Companhia Siderurgica Nacional SA (SID) 2010 Q4 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to CSN's Fourth Quarter 2010 and Full Year 2010 Earnings Conference Call. Today we have with us the Company's executive officers. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After the Company's remarks are over, there will be a question-and-answer section. At that time further instructions will be given. (Operator Instructions).

We have simultaneous webcasts that may be reached through CSN's Investor Relations website at www.csn.com.br/ir. The slide presentation may be downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay service for the call on the website.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CSN management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of CSN and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mr. Paulo Penido Pinto Marques, who will present CSN's operating and financial highlights for the period. Mr. Penido, you may begin your conference.

Thank you. Good morning to everybody. We have a 12-page presentation as a quick introduction to our results of 2010. We have a statement on page two that I will skip because it was already mentioned, and go to page three. In this page we show our result. It was a quite strong result when comparing to 2009. We see net revenues going up 33%. Gross profit going up 71%, our EBITDA -- now our gross margin going up from 36% to 47%. Our adjusted EBITDA going up 76% to reaching BRL6.355 billion.

Our adjusted EBITDA going up from 33% to 44% and our net income flat when compared to the comparing two years. So it was a quite strong year in terms of growth in terms of cash generation and it makes us, I'd say, happy with this return.

On page four we show in details why our EBITDA went up and basically as it is shown here the volumes and price of steel, together is volumes and price of mining they're responded for most of the growth of the EBITDA. But also we need to highlight the cost reduction in these two operations, mostly due to reduction of cost of raw materials. So very strong year, growing volume in our sales with a good price, I'll say, for the products.

On page five we show our leverage of say basically flat during the year, around 1.5, 1.6 times the net debt to EBITDA ratio. On page six we show how comfortable is our maturity schedule. That is that one can see there is no concentration of debt maturity. Basically, CSN has no need to refinance its debt just to pay down the maturities and during the years to do some financing for the CapEx.

And moving to page seven we have record high CapEx in the year, BRL3.6 billion, much higher than the previous year and the other years. It shows the commitment of the Company for growth -- for the organic growth programs that we have announced in the past.

Now on page eight it's the first time that we are disclosing our result by segment. As you know now, the Brazilian company is making the reports using the IFRS accounting system as already [no] 91% of our revenues comes from steel and mining and 93% of our EBITDA from the short periods. Of course, it's a method that is growing, that are other, it feels very important to provide support to our two major deals. But certainly as one can see, (inaudible) steel and mining company.

On page nine we have some more details on this steel company showing the volume growth by one year to the other, the having the growth, the EBITDA growth and the EBITDA margin growth. So those are quite positive here, when comparing in every single area. We have the same similar view on page ten for our mining activitiy, we have record high volume of sales of iron ore reaching 25.3 million tons and margins are very good as a result of the international price movement that we have seen last year. And that we have already seen this year.

So on page 11 we have the traditional graph showing the performance of our shares, as you all know. And then the last page our contacts if you need to further clarify any item, it's a way to help you to contact us. That's it, as an introduction and we are ready to go to the Q&A section.

Thank you, the floor is now open for questions. (Operator Instructions). Your first question comes from the line of Felipe Hirai with Merrill Lynch. Felipe, your line is open. Your first question comes from the line of Rene Kleyweg with UBS.

Hi guys and -- (technical difficulty)

I believe we may be facing some connection, problem in the connection because we are not hearing the question from Rene, we just got his greeting.

Rene, your line is open. I'm sorry Rene withdrew his question. Your next question comes from the line of Renato Antunes with Barclays Capital.

Good afternoon Paulo, can you hear me well?

Yes, we can hear you.

Yes, thanks. Thanks for taking my questions. My first question is really into your international business really. If you could please share your views on M&A opportunity abroad that would be great. And also, if you can talk a bit about M&A opportunities outside of your (inaudible) potential opportunities. We've seen the [individual] market, how you would rank those, if possible, that would also be great. That's the first question.

The second question is a more generical question related to your outlook for the industry and price and what are your views on the outlook for global steel prices, how do you see price change for steel over the next months? And within this context, if you can give us a sense on if it's fair to assume that the market steel prices will basically move together with global steel prices as we enter the second semester of stocking? That's the second question. Thank you.

