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Edited Transcript of USIM5.SA earnings conference call or presentation 14-Feb-20 2:00pm GMT

Q4 2019 Usinas Siderurgicas de Minas Gerais SA Usiminas Earnings Call

Belo Horizonte, MG Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Usinas Siderurgicas de Minas Gerais SA earnings conference call or presentation Friday, February 14, 2020 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

* Julio Mendez Arroyo

Usinas Siderúrgicas de Minas Gerais S.A. - Controller

* 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

* Marcio Farid Filho

JP Morgan Chase & Co, Research Division - Research Analyst

* Thiago Augusto Ojea

Goldman Sachs Group Inc., Research Division - Equity 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 standing by. Welcome to the Usiminas conference call to discuss the full year and the fourth quarter of 2019. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to mention that this conference call is being broadcast live on the company's Investor Relations website at www.usiminas.com/ri. The earnings release and a slide presentation are also available on that site for download. 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 made during the safe harbor of the Securities Litigation Reform Act of 1996 (sic) [Private Securities Litigation Reform Act of 1996.] Actual performance could differ materially from that anticipated in any forward-looking statement as a result of macroeconomic conditions, market risks and other factors.

With us today are Usiminas' Executive Board, Mr. Sergio Leite, CEO; Mr. Alberto Ono, Finance and Investor Relations Vice President Officer; Mr. Túlio Chipoletti, Industrial Vice President Officer; Mr. Takahiro Mori, Corporate Planning Vice President; Mr. Kohei Kimura, Technology and Quality Vice President Officer; Mr. Miguel Homes, Commercial and Vice President Officer; Mr. Carlos Rezzonico Managing Director of Mineração Usiminas; Mr. Ascânio Merrighi, Managing Director of Soluções Usiminas; Mr. Heitor Takaki, Managing Director of Usiminas Mecânica; Bruno Paulino, Head of Legal Department; Mr. Julio Arroyo, Controller; and Mr. Leonard Karam, Head of IR.

First of all, Mr. Sergio Leite will make some initial comments, followed by Mr. Alberto Ono, who will comment on the full year and the fourth quarter of 2019 results. After, the entire management will be available for questions and answers.

Mr. Sergio, you have the floor, sir.

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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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Good morning to all of you. Thank you for attending this results conference call for our fourth quarter of '19 at Usiminas. It is a pleasure to have you all here. We are beginning the year 2020 when we are receiving signals from the market which are positive in terms of the GDP, of civil construction, of employment rates. We are beginning the year in which a scenario that was signaled to the market is positive.

In 2019, the steel industry experienced an international scenario that was marked by a lot of protective measure in commercial relations and trade relations, an increase in -- or a decrease in steel where we had a compression of the margins at the international level last year. In Brazil, we experienced a growth scenario of the GDP, with a projection that was inferior to then -- that was projected in the beginning of last year and much lower than 2017 and 2018 according to what was announced by the Instituto Aço Brasil. There was a drop in the steel consumption in -- by 3.7% in 2019. And the international factors, obviously, impact the steel business in -- across the world.

We, at Usiminas, have been working very hard, and we obtained Mineração Usiminas results which was very positive for 2019. We had at Soluções Usiminas, Usiminas Solutions, very -- record EBITDA for the year ever since we created the company. At Usiminas Mecânica, we had a difficult scenario, and we were impacted by this international scenario which compressed many -- much of our margins.

There was an action that we carried out in debt management. We managed to renegotiate and roll the debt for a month. We were able to pay up every debt negotiated in 2016, in September, and to reposition ourselves in the market by launching bonds in July and debentures of BRL 2 billion in October. With this, at the end, we had a total gross debt of BRL 5.6 billion, a debt which, 6 years ago, was BRL 6.9 billion. Our condition today is much more comfortable not only in terms of value, but the cost of the debt as well. In terms of the deadline or the payment terms, we have 4 years to pay up, and we will pay debentures after October. So we have more or less 4 years, with no commitment of debt payment, which was a reduced scenario and very much improved.

And today, we published a material fact that our net revenue -- the expenses of BRL 271 million was published. So that was very important for us to carry out our activities with much more focus on the generation of results.

Also, in our material fact day, we disclosed our investments guidance for 2020. And it's worth noting that in the very challenging years where we were recovering the company, we had a level of BRL 220 million per year for investments, so '16 and '17. And in 2018, we increased investments twofold. We went to BRL 460 million. Last year, 2019, we grew by 50% in terms of our investment levels, totaling BRL 690 million. And now we are communicating -- we have communicated to the market our guidance of BRL 1 billion.

And now going into 2020 with a more positive outlook, our commitment to the market with investors is to work very hard, the entire Usiminas team, in order to achieve results and, of course, face all the challenges that 2020 will also bring.

I thank you all for being here. I will now give the word to Alberto Ono so he can present the results for 2019. Thank you.

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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, everyone. I'm going to Slide 2. This is the steel sales in 2019. Our level was very stable compared to 2018, 4,000 -- 4.004 million tons. Domestic market, there was a slight increase, 1%, more or less. And just as Sergio has said that Brazil faced a challenging scenario last year, the -- our domestic market shrunk. So I think it's very good result.

Concerning iron ore sales, to your top right, we have a record volume per thousand tons, over 8.616 million, and also record rates, over 4.631 million in exports, which is also a record. And later on, I'll break this down for you.

Concerning EBITDA, adjusted EBITDA, we are slightly below BRL 2 million for the year, a 13% margin, and net profit, BRL 377 million.

Going on to the next slide, you can see the evolution of the adjusted EBITDA margin since 2015, almost BRL 200 million. Today, this year, actually, in 2019, we had a recurrence in the maths. Adding up the positives and the negative factors here in 2017, we had BRL 115 million. This is a breakdown. The main nonrecurring events are listed here on the slide. And in 2019, especially because of the fourth quarter, there was an acknowledgment of credits from Eletrobras, the BRL 117 million. And the financial potential is BRL 306 million according to what was shown in -- what are stated in the financial statements.

Concerning Steel Unit on Slide 4, as Sergio also has said, we had a year that the margins shrunk across the steel industry. We closed the year with a margin 10% lower than the previous year, with an EBITDA rate that was lower as well. And then the main nonrecurring effects are broken down to your right. We had some nonrecurring in mining as well, which is what you can -- be seen in the next slide on Slide 5.

In the Mining Unit, Mineração Usiminas, the record volume for sales in the year in which prices -- international prices of iron ore were favored due to events we already know of. This made us attain an EBITDA of BRL 680 million, a better result, the best one in -- of this unit since the unit was created.

Going on to steel transformation, Soluções Usiminas, BRL 120 million in EBITDA. It's also the best historical result since the company began operating.

Going on to our Capital Goods Unit, which is Usiminas Mecânica, we are still suffering because of the lack of a return on investment, especially in terms of infrastructure in Brazil. This is the third year in a row in which we have a negative EBITDA. We were able to diminish the losses, but we are still suffering with -- due to the lack of investments.

Now we have the results for the fourth quarter of '19. In terms of Steel Unit sales, in thousand tons, we are above 1 million tons. And here, with the reduction in the domestic market, which is natural for -- in terms of seasonality. 2019 was a year in which there was a more typical behavior of seasonality factor. It was a fourth quarter, which was lower in figures in -- compared to the previous quarter.

As we see iron ore to your top right, this is also a record. And also, a new record in terms of export volume, more than 1.707 million tons here. In terms of the adjusted EBITDA, BRL 468 million, a margin of 12%, and we are very close to what we had in the third quarter. Concerning net profit, there was a different scenario from the loss to a positive result of BRL 268 million.

Going on to the next slide. The opening of the extraordinary events that happened, they are nonrecurring events in the fourth quarter -- are broken down to Eletrobras credits as we have already mentioned. And in terms of the mining, we also -- the main point was renegotiating our lease agreement with a positive impact.

Going on to the next slide. The Steel Unit, again, you can see the main point here in the -- an EBITDA of the quarter of BRL 184 million. As we can notice, we are still suffering -- we have been suffering during the year because of this margin compression Sergio talked about and the acknowledgment of the Eletrobras credits also with the nonrecurring events.

In the Mining Unit, for results, Mineração Usiminas, an EBITDA first of BRL 209 million, a margin of 36%, which was favored by the record volume we have attained.

In terms of Soluções Usiminas, the steel transformation unit, it's the third quarter in a row in which we had a result above BRL 37 million -- BRL 30 million, and there was an expressive improvement compared to the previous quarter.

And now the Capital Goods Unit, Usiminas Mecânica, as you can see, this area has offered because of the lack of investments in infrastructure.

Going on to other financial indicators. Concerning working capital, we had a drop by 12%. And the main factor in the third quarter were that we had credits for Eletrobras that were launched as revenue at the end, and we received it in the fourth quarter. This influenced our working capital. And now in the fourth quarter of '19, also, these credits, BRL 306 million of them, were accounted for as receivables in working capital. So taking that out, our working capital was stable in that period, around BRL 4.2 billion.

In terms of the Steel inventories, there was a drop in terms of volume and working capital. As you can see, our inventories are controlled. And now our cash position and indebtedness levels. Our cash is close to BRL 2 billion, and our net debt, as Sergio has already mentioned, BRL 3.2 billion in net debt. And during the fourth quarter, as we have paid off the remaining debt that was to be renegotiated in 2016 with the resources received from the Eletrobras credits, our gross debt level is just BRL 5.1 billion. And this means that even if we have a fourth quarter compared with the previous year, year-on-year, with a lower EBITDA, our leverage rate is stable.

Lastly, the evolution of CapEx. We had a pickup in the fourth quarter as you have -- already know. In the fourth quarter, we obtained BRL 356 million. Totaling for the year, as you can see, BRL 690 million. This is slightly lower than what we had expected in our forecast. Some points, we still have to consider that our motives -- we have late [misses], delays, we had licensing problems, and they affected the development of our investment, especially in mining, and other more connected to delays in projects. But nothing too exceptional if you look at the entire normal operations for regular course of business.

This is the end of the PowerPoint. And now we have a question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Ojea from Goldman Sachs.

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Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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My first question in terms of Eletrobras, which you acknowledge BRL 800 million. And now you have a decision which allows you to receive BRL 300 million. When do you expect this cash to come in? And how about the difference of credits? And is there any other amount that you are expecting besides Eletrobras?

And in terms of the steel industry, we know that it had a more difficult quarter. How do you see this first quarter of 2020 in terms of demand? The recent price increase that you have announced, do you think this will be implemented and you'll be successful? Could you comment especially for the car industry, the automakers?

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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, this is Alberto. Concerning Eletrobras credits, what we have acknowledged, both in 2018 and 2019, was the unquestionable part where we had a court decision which orders Eletrobas to pay us. In 2018, it was a part considering -- concerning the [Ipatinga] plant; in 2019, the Cubatão plant. In both cases, we only had the unquestionable part that was paid that the court ordered Eletrobras to pay us.

We also have ongoing lawsuits in which Usiminas believes that the amounts that they own is higher, both Ipatinga and Cubatão. Indeed, we inform in our [DS], but they are not acknowledged in the final statement. The precise amounts, you can look at our statements and our Investor Relations, is one that is still being discussed. And in terms of this, we believe it's BRL 1.1 billion. That is our interpretation. We are arguing for this, and this is not in the statement. In the statement today, we only have BRL 306 million, which is in the short-term working capital, and we expect this to be received during the course of this year.

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [4]

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This is Miguel. Concerning what Sergio said, the positive expectations for the Brazilian economy, in addition to other indicators such -- lower employment rates, lower interest rates and improvement in investments, lead us to believe everything in terms of demand. The growth for the steel in Brazil should be around 1.5% plus positive. In Usiminas, the goal is to carry on and to continue this -- to be able to meet this growth in demand. The increases that you have mentioned, the ones that were informed last year, they were implemented in the distribution sector.

From now on, we have to monitor constantly the international indicators. When you look at the international indicators, both here in (inaudible) other products, you can see a positive trend for 2, 3 months. Obviously, with all the coronavirus situation, this is a little bit different. But it's a little -- it's at another level -- at a higher level than the international level.

Another thing is that the exchange rates has moved, fluctuated in the last 2 months. We have an exchange rate which is 10% undervalued, and various factors will impact in our pricing.

And concerning your last question with the agreements with automakers, we signed contracts with American and European automakers, and they were closed with a higher price -- with a price increase.

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Thiago Augusto Ojea, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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Miguel, could you tell us what was this price hike in this sector? And Miguel, according to your legal department, do you know when these lawsuits will be concluded?

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [6]

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Well, the pricing -- the agreement, because they are a year every -- they are yearly -- they reflect what happened in the last 12 years and the future expectations. With these variables on the table, we try to keep the level according to competitive prices obviously. But if we look at an exact price increase level -- our compliance norms in Usiminas were reviewed, and I cannot tell you how much exactly we increased.

Concerning the lawsuits in dispute, it's very difficult to say. It should take a couple of years for us to have a conclusion. And it's very difficult to forecast, but it's what I can tell you. The undisputable amounts that are owed to Usiminas, we can see, is what happened in 2019. We acknowledged them in 2018. And in 2019, we received the amount -- the payments. So we believe this will happen in the same period of time for the part of -- amounts that are also in dispute.

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Operator [7]

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We now have a question from Daniel Sasson from Itau BBA.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [8]

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My first question is for Miguel, concerning pricing. Miguel, could you help us to understand what happened in this drop by 5% in price for the domestic market and in the automaker industry, the pricing decrease in general for distributions? How could this -- help us understand how much we should be thinking of sequential increases in the first quarter compared to the fourth quarter, especially [considering] an improvement in the overall mix. Could you explain us the mix and pricing components?

My second question is about mining, about the renegotiation of leasing agreements and third-party areas. Could you explain and shed more light what is recurring? Can we think that your cost will be falling BRL 5 per ton, for example, in the future? Or BRL 20 per ton in the semester, but you acknowledge this impact for the entire year? Is it reasonable to think of a fall -- of drop of BRL 5 per ton in 2020? Or this will not be recurring?

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [9]

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I think your question is very important because should have information to be able to try to analyze what future pricing will be. Of course, the mix impacted the average price. For you to have an idea, a novel product may be 20% to 50% in terms of variation. And this pricing level in a novel product and a more commercial goods will impact the average price. So we observed the larger impact of the average price or the fall and the drop of those average pricing, explained by the mix of goods.

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Unidentified Company Representative, [10]

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As you said, in the last quarter, we had an impact on -- because of the renegotiations of the leasing agreement, in which we had a cost reversion for the entire year 2019. For the future, what we can expect is we have to follow the historic cost because we do not have a strategic long-term definition. As our material has shown, it will depend on the use that we may have for the [court tax] agreements that we are paying.

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Daniel Sasson, Itaú Corretora de Valores S.A., Research Division - Research Analyst [11]

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Just one follow-up. Miguel, 100% of the price drop has been priced by the mix. You did not have a drop in pricing in distribution. Is that it? I just want to try to understand it better.

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [12]

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Just to clarify, around 90% can be explained by a worse condition of the mix, yes.

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Operator [13]

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Our next question comes from Mr. Leonardo Correa from BTG Pactual.

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Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [14]

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My first point, for Eletrobras. Just to see if I understood this, what is -- what remains that will be may -- come a BRL 300 million. That is the undisputed amount, right? You don't have a period for this, but you'll be receiving this in 2020. The BRL 1.1 billion which is disputed in court can take a few years. Is that it? Because I believe this was not 100% clear so I just want to make sure I understood -- I understand.

And my next question is if I look for the next quarter, and I'm focusing on the first when I say this, in the past, you helped us to understand the evolution of the quarter, talking about an expectation of price increase and an expectation of cost decrease. Could you help us understand this now? How can -- how much can the price or cost change per quarter?

And my last question is according to the lines, focusing onto -- on galvanized and in the fixed rate, I think -- I know there are very different products, but what are -- is the idleness, what is the idleness rate in electroplating or galvanized steel? I would like to confirm these figures with you.

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Unidentified Company Representative, [15]

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Leonardo, concerning Eletrobras, your understanding is correct. So the undisputable rate -- amount to BRL 300 million, and it will be received during this year. The disputed amounts are still submitted to the court and depend on the justice system. The last information we had is that it's going to take a couple of years.

In terms of cost expectations for the first quarter, the expectation is that we have a reduction. Again, as Miguel, with a review of compliance norms, we cannot give you the precise number, but the trend is a downward one.

Concerning the pricing, as Alberto said, there is a trend for pricing and a trend for the level -- local level. And what happened in the last 60 days that will be affected is that we see an increase of between 8% to 12%. If you look at exchange rates, it's also a downward level. And we should look at a positive trend in the local market for the future.

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Julio Mendez Arroyo, Usinas Siderúrgicas de Minas Gerais S.A. - Controller [16]

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This is Julio. I'll -- I'm going to talk about our full capacity of our plating units, both [Ag] and [HPG], the coverage. And therefore, in plated, we are occupying 100% of our capacity. In terms of the thicker plates, we have a lot of thick plates. In [Ipatinga,] for example, we could increase 400,000 tons in terms of capacity. That's what's available there, without mentioning that we have a sixth plate in (inaudible) in Cubatão that is under capacity. Therefore, we are operating 30% of our capacity that is not being used. We have a lot of availability at disposal.

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Operator [17]

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Our next question comes from Mr. Thiago Lofiego, 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 [18]

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Miguel, if you could comment, after the price increase, I believe that this was, what, 10%. What is the discount that you have in terms of domestic steel and imported steel? And if you see a discount, what is there -- is there room for an increase in March?

And my next question is adding to what Leo said about the thick plates. How do you see this new demand or this pickup in demand of thick plates? You have a more -- a clearer outlook for 2020? Or should we expect this to take place?

And the last thing is -- my last question is how is the issue of expansion and compact being developed. I know it's still far away, but I believe we should understand what is the expectation concerning this asset.

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [19]

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Concerning the parity, as you have said -- concerning the evolution of pricing and the drop in the exchange rates, we are operating at a negative rate because of this low -- and weakness of the real. And therefore, the 10% is healthy for the local domestic. And we should expect a positive trend in the future.

In terms of the thick plates, this is impacted by the level of activity of infrastructure and the naval industry. And another thing is that we have a higher level of exchange rate, which will affect the future demand. We do not have full data on this, but we also will depend on the projects of the local market. Yes, we can expect growth, where we can have specific increase in the next 12 months.

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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 [20]

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Miguel, again, can I go back to your discount? According to my discount account here, considering January and midpoint, what I see here is at around 5%. Does this make sense?

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Miguel Angel Homes Camejo, Usinas Siderúrgicas de Minas Gerais S.A. - Commercial Director, VP & Member of Executive Board [21]

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Yes. It does make sense, but it can even be a little bit higher.

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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 [22]

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Okay.

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Unidentified Company Representative, [23]

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Concerning the compact project, we are working to be on schedule. And for 2 to 3 months, we will have to analyze the alternatives and scenarios we are assessing. 2020 will be a year for us to design the final project, but we are still trying to close this. And this has been asked by the partners, the shareholders.

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Operator [24]

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Our next question in English comes from Carlos De Alba from Morgan Stanley.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [25]

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I have 2 questions. My first one -- the first one is if you can comment on the trends that you see for the steel cost in the coming quarters. We saw an increase quarter-on-quarter, and I just want to see how is it progressing into the first quarter of 2020 and maybe the second quarter, if you have any visibility.

And the second one, if I may, is related -- the automotive price negotiations. What can you tell us as to how those are progressing? And on a related topic, what is the expectations for the Argentina auto market that may have an influence in your business? And clearly, the depressed levels are still there. But do you see further declines in the auto sector in Argentina? Or do you see more of a stabilization, maybe perhaps a small increase from, clearly, very low levels?

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Unidentified Company Representative, [26]

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Carlos, about your question, our cost trend for the following quarters, it's difficult to say due to the volatility rates that we are still experiencing. But in theory, for the first quarter, we see a reduction trend. The expectation is that there is a reduction in cost of production compared to the fourth quarter. But for the following quarters, it depends. We have seen -- we see a volatility, which is very high, both in terms of the exchange rates and raw materials, especially iron ore.

Iron ore, we have seen a significant drop in January. It's recovering in February, but this bring this to -- brings it to our attention to see how -- at what level this will stabilize. But the first quarter 2020, our expectation is that there is a drop.

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Unidentified Company Representative, [27]

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The situation in Argentina is very complex. We had economic -- an economic scenario that was very complicated: renegotiating the debt that is happening now. So we could expect a first quarter worse than last year, or even, it could have a negative impact in the first quarter with a more positive trend in the second quarter. Of course, Argentina is important in our sales, but we are able to offset this drop in this sector, in the auto sector. And in general, we will be able to cope with it.

In terms of the automakers, we closed agreements, as we said, and we expect to close other agreements with other automakers at the same level that we have used with American and European automakers.

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Carlos De Alba, Morgan Stanley, Research Division - Equity Analyst [28]

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Just -- if I may follow up, how are you offsetting the negative impact of Argentina? It's just because of the Brazilian auto sector is doing better than you expected or...

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Unidentified Company Representative, [29]

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In fact, we had a growth last year that was slightly lower than we expected in the first -- in the beginning of the year, and this was impacted by exports. The domestic Brazilian market is doing well. Last year, grew above expectations. And this year, we believe that this will offset the drop in exports. So the automakers, in an entire chain, will be looking for other export alternatives to offset the drop in sales to Argentina.

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Operator [30]

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

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Antônio Heluany Neto, BofA Merrill Lynch, Research Division - VP & Research Analyst [31]

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My first question, for Sergio. Sergio, could you comment that discussion on the import fee -- tariffs? And how do you understand the increase in galvanized steel? And how do you plan in terms of approval? And also, if you have an idea on CapEx?

For Alberto, I would like to know, in terms of other expenses, you have idleness, that this was close to BRL 80 million per year. And now you will need a renegotiation in terms of mining, and this is related to Cubatão. So how much of this is recurring? How -- what are figures we should expect for the following quarter?

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Sergio Leite de Andrade, Usinas Siderúrgicas de Minas Gerais S.A. - CEO & Member of Executive Board [32]

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Antônio, concerning the import tariffs, this is a topic which is on our agenda as in the steel industry. We have been working and talking about this with the federal government through Aço Brasil. And this topic, there is a federal government commitment with us that as we go, if we have a more -- a higher liberalization of the economy than -- should be a solution of nonisonomy of what exists in Brazil because of the, what we call (foreign language), Brazil costs. This is a topic that has been being developed well, and we believe there will be a reduction in fees. This will come together with the fiscal reform, with the improvement of infrastructure, a reduction of cost. And it's an action that the government is working with in order to give the Brazilian industry more competitiveness, not only the steel industry, but all Brazilian industry, and to cancel distortions when you analyze trades relations across companies and countries.

Concerning galvanized steel, we are still studying this. This is also on our agenda. We do not know yet when the decision-making will take place. We are following the domestic market, what is taking place in the domestic market. We are looking into it, but we do not have a decision-making pipeline yet.

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Alberto Akikazu Ono, Usinas Siderúrgicas de Minas Gerais S.A. - CFO, VP of Finance & IR and Member of Executive Board [33]

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Concerning other expenses, there are 2 points I have to make. One is that, yes, you are right, a great deal of the issue here is related to the weakening of the assets that are stopped at Cubatão -- or are not being used, and some other assets are reduced. And this depreciation has been reduced because some of them has been depreciated.

Another point, and you mentioned this a bit, is connected to Musa because today, reminding what I have said -- is that you're retaking up activities in Musa, which is the Samambaia unit. And this happened in the third quarter, and it operated in the fourth quarter at full capacity. And it has priorly -- assets which were inactive.

So we see that there are entries. There are -- there is a reduction in depreciation. There are some adjustments that have been made. And you will be able to look at this better after the next quarter, which is the first quarter of 2020, to see the level of this line. There have been these movements, therefore, in the last quarter, and that is why these variations occurred.

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Operator [34]

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Our next question comes from Marcio Farid from JPMorgan.

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Marcio Farid Filho, JP Morgan Chase & Co, Research Division - Research Analyst [35]

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I have 2 questions. The first one is for mining. You sold more than production in the last 2 quarters. How is your inventory rate? What can we expect in terms of production and sales for [Usiminas?]

And another thing, for Sergio or Miguel, is you commented during the call that we have good conditions in place to improve demand, such as low interest rates and other more optimistic figures. So what do we need to have a better -- an outlook of demand higher than the 5% that (inaudible) mentioned? Or is it more of the same? Or are we waiting for a pickup in the economic activities?

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Unidentified Company Representative, [36]

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Our inventories -- Musa has taken advantage of market actions that enabled us to sell inventory that we had for a number of years. Therefore, taking advantage of favorable market conditions, we try to sell these materials and, therefore, reducing our inventories significantly. Today, we are now trying to recover just a bit of this inventory because of operation conditions, but not significantly. Another thing, it was an opportunity, and this is -- can be seen in the figures, where you can see the difference between sales and production.

Concerning demand, there are factors that may have a higher impact than what we are forecasting today for Aço Brasil. There was a drop in 2019. This could present a better behavior for 2020. The improvement in the sector -- generating more employment makes consumption pick up, and this could positively influence in the purchase of new cars, of white lines products, which influence in that consumption of steel.

The agro industry is also important, together with the civil construction industry, because of capital goods. They were below the rates that were expected for last year. Therefore, both in this industry, agriculture could impact in the 2020 demand as Aço Brasil has forecasted.

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Operator [37]

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Our next question comes from Mr. Gustavo Allevato, Itau Asset.

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Gustavo Allevato, Santander Investment Securities Inc., Research Division - Research Analyst [38]

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I have a follow-up on Electrobas. Just to clarify, the part that was not disputed, the undisputed part, may take a couple of years. I'd like to understand if you think that this amount can be anticipated with a discount for this year still.

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Unidentified Company Representative, [39]

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Gustavo, well, these disputed amounts, that may take a few years to be solved in court. Of course, we will analyze every opportunity that takes place. If we need to monetize this or give a discount to receive, we may do it. But this is an issue that depends on the discount rates and the expectation of the assessment. Because even if we consider the amount, if its BRL 1.2 billion, this is still disputed. The court has to decide. So the assessment influenced a lot in terms of the final amount that you could expect. Obviously, if we consider opportunities that are interesting to us, we will definitely take them into consideration.

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Unidentified Company Representative, [40]

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We are now closing the Usiminas conference call. If you have any questions, our RI (sic) [IR] team will be available. Thank you very much for taking part, and good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]