeven price for energy at BRL 180 per megawatt-hour?

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Tulio Chipoletti, Usinas Siderúrgicas de Minas Gerais S.A. - VP Officer of Industrial and Member of Executive Board [15]

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Well, Marcos, our cost of breakeven is a bit higher than what you mentioned. I would say that our average would be closer to BRL 200 million than to the number you mentioned. We have 2 different contracts. So you have to consider the average. And also, we are consuming a bit more energy. So we have consumption of energy that leads to a lower leftover. And therefore, we have lower sales when we were able to sell energy. Okay. And you talk about CapEx. Well, the CapEx of the first quarter is low. It's going to increase in the coming quarters. And we probably are going to reach in the year BRL 300 million, which is a bit higher than last year.

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Operator [16]

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Our next question is from Leonardo Correa from BTG Pactual.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [17]

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I think you covered the main points. But I would like just to go back to a few points. So distribution, we saw the numbers of your solutions. They were strong numbers, as they can look at in the bank. We see a weaker level with inventories still high, absolute numbers going up and then with a scenario of a very high premium and some discounts for the future. We might see a reduction of pace of purchase. So first talking about distributors, I would like you to comment on that. And also imported product, in some previous calls, you were not so much concerned with import levels because of a series of factors, including credit and the financial standing of several distributors. What is going on in this aspect and what is your expectation in terms of levels of import at this new levels of premiums? Are we going to continue seeing levels above 100, 150 tons a month? And also, I would like you to comment about the sustainability of your results. I think this is the main topic today. The first quarter was strong. There was a certain mismatch of price and cost. You clearly mentioned that the costs are going to increase in the second quarter. There is going to be an increase of price. So I'd like you to help me with this math of sustainability. You have your EBITDA margin. You're still up 21%. My question is how sustainable is that because of the correction of prices of an up of 15% in China?

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Unidentified Company Representative, [18]

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Well, the business dynamic is quite impressive. And you deal with variables that are more or less volatile all the time. The first point that you mentioned is distribution. Well today, we have data reported from industry that shows so high inventory level, 3.4, 3.5. Our inventory in sales solutions is balanced, about 2 to 2.5. As for premiums, we already approached the issue. We are basically following how international prices are going to evolve, because I do not have a question about the exchange rate. But the international prices, we still don't know. And as I mentioned in this call, when you have premiums of 20% to 30%, well, they are not sustainable in the long term. As for imported products, I'm going to get just the first quarter of '16 and the first quarter of '17. In the first quarter '16, we had import volume of 118,000 tons with a penetration rate of 5.5%. Now in the first quarter of '17, this volume is past 300,000 tons, about 311,000 tons, with an average of 100,000 a month and a penetration rate of 12%, almost 13% as we see it. We consider the penetration of imports very high. Our target is to work with a penetration rate of 5% to 10%. And last year in the first quarter, we have a very positive rate of 5.5%. And the level that we see right now, I have to admit, is high. If the present conditions are maintained, imports are going to continue at 100,000 tons a month keeping the market conditions today. The positive thing that we have is an ongoing process with the federal government and the Ministry of Industry, Foreign Trade and Services, which is the antidumping, including hot-rolled products from China and Russia. We're going to have a final definition of this process in the beginning of the second half of '17, and that would certainly be an inhibiting factor for imports. So what we have to do is what we always do, which is to monitor the different variables inside the business dynamics and work to neutralize those that prove to deteriorate our results. And for sustainability of results, what I can tell you is the following. Usiminas team is going to work very hard to keep positive and robust results for the company. And obviously, we'll have to face difficult challenges. I just mentioned import premiums, but we are really willing to work and to ensure the company's sustainability.

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Operator [19]

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Our next question comes from Thiago Ojea from Citibank.

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Thiago Ojea, Citigroup Inc, Research Division - Analyst [20]

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My first question is with respect to cost. You had mentioned about the impact in the next quarter of 7% to 8% because of coal. Do you see any gains of cost with any other measures that you're taking? What is the situation in Cubatão like? Do you have a run rate that is ideal? Do you have a capitalized cost that you could talk a bit about that and if you have any measure in progress in Ipatinga?

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Tulio Chipoletti, Usinas Siderúrgicas de Minas Gerais S.A. - VP Officer of Industrial and Member of Executive Board [21]

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Thiago, this is Tulio. Well, obviously, Usiminas has a competitiveness plan for both plants to improve its efficiency and reduce costs. It is important to understand when we talk about reducing costs that we work on different variables, KPIs of efficiency, talking about losses in consumption, improvement of productivity in our line, ton per hours. So (inaudible) variables that you can work with, and little-by-little, you improve our results. It is important to understand that we have this plan in place. It is implemented both in Cubatão and Ipatinga. We have very clear targets to have transformation cost dollar per ton in each product, in each rolling line and also with our labs. But quite often, these variables cannot offset an increase in coal at the level that we had. It's important to understand that we are working at a level of detail, but you cannot overcome or offset a brutal increase as we have in coal this time. So we do have plans in place. They are working for both plants in Cubatão, in Ipatinga to improve our KPI. This is pursued daily, weekly, monthly. We have teams to monitor them. But sometimes, the magnitude of the increase really is something that we can also offset with our initiatives. And that's basically it.

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Thiago Ojea, Citigroup Inc, Research Division - Analyst [22]

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Tulio, if you allow me, can you estimate what is the gain of decrease of fixed costs with an increasing volume. As I know, every 5%, how much you can dilute in your cost per ton?

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Tulio Chipoletti, Usinas Siderúrgicas de Minas Gerais S.A. - VP Officer of Industrial and Member of Executive Board [23]

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I don't have this number, Thiago, I'm sorry, to share with you. It's very hard to say that, because today, the production reality of Usiminas, you have to understand, we have one plant producing steel and rolling products and the other plant buying in flat and rolling. So if you think of percentages in such difficult and different processes, it's too complicated. So I really cannot provide this information to you.

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Operator [24]

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Our next question comes from Bruno Giardino from Santander.

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Bruno Giardino Roschel de Araujo, Santander, Equity Research - Head of Education and Healthcare [25]

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I would just like to understand the increase that you had in court deposits, if you could talk about that. And second, the potential sale of assets, if you see it as a possibility. And if the stick up of our economy that you see, although gradual, is a motivation for you to have a greater asset in -- greater value in assets that Usiminas wants to sell?

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Ronald Seckelmann, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP Officer of Finance & IR, IR Officer and Member of Executive Board [26]

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I'm not going to be able to answer the court deposits question, because I do not have this information right now. It went down from 50 to 14, -- no it went up. I do not have those numbers. I'm taking a look at our balance sheet, but I cannot explain what this is. So if you contact our IR team, they're going to give you more color on these lines. As for the sale of assets, as you mentioned, there is an expectation that things are going to get better in the business environment. But this is so not concrete, it's not fully materialized. So we haven't seen any signs that would tell us that we're going to be successful in the sale of nonstrategic assets for the next quarter.

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Operator [27]

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Our next question is in English by Jon Brandt, HSBC.

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [28]

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EBITDA generation was very strong. Margins were very high to the extent. And I think there was some discussion about you potentially increasing iron ore production going forward. I'm wondering if you could comment a little bit about the strategy if that's no longer the case, given the iron ore prices have come down over the past few weeks? And secondly, I just wanted to ask about the media articles from earlier this week. It implied that March was loss making. I know you have this target of BRL 100 million in EBITDA per month. I'm wondering if you can give us a little bit of clarity as to how the EBITDA generation worked out on a monthly basis. And then sort of related to that, if you could provide a little bit clarity on exactly why the media articles appeared if this was done on purpose or if this were results that were leaked to the press and if you expect any ramifications from CBM?

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Unidentified Company Representative, [29]

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Mr. Brandt, could you please repeat the beginning of your question.

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [30]

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Yes, so the first question was related to the mining and iron ore production. I think there was some discussions that you might want to increase iron ore production. I'm wondering what the strategy is on the mining side and if that increasing production is no longer the case, given that iron ore prices have come down over the past few weeks?

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Ronald Seckelmann, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP Officer of Finance & IR, IR Officer and Member of Executive Board [31]

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This is (inaudible) speaking. With regard to your question about prices and increase of production in (inaudible), today, at the current prices that we have at BRL [ 315 ] and sea freights at BRL 14, BRL 15 per ton, exports are still competitive. So we are thinking of a reconnection of plants that today is not operating. It has a good product and it has good acceptance in the market. So we have a plan and people in place that maybe would lead us to resume production in 3 to 5 months. Of course, that depends on market variables, and we are paying attention to all the variables that are taking place. But the idea is to resume production. As for your second question thinking of monthly evolution of results, first, I would like to say that we had a terrible event where there was a leakage of information regarding the second quarter of this year. This leakage was referred to precise information of January, February and then the whole of the quarter. As Sergio mentioned, this leakage is being investigated deeply by the company. So we are not going to make comment as we never made about the monthly results. We always discuss quarterly results. So all the information that we talk about with regard to evolution of prices, demand and costs refer to quarterly periods of the company. And we do not make EBITDA projections either or projections of volume. They only future guidance that we give is for our CapEx.

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Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction and Real Estate Equity Research Team and Senior Analyst, LatAm Metals and Mining, Pulp and Paper [32]

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Okay. And just I had a follow-up on that. I mean, do you expect any penalties or anything from CBM regarding the leakage?

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Unidentified Company Representative, [33]

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No, I cannot say that for sure with regard to any penalty from CBM regarding the leakage of information. Of course, CBM has contacted us. We are providing all the information and clarification that we could, but it's still too early to comment on any penalties to be imposed to the company.

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Operator [34]

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Another question in English from Carlos De Alba from Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [35]

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My question has to do with cost. And we could see that the cash cost per ton of roll products increased 14% quarter-on-quarter; however, cost per ton remained stable. So do you expect to see an increase in cost per ton of around 14% in the second quarter, given the inventory movement and the delay in perhaps higher cost moving from inventories to the P&L? And this 14%, 15% is a good reference? And second, could you please remind us how much of your coal is purchased on the spot and how much is purchased under contract? And more or less, how many months of coal inventories do you keep?

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Unidentified Company Representative, [36]

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Carlos. You asked first, the question about cost. And you were comparing the cost of production in the first quarter that has an increase of 15% compared to the previous quarter and the COGS, cost of goods sold, that was basically stable compared to the previous quarter. You were talking about 2 very important indicators, but that should not be compared directly. Of course, you have a time difference between the COGS that relates more to stocks, to inventory and the cost of production. The cost of production basically indicates a trend for the COGS, but it is not a direct relation. And also, there is a difference in the mix of products in a given quarter. You produce a product mix that is different from what you're selling in that same quarter or in the following quarter. So an increase in the cost of production is in line with what I mentioned with the increase of the cost of products sold in the coming quarters, but not at the same levels. I mentioned 7% to 8% in the second quarter, and then a remainder increase, 2% to 3%, in the third quarter. With the prices of coal that we know today, except for that increase of prices that we had with the cyclone in Australia, so I mentioned that before. And you also asked about the proportion of the buying of the coal in contracts and the spot market. I would say the ratio is 70% to 30%.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [37]

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And just to clarify then, the 7% production increase in the second quarter and 3% in the third quarter is on COGS per ton then?

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Ronald Seckelmann, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP Officer of Finance & IR, IR Officer and Member of Executive Board [38]

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Yes, that's exactly what it is. COGS, cost of goods sold, yes, you're correct.

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Operator [39]

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Our next question comes from Gabriela Cortez from Banco do Brasil.

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Gabriela Cortez, [40]

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I would like to ask you about reconnecting remaining plant. Today, you have an annual capacity of 12 million tons. If you restart this plant, what capacity are you talking about? And would you have enough CapEx for that?

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Unidentified Company Representative, [41]

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This plant has a capacity of 4 million tons a year. If we were to restart, we would be generating 80,000 tons. As for CapEx for us to conduct all activities, we don't need much CapEx in this plant basically with the labor and hiring employees.

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Operator [42]

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Our next question comes from Milton Sullyvan from XP Management Gestao.

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Milton Sullyvan, [43]

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My first question is the slab market. What do you see in this domestic and international market due to the changes that we're seeing in the market and premium levels and also working capitals. In addition, the line of suppliers is coming -- is going down? And I would like to know what kind of models we should use from now on? And finally, I would like to know for mining, if you could give us a more color to restarting the mining plant, because you said, if you make the decision today, the plant would start production in 3 to 5 months. What is the period of ramp-up? And also, you said at prices you have today, you would still be operating at a profit. So I would like to know what your breakeven would be?