Okay let me start with M&A abroad and then I'll move the answer to Mr. Martinez who will talk about the global steel price. As it's already announced that CSN has a plan to carefully diversify its geographic base, the geographic base of its business. It's a careful, careful movement. It's something that will be executed not slowly but at the speed that we believe it's acceptable and it's good for our learning curve in this area.

The first step as it was already announced maybe or can be an acquisition of some assets from Mr. Alphonso's [Qualicalargo Group]. As we have announced we are analyzing cement plant and a long steel plant -- the acquisition of a cement plant and a long-steel plant in Spain. We all know the situation of the macro economic situation of Spain and know the challenge that the country is faced, region is facing.

But our plan is very simple, we are going to -- if we manage to buy these companies, at this point in time where we are, had we had the opportunity to find outstanding assets, very, very good assets whose price adjusted to the reality of the market there, we will be able to buy these assets at the current market price. That means that it's [health], if the market is moving.

And to earn this company's, I would say, true speed, full operation -- full capacity, sorry, in order to export some part of their production to Brazil. We are in the final phase of these negotiations. We don't -- there is no [base] you know M&A process they may take some few months that is normal. But I can say that we are in the final phase. There is a chance for us to do this major step, enhancing or having a greater presence in Europe.

Some other few steps may happen in Europe and also in the US where it is the focus of our international [effort]. But again, on a careful base. And just to provide a model of magnitude, as I have said before, an order of opportunity. The size of this acquisition of the cement plant and the long-steel plant is around EUR300 million, I'm not saying that is the price, it's just an order of magnitude just to quantify. That's not a (inaudible) you're not spending billions of euros on it, it's just EUR300 million as the first step into the operation and acquisition of 100% of the equities of those companies. Martinez, can now talk a little bit about the steel price.

Renato, good morning. In terms of steel price, we are considering in our calculation, hot, rolled coils in the range of $720 to $750 per metric ton, FOB price. In cold rolled coils something like $830 to $850 per metric ton, also FOB price. In hot galvanized products a range of $950 to $1,000 per metric ton FOB price and thin plate, $1,250 per metric ton FOB price. So this is basically the price that we are considering for this moment.

At this time we are facing some slowdown in Europe and we believe that we have something like $20 or $40 less in the global price in terms of hot bend, but we believe that we are going to have same levels right now till the end of this year. So we are not forecasting to have a lower prices than we are facing right now.

Thank you.

Thank you. Your next question comes from the line of John Brandt with HSBC.

Thanks for taking my call. I just wanted to get some clarity around the iron ore pricing in the fourth quarter. It seems that that was a very good realized price and I'm just wondering if that was due to the transition to IFRS or more sales in the spot market, or exactly what that's related to? And secondly I was hoping you could shed a little more light on your stake in Riversdale. I understand that you are not -- do not wish to sell, but I'm wondering what the end game is, are you opposed to a JV, have there been off-take discussions there? So anything you could tell us there would be very much appreciated. Thank you.

Okay I will take advantage of the presence of Mr. [Jaime Nicolate] who is the CEO of NAMISA and our mining director. He can go ahead and talk a little bit about iron ore pricing in the fourth quarter.

John, thank you for your question. Our iron ore price in the last quarter was in line with the market. As you know we have more stable clients, that means we are not strongly positioned in the spot market. We have some contracts based on the quarter formula but we have also monthly price that in my case, my personal belief, that will be movement in the market for the future to move for this monthly price, that's my personal belief.

That's why we had a good results in the price because of this, because of this portfolio of let's say, price contracts and also because of the products that we sell. I would say it defines with good quality and that means that at the end we have an average iron ore price that was very good in the last quarter.

Okay, let me now talk a little bit about Riversdale. As we have said before in other [offers], CSN, entered in Riversdale as a way to hedge part of its metallurgical goal necessities. That's the idea. CSN has 19.98% of Riversdale shares at this point in time and of course we are following the movements of Rio Tinto I would say, attempt to buy the control of the company. Rio is a first-class company, as we all know. They are one of the finest operating companies in this area in the world. There are others of course but Rio is among the best.

So in the projects as large and as challenging as Riversdale, [hopefully like] (inaudible) is very well cut to the process in order to run the operational part of the project and to make it happen. So that's basically -- our idea is to remain the company, our idea is to be a shareholder there and to follow the process and to of course, in the due time to have some commercial agreements in order to show as part of our materials funds plant.

Right. Thank you.

