Vale S.A. (VALE3) Earnings Call Transcript

Good morning, ladies and gentlemen. As we get closer to the proxy season, Vale is please to hold its webinar to discuss the topics of the upcoming 2020 Meeting of Shareholders. Vale's proxy statement and materials related to the Meeting of Shareholders were made publicly available at www.vale.com/investors. This conference call is accompanied by a slide presentation. The broadcast via Internet, both the audio and the slide changes, has a few seconds delay in relation to the audio transmitted via phone. It is important to mention the question-and-answer session will be hold only through the online platform. With us today are Mrs. Sandra Guerra, Vale's Independent Board Member; and Mr. Luciano Siani Pires, CFO. First, Mr. Luciano Siani Pires will proceed to the opening remarks. Sir, you may now begin.

Good morning and good afternoon to everyone. We do appreciate your willingness to connect in these very tumultuous times. I hope your organizations are coping with all the challenges of the moment. On Friday, we just sent out the proxy materials for the general shareholders' meeting, which will take place in late April. We also created a hot site for you to have quicker access to information. And now this is the sixth webinar to engage with investors on those governance, environmental and social topics. We did 2 in 2018, 2 last year, and we're starting -- today, we're going to be focused on -- mostly on governance questions. And for this, we have Mrs. Sandra Guerra. She's our Independent Board Member since 2017, a member of the Personnel and Governance Committee. And amongst the Independent Directors, she's likely the most -- the specialist in governance matters, has a very broad experience and board member in several public traded companies, a member of the Brazilian Bodies of Governance and class associations. And she's been also in the past, she consulted with several companies on the matter. So I'm going to hand over to her. And she is going to provide very independent views of the proxy and the shareholders' meeting and the way the company is moving forward on ESG matters. Sandra? Thank you very much. You may now begin.