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Unidentified Company Representative, [44]

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First with regards to the world market of slabs, we are monitoring the market, because today, the flat is essential for our operations in Cubatão. What we see is that there is a firm demand in the international market, which has been affecting prices. So we have significant drop in the price of (inaudible). And I talked about China. It went from 500 to 435. But the price of the slab in the international market did not follow the reference that we had with prices in Beijing. And our view is what we believe that we're going to have a recovery in Chinese prices. And then we have to see what the slab prices are going to be like. But this is a point that is requiring our attention. As for suppliers, the line of suppliers has to be seen together with proceed levels. When we include the accounts of some suppliers in our short feed operations, you decrease the balance of suppliers and increase short feeds or vice versa. You have to see the 2 lines altogether, because short feed operations basically are used for suppliers of raw materials and slabs. And as for Mining, if we decide to restart the plant, we would have from 4 to 5 months of work to restart production. This production would have a ramp-up close to 3 months. In the fourth month, we would reach of our capacity. And then you asked about breakeven. In the current situations in the market, we would have up breakeven between $55 to $60 per ton.

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Operator [45]

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Our next question comes from Humberto Meireles from Goldman Sachs.

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Humberto Meireles, Goldman Sachs Group Inc., Research Division - Equity Analyst [46]

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My question is with regards to the conciliation of operating cash and EBITDA. In the first quarter '17, we had a generation of operational cash of about BRL 180 million versus EBITDA of BRL 530 million, that without considering the CapEx that you would mention BRL 100 million a year. So even with the EBITA the investment of BRL 500 million, the generation of cash would be close to 0 if you have BRL 100 million of CapEx. Would you help us conciliate these numbers of operating cash and EBITDA?

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Unidentified Company Representative, [47]

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I'm not going to be able to do it now in this conference call. I'm sure that you can have this information with our IR team. But remember that we have a very heavy interest account. We have approximately BRL 230 million for the payment of interest. In the consolidated numbers, you have a not so relevant, but not that irrelevant line of the payment of taxes. And so I think that the IR team is going to be more fit to provide this information to you later on.

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Humberto Meireles, Goldman Sachs Group Inc., Research Division - Equity Analyst [48]

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Okay. And just to be clear as for your CapEx slide, could you reiterate your CapEx guidance for this year, and how much we should work with third quarter from now on?

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Unidentified Company Representative, [49]

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I already mentioned that the guidance for this year is approximately BRL 300 million. That means that the CapEx for the coming quarters is going to be above that we recorded this quarter.

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Operator [50]

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Our next question comes from Thiago Lofiego from Bradesco BBI.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [51]

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I have 2 very quick follow-ups. First, did you mention a number for the expectation of increase of demand in steel. I do not recall if you did. And second, is the cost of goods sold that you mentioned, could you say that again? You said that the cost of goods sold should increase by 7% to 8%, is that right?

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Unidentified Company Representative, [52]

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Thiago, I didn't mention about our expectation of the growth of demand in flat plane for 2017. But the number today that we know is 3% to 5% of growth for Brazil.

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Thiago K. Lofiego, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [53]

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And based on what you see in the market is what you are expecting?

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Unidentified Company Representative, [54]

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Yes, we're expecting that. As for cost, what I said is that we are going to have growth quarter-on-quarter of 7% in the second quarter and 2% to 3% in the third quarter. This is cost of production, yes, cost of production of steel.

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Operator [55]

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Our next question comes from Marcos Assumpção from Itaú BBA.

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Marcos Assumpção, Itaú Corretora de Valores S.A., Research Division - Sector Head [56]

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I have a question about your liability management. With this improvement in reserve expectation of cash reservation from now on, do you see there is room for decreasing your debt? Are there any restrictions that are imposed to you today for the issuance of new debt because of your debt renegotiation agreement. How can then we see Usiminas benefiting from a scenario of better cash generation and reduction of net financial expenses?

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Unidentified Company Representative, [57]

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Well, with regards to our debt renegotiation agreement, it hasn't turned 1 year yet. And it still has some stages to be completed before it is considered -- concluded. And there are several restrictions to new in that business. So it is very early for us to talk about liability management in Usiminas. Now one thing is undeniable, the top of Brazilian basic interest rate has direct effect on the cost of our debt regardless of any liability management. This will reduce in the coming quarters. If the trends for the decrease of interest rates is confirmed, and also better cash generation gives us a bit more financial reserves. So we probably are going to have an improvement in our net expenses with interest. As for liability management, I believe that this is going to be clear as -- the next year. Then we're going to know what conditions we'll have to improve our indebtedness profile basically with regard to cost, because in terms of times, we are okay now.

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Operator [58]

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As there are no further questions, we are now closing this conference call. If you have any questions, please contact our IR team. We thank you very much for joining us, and wish you a very happy holiday.