Your next question comes from the line of Alex Hacking with Citigroup.

Good morning Paulo. I guess a couple of questions. The first one on Usiminas, can you remind us where your stake stands today and if you are still kind of working towards a goal of around 10%? And if you were still intending to look for a [board seat] at some point? And the third question just regarding iron ore. Do you have any guidance for production this year in '11 and maybe for next year in 2012 when you have a little bit more full capacity?

Sorry, Alex, regarding Usiminas, our plan as already announced it in communication that we have made, is to reach around 10% of the equity of the company. We consider Usiminas as a strategic investment, an investment that has a big value for us. And the idea is to contribute where possible, when possible to make it into another -- a better company. They are a good company and our idea of being a shareholder there is to be a part of the process, as a board member, when possible. There is no, I would say, hurry, in this process. Okay?

Now, regarding iron ore guidance. Our number for 2011 is something ranging from 30 million to 32 million tons being roughly 20 million from [Amirza] a little bit more than 10 million for [Cardes Verdes]. The guidance for 2012 is 40 million tons being 25 million tons for [Anamile] and 15 million for Cardes Verdes. As the seeds are growing trend. We are jumping from 25 to 30 then from 20 to 40 million tons. We feel very comfortable to provide this guidance because as you may know the expansion of Cardes Verdes is ready, the expansion to the 42 million tons production capacity is basically ready and we are just fine tuning the equipment and waiting for the port expansion in order to be able to export. So that is something that there will be a lot of value to come, this year and last year, regarding our iron ore afield. And also, in the following year, 2013, also.

Great. Thank you very much.

Your next question comes from the line of Carlos de Alba with Morgan Stanley.

Good afternoon Paulo and gentlemen. Just a question, you said, if in the case that you decide to become a more active shareholder in Usiminas, do you foresee any issues from the antitrust authorities in the field, can they -- given that the two companies together would have a significant share of the flat rolled business in the country? Or even if you -- it's not a full consolidation of the two companies, such as having a seat in Usiminas boards may create some issues in terms of intelligence and information flows between two companies. Do you see any issues with that Paulo?

Carlos, it's very hard to comment on this subject at this point in time. Currently, we are still looking for our goal to be at 10%, it might take some time. As I said, it's not in a hurry it's a careful movement. We are outside the control group, as you know, but you have to keep in mind that if we do something Uniminas for -- to make the Brazilian's (inaudible) stronger. So that's nothing that the authorities may find negative, but it's very early to make any comments regarding this.

Of course, in the case of Uniminas we can also explore their mining together with our mining activity. So there are -- so it's very preliminary to make any comment regarding Uniminas at this point in time. The only thing that I would explain to them, say, clearly is that we have a gold, the announced goal of 10% and that we consider Uniminas a strategic investment that has obviously a very good value for us.

A right, thank you. And my second question is, could you give us an update on the long steel business, there have been some delays there but I wanted to see if you can share with us where do you stand at the moment and what are if any future plans?

Okay, you are right, there was a delay basically, mid last year, August last year we had decided to change the contractor that was the building company. We have now the works coming back we already have 400 people coming back to the construction of this long company, this long-steel plant that we are doing. And the number of employees will go to 600 very soon.

We have hired a first-class contractor of the branch and we have a plan to finish it before the end of next year. As they started the process of understanding the work to be done and to fine tuning the engineering plans, back in December we still need some, I'll say few weeks, in order to have the final or the target date for the inauguration of this plant. It will be some sad day between let's say August and December [next] year, but that's new duration. I promise you the next conference call I can give you a more accurate date for the long project because I don't want to risk the engineers that make a very careful plan. We members of the [invested] board of (inaudible). We are taking care of this project is top priority to avoid any further delay because it's unacceptable to have more delays in this case.

And the total amount is still around 550,000 tons in the Volta Redonda and what about the other two plants, long-steel plants that you had mentioned before?

In total we are doing three, long-steel plants. The first one involving Volta Redonda is a 500,000 ton per year, in terms of capacity. The other two have the same capacity, same level of capacity, one to be built in the state of Minas Gerais and the third one to be built in the State of Sao Paulo.

Any timing for the last two plants, the one in Gerais and Sao Paulo?

Yes, but it's around let's say three years from now, two and a half to three years from now. Most likely three years from now. But again, that's a very preliminary target date. That's something that we are refining our engineers and the contractor to present you a more accurate date the next let's say conference call, as soon as possible as soon as we can announce it.