Thank you very much, Luciano. Thank you so much for all the investors joining us today. The Board of Vale appreciate very much your willingness to have this conversation on the topics that we are going to cover today. So we are going to cover 3 main areas: corporate governance, management compensation and ESG approach. And we will ensure that we can dedicate around 30 minutes for your questions, which are the more important part, of course, of this conversation this morning. So moving to the Slide #5, I think. It's important to say that 2019 was the most challenged moments in Vale history. We are saying in all public situations that we will never forget Brumadinho. And this is not only a statement. This shows the feeling that I can witness every day I enter at Vale's premises. You can see this in the faces of our employees and the Board of Directors, in the management team, working every day with the sensation that it -- this at least can become an important learning opportunity for us. And this is the trigger. This is the motivation for us to move forward. And to change the company to allow that we will never again leave a situation like that. Moving to the next slide. It's important to say that the company is focusing a lot of efforts in changing the cultural aspects in the company. And this has been facilitated by the renewal of mostly -- around 50% of the executives that we have in the company. As you see in the slide, all the ones highlighted in green are new executives on board of the management team. And among the 11 positions here, 2 of them are new positions created after Brumadinho, the position of Executive Officer for Safety and Operational Excellence and the Special Director for Recovery and Development. And both of them are new executives in 2 new positions created after Brumadinho. So this fresh blood in the executive team is helping to make the -- to lead the changes in cultural aspects in the company, which are very important in this moment where we can -- where we want to transform the safety and management approach. Moving to the next slide. We can see what you have been informed already, the actions that the Board took right after Brumadinho, installing 3 independent committees. The first one -- not in order because the first 2 ones were the Extraordinary Independent Consulting Committee for Investigation and the Committee for Support and Reparations. These 2 committees were announced already 2 days after Brumadinho, and 1 week later, they were up and running. A week after, we had installed the Independent Consulting Commission on Dam Safety (sic) [ Extraordinary Independent Consulting Committee for Dam Safety ]. This one, we decided -- the Board decided to maintain the committee beyond 2020. We agreed that it's a very important committee adding value, not only for the Board, but including to the management team, considering the expertise that we have in the committee and the independence of their view. As you can see, they had already 40 days in field trips, analyzing all the dams that we have. They had 19 meetings, and they have provided 16 very detailed reports to the Board. And the other 2 committees have already concluded their work. You are able to assess and there are 2 links in the presentation where you can access the report of the Support and Reparation Committee and also the investigation report. So these 2 committees conclude their work, but the Dams Safety Committee will keep working, providing advice to the Board on dam safety. Moving to the next slide. You can see the governance structure, the governance system that are helping us in governance, the company. It's highlighted in yellow all the new orders or positions created recently. So we have, of course, the general meeting, representing the voice of shareholders, the Board of Directors. And at the right side, you're going to see the fiscal council, which is Brazilian -- a Brazilian body elected by the shareholders in the AGM. The Board now is supported by Operational Excellence and Risk Committee, the Finance Committee, Personnel and Governance, Sustainability. They were the standing committees. And we have, as I just said, the Extraordinary Independent Consulting Committee for Dam Safety. And we are precisely announcing this week the creation of the Statutory Audit Committee that will be up and running after the AGM late in April. We have -- on the right side, you see the changes that we are organizing on -- in creating a function, which is the chief compliance of the function. So this function will gather 3 areas: the whistleblower channel, the internal audit and the integrity area. And also, we have the Corporate Governance Secretary reporting to the Board. Important to say that this function, the Chief Compliance Officer, will report to the Board of Directors, working closely with the Audit Committee. So below the Board structure, we see the management team. As I have mentioned before, the 2 yellow positions are new positions and we have the executives reporting to the Board. So this is the governance structure created to protect and to create long-term shareholder value. Moving to the next slide. We highlight the activities and the decisions we took in regards to intensify the risk agenda. And the governance enhancements that we see here is that the Personnel and Governance Committee is reinforcing the nomination role. And I'll talk about this later on with good news. We -- the Compliance and Risk Committee is becoming the Operational Excellence and Risk Committee. The Statutory Audit Committee, as I said, will be up and running after the AGM. The creation of the function, the Chief Compliance Officer and as we speak, we have already some candidates that the Board will be -- will interview in the following weeks. The Dam Safety Committee to continue over 2020 and the increase of the number of Board members with mining experience. I will cover this later on in the presentation. And of course, many of the elements that I'm describing here are subject to the approval of the bylaw amendment in the AGM. In the next slide, we see the activity in the Board over the last year. Right after Brumadinho, of course, the Board was having daily meetings, full-day meetings. So in a year -- or we had in 2019, the Board had 46 meetings. In the side, you see the attendance rate of the directors. And then you see the number of natives of the different committees and also the attendance rate in this slide. Moving forward, you see the Board directors that will be presented in the next AGM to complement the term initiated in April last year. As you possibly -- is informed -- there is the last quarter -- the last Board was elected under cumulative voting system. With 2 Board directors leaving the Board last year, it is needed that the full Board to be elected again in the AGM. So these are the Board directors that will be presented in the Slide 10 and the Slide 11, the Board of Directors that will be presenting for election in the next AGM. And you can see the qualifications and expertise of each one. And of course, in the proxy statement, you're going to find much more detail on each of the candidates. Moving to the Slide #12, you see another picture of the Board. There are 13 members, and then you're going to see the number of independents, the employee representatives, the tenure and the average age -- of the average age -- and the distribution of age of each Board of Directors in the chart at your right. And below, the key qualifications and experience in the Board. As I mentioned before, we have increased mining and operations experience in the Board in the last year. And you see the international experience, logistics, corporate governance, sustainability, ESG, communications, risk management, strategy and innovation, financial and accounting expertise, and people and talent management. Moving to Slide 13. I will dedicate some minutes to talk about the cultural transformation. This is essential topic in the organization today. What we did so far in regards to the cultural transformation, you see that the Board of Directors and the executives were interviewed in relation to the culture and the culture needed to the company, 5 meetings about culture in the Executive Board. Several workshops, marketing insights, assessments were conducted to analyze the culture prevailing in the company. And we had a Board -- a workshop, not only to be sure that we were in agreement with the decisions of the management team in regards to the drivers of the culture transformation, which we were, but also to analyze internally the culture prevailing in the Board itself was a very, very useful workshop where we, as the sponsors of the future transformation in the company, we really got involved with all the process. They are having several meetings with level leaders in the company, workshops. And the results of all these initiatives is -- so far is that the narrative of the culture is being under construction. And this is a collective work of management and board, and management team, of course, has a protagonist role in this regard. There has been the 360-degrees assessment for focusing on the behaviors, the process of development of the leadership in many aspects. There are the use of reflection about the cultural journey, which is becoming regular in several meetings and regular in the company, and human resources with greater visibility of culture actions. Of course, human resources is the lead sector of this project. The Board is very closely keeping track of the progress that have been obtained. And let me talk about the indicators that we are tracking, the management team and the Board in regards to the cultural transformation. First, there is the assessment by Walk the Talk (sic) [ Walking the Talk ], the company that had been providing advice to the company to better understand the beliefs that are prevailing in the company and the reasons for these beliefs. I have mentioned already the 360 assessment. We are additionally doing an assessment on innovation and corporation's readiness. We will be tracking indicators on global corporate behavior as well. And currently, management team and human resources are analyzing the use of artificial intelligence to capture the use of signals and signs within the company that can inform us on the changes that are being observed in regards to culture. These are the indicators that we are going to be tracking regularly. And there are some elements that already show that change has really started. First of all, the position on diversity and inclusion as part of the ESG efforts. We had very recently, 2 to 3 weeks ago, a workshop with the leaders of the company from around the world talking the full day on important elements of diversity, bringing cases, discussing elements. I was here in the day that the workshop took place, and I saw the people leaving the workshop very energized and really willing to change the situation in regards to diversity. And we all know mining, when we talk about diversity, gender diversity, for instance, it's important to say that the mining industry, in general, left behind this effect. So I -- when I met people leaving the workshop, I felt that there is in the air, this willingness of really changing the situation, although we know that this is not easy to attract women to work in the mining industry. But I felt that the management team has really decided to go further on this and do this very fast. So other indicators that I foresee, there's already results on the road to transform culture in the various workshops, leaders meeting on culture, diversity and inclusion. So I'm very excited, in particular, with the culture transformation that I can witness. And I can say that the Board is very closely keeping track of this improvement. Moving to the next slide. We will be talking about management compensation. And here, in the first slide, #15, we can see the distribution on fixed fees, the salary, annual bonus matching and the virtual share plan. And you see the CEO compensation and other officers' compensation the amount, the percentage dedicated to each of the items. Of course, the salary is to attract and retain our team. The annual bonus is a short-term recognition of participation in the results of the last -- the current year. The matching encouraged long-term retention and committee -- commitment of executives as they contribute in the same way the company does. So it shows their commitment to the company. And the last one, the virtual shares plan, which you can see the percentage dedicated to CEO and other officers, now is 80% to total shareholders' return, of course, relative to the peer group and 20% dedicated to ESG sector's indicators. Health and Safety, 10%. And the metric is based on the commitments of Vale to 2030 is another 10%. Moving to the other slide, we show the 2019 short-term incentives where you see the EBITDA, of course, that were not achieved; the sustainability indicators that with 10%, were achieved. What we are talking here are the sustainability indicators linked to the sustainability goals of the company, Health and Safety and the Crisis Management and Reparation. So we are talking here about 5 elements that we'll consider to -- in this 40%. Brumadinho recovery, legal agreements, operational continuity, reputation and management of communication, and organization and culture restructuring. This elements of the remuneration of 2019 was decided right after Brumadinho because we believed that we had to lead all the efforts to management of the crisis and do the reparation. So we created this new target for the year, the new goals. And at the Personnel and Governance Committee, we tracked all the development of this every month last year. And the final evaluation was a process where the executives made their self-assessment of each area, each of the 5 areas included in the goals. And we had 2 board committees involved in assessing and having our vision of the Board of their achievement of the goals, the Sustainability Committee, and the Personnel and Governance Committee. So we have joint sessions to analyze each of the 5 goals and to decide our position of the Board in regards to the goals established, the 5 goals established for crisis management and reparation. Moving to Slide #17. This is the remuneration, the short-term incentive for 2020. And you see EBITDA, sustainability indicators, health and safety, risk management and individual contribution. So 40% is related to the treatment of EBITDA; 10% of sustainability indicators; and 10% health and safety; risk management, 10%; and individual contribution, 30%. I would like to highlight in the right side of the slide that the safety and operational excellence officer has no goal whatsoever related to EBITDA. So all his remuneration is related to the other factors: sustainability, health and safety, risk management and individual contribution. And with that, we want to ensure that the only element that would drive their -- the area behavior is related to those assets: sustainability, health and safety, and risk management. Moving to the next slide, Slide #18. You see the reparation and the achievements that we have been observing in regards to the reparation related to Brumadinho. And you have been receiving news on that recently, restoring the livelihood and dignity of those affected, economic and noneconomic compensation, the amount of money in provisions and incurred expenses, the expert planner report, the restoring the productivity capacity of affected areas, recovering the environment, the agreement signed with public entities, and the report from Investigation Committee, the independent Investigation Committee to the Board. So as the reparations advanced and the circumstances, in general, improved, the Board was able to resume variable value compensation. And this is an important element because of the resilience of the team facing the difficulties in a crisis situation as we have been through. It's very important for the company's performance and for the reparation itself. So the Board decided to continue to the payment of 2019 variable remuneration to the ones not involved in any investigation or in the report from the Investigation Committee. So this is the way that the Board understands to thank and to reward the ones who are contributing importantly to the company face the crisis coming from Brumadinho. And be sure that it requires a lot of resilience of our team to face the situation and the problems in all the operations in the field. We now move to the ESG agenda. And in the Slide 20, I would like to highlight a very important element and very dear to my heart which we achieved the last year, which was the opening of this engagement process of the Board with investors. I myself have been involved in meetings in London and individual conversations with individual investors throughout the year. And I can say that is a very important opportunity for us to learn. And we -- what we show in this slide is what we believe we are learning from hearing from you. So in this engagement with investors, we understand that the investors were concerned about the diversity of experience in the Board. So we responded by adding 6 new members with different backgrounds in 2019, with focus on mining and operations background. We also learned that there was a concern regarding the nomination, and we responded by promising to establish a Nomination Committee by 2021. And we are working to strength the nomination portion of the Personnel and Governance Committee until we have the Nomination Committee installed. We also understood from you that there was a need of a better disclosure on ESG. And our response was a portal presenting all the elements and keeping track of our progress and our goals on ESG. I really encourage you, if you didn't do so yet, to visit the ESG portal, bringing a lot of information -- lots of information on ESG and our goals and the things that we are committed to achieve. In regards to compensation, we heard that the C-level should be committed to the 2030 goals. And our response was an addition of 20% ESG factors to our long-term compensation. In regard to gender balance, which would include the percentage of women in the workforce, and the response was a new goal in this regard to double the female presence from 13 to 26 by 2030. And on climate change, we respond aligning our goal with the Paris Agreement and targeting carbon neutrality by 2050. Moving to the Slide 21, during the Vale Day in New York and London late 2019, we launched our commitment to closing the ESG gap in relations to best practice by 2030. You can track the -- our plan in this regarding the ESG portal, which is presented on the Slide #22. It's the way we increase transparency of our sustainability approach. And we hope that when you visit the portal, you can give us feedback how to improve the portal because this is what we really want to create, a way where the information regarding ESG is available to you, and that it's a channel of communication that we want to improve through time. Vale proxy statement in Slide 23 and the materials to the meeting shareholders were made public, as Luciano Siani was saying in the end of last week. And I can say that you may notice a very important change in regards to the last year. I believe you will appreciate the information that is presented in the proxy statement. And I think there is a very important improvement in regards to the last year. So and I will finish saying that our ambition here is to become one of the safest and most reliable miners in the world. The management team and the Board is working hard and working hard on that. And we believe that we only will get there with your help. So we are very keen in listening from you, your concerns, the opportunities you see for us because we firmly believe that we can learn a lot from you. So that's why I open now the Q&A session, and we are willing to hear from you.

Well, Sandra, we've been receiving, through the Internet, some questions which I'll read for you. First one, from Mr. Jackson from Sustainalytics, Bruce Jackson. He said that only 20% of the 17% overall long-term incentives equate to only 3.4% of total long term. So this is -- he's referring to the amount of ESG on the long-term incentives. And he says this could be higher given the risk attached. Long term, will the proportion of ESG long term increase? So the question is, are there any plans for that? And how far down the management ladder does this apply?

Thank you so much, Jackson. Very, very good to hear your perception on that. When you deal with compensation in a company as big as Vale, you have to be very safe in regards to your steps. So I believe that this was the first step towards improving the long-term approach to our compensation. When you talk about the compensation that will impact the compensation of all the employees at the end, we have to be careful and a bit more conservative in this regard. So I would say that you may consider this as not a first because these have begun before that but as a step towards going to -- considering more and more the future and the sustainable approach in regards to compensation. It's a step. We believe we are not there yet, and we want to keep on improving and learning from your views, it's important in this regard. Thank you for your feedback.

Jackson, if I may add, just there's also 30% of ESG metrics on the short-term bonus. And there's also an overarching understanding around the company that to improve -- that the share price, for example, is very responsive to improvements on ESG. So you should consider also that indirectly, the matching portion. Also everyone is on the same page that even to create value to shareholders and to the executives themselves, the ESG progress is very important. And the question, how far down the management ladder does this apply? This goes 3 levels below the executive officers. So not to the first layer of management, but the second layer already, middle management has it. The next question, Mike Shavel from Wellington Management. There has been a lot of changes since Brumadinho, why weren't these changes made after Samarco?

Thank you, Mike. I arrived at the Board of Vale in -- November 17 was my first meeting. And when I started to have, I -- we have -- we were 2 independent directors by then, the first one in the history of the company. And as soon as we arrived at the Board, we asked for several meetings with executives, including the dam responsible ones, all the functions. Let me say, it was around more than 20 meetings and around this amount of meetings and visits and so on. And my perception, as I arrived is that there were lots of initiatives that took place after Mariana, after Fundão. I can say that, for instance, when I had the other independent director, Isabella Saboya and myself, we had a meeting with the 3 executives responding for the dam structures. By then, they were 3. We learned from several improvements that they have been doing since Fundão. Another element that I could say, as soon as I arrived, I was the first one to be interview in a risk assessment by one of the big 4s. And this was a response after Mariana, after Fundão. The understanding, the awareness, the increasing the awareness in regards to risk. It was an important project with the crisis model was reviewed and implemented throughout 2019. So I can say that -- and I saw, of course, the minutes of the Board prior to my arrival. And again, I saw in the various minutes that several actions we were taking, a strong concern in regards to the expenditure in regards to everything that would improve safety in the company. So many things were done after Mariana. What we can say now for sure that all the things that were done were not enough because if it would be enough, we are not talking about Brumadinho. But there were certainly many initiatives that took place in Vale even after -- before my arrival and after my arrival. But of course, after Brumadinho, the changes in the initiatives got to another level, and not only within Vale. I can say that because I have been participating in international conference, local Brazilian mining conferences, and I have been interacting with agents of all -- many companies and providers. So the change is in all the industry, not only within Vale. I believe that what happened in Brumadinho now created an awareness and understanding of safety which is completely different from the past.

Okay. Jaime Gornsztejn from Hermes asks, although the work of the Extraordinary Committee on Reparation has been formally concluded, the reparation work is far from done. Will the Board commit to provide regular progress assessments on the reparation work from an independent third party?

Thank you, Jaime, for your question. Yes, you are right. The committee has been concluding their work. But we are far from concluding our work here. And yes, one of the elements of the plan is having a third-party that will track the improvement in all the elements of reparation. We were -- we are about to disclose the action plan of the Board in regards to all the 26 elements suggested by the Independent Committee. And we are going to have a third-party assessing as we go forward on debt.