Fine, thank you very much Paulo.

Thank you Carlos.

(Operator Instructions). Your next question comes from the line of Marcos Assumpcao with Itau BBA.

Hi, good afternoon this is actually Alexandre Miguel speaking. I have two questions. My first one regarding dividends. You have any updates on the proposed dividends for the previous years that will be paid in 2011 and especially maybe in the face that, considering that the controllers might need the money to finance the recent acquisition of the CBS stake, part of the CBS stake in the company. So any update on these things.

Sorry, I was not able to pick up the first one, the question was, the first, one the connection was not very good here. You were asking me about dividends. We have -- we don't have the Board approval for the dividend payment. The level of payment, the proposal is about BRL1.8 billion but that's something that will be submitted to the Board to be approved. But that's the order of magnitude that would be the example that we are expecting to be pay. But again, it depends on the Board approval.

Okay and then do you expect a timing for that Paulo?

Yes, I'm checking here. I was out last week when it was decided, being honest. That's after July?

(inaudible - microphone inaccessible)

Yes, after the General Meeting after the end of April it will be decided and announced, so we don't have a date here, sorry about that.

Okay, no problem. And the second question is regarding the cement business. Can you provide a color of how you are seeing the cement market in terms of demand prices in the short term. We could see margins going down in the fourth quarter versus the other quarters so are you seeing any price pressure in the short term or you expect prices to recover and increase given the unexpected [above] your demand for (inaudible) give a color for us on the finance part?

Sure, we can give a color. I will start it and then Mr. Martinez will provide more details. You know that cement market will be over 59 million tons per market last year. That presented a strong and (inaudible) grow. We expect further growth in this market because of all the infrastructure works that are being developed and executed in Brazil. But before changing the word to Mr. Martinez, just to remember that we are now inaugurating our clinker plant, it will make our margins in the cement business much stronger and much better, starting in the third quarter of this year.

So it's -- we are committed to keep on growing cement. Our current sales capacity [sequence] 4 million tons, we are assuming the ramp up process, the ramp up of the clinker plant and the ramp up of the other plant, but it's going very well. But please, Martinez, if you can go ahead and say a little bit more.

Okay, in terms of market, Paulo had already mentioned that total market will be around 59 million tons a year. We have to emphasize that we are just starting this market comparing with other players in the market we have a different strategy. We would like to have much more -- we would like to have much more customers and we would like to sell the material, to sell the cement very close to our plant in order to maximize the margins.

So in terms of a strategy we are selling everything we produce in the plant right now. We have a very strong sales team working in a very spread sales -- mainly very close to Rio de Janeiro, region. And cement business, part of our -- one of our pillar in terms of our strategy is probably we are going to have together in the same business, cement and long products, we are going to have lots of synergy in terms of being a very strong player in the building products market. But now market is really good, just booming, following the growing in the building products and the construction markets and infrastructure. In terms of price we are doing something like BRL150 per ton.

Okay, and Martinez, this price is probably likely your net price, right, net revenues divided by the price. But do you see this, expect this price increases in the short term or throughout 2011 given this higher demand?

We are not working with price increase in the cement right now. We are just starting in the market so we would like to be focused in a niche market very close to Volta Redonda. So our focus is to know the market to know the customers and to be different from our competitors in Brazil.

Okay, thank you.

Your next question comes from the line of Rene Kleyweg with UBS.

Hi gentlemen. Many of the questions you covered now, but just wanted a couple of follow up points. In terms of realized pricing on steel, can you just confirm that all of the discounts that were offered are reflected in net revenues and that none of those discounts are through as a financial expense in terms of early payments?

Then secondly, just to touch on Uniminas again, whether you can provide any color on how you can extract a material economic return from what remains a relatively small economic participation, like at the end of the day you're potentially improving the operating performance of a competitor for an economic stake which will be less than 10%? How does that work economically?

Okay I -- we didn't understand well your first question about steel price. What do you want to know the line of prices in Brazil or the gap or the difference between international price and our spreads, sorry, we didn't get it.

I can follow up with David, but I thought that previously there was the possibility of the discounts that you had been offering on pricing were just incentives for early payment, to be treated as a financial expense as opposed to deducted from revenues. So I'm just trying to understand if the discounts that were offered in the fourth quarter are firmly reflected in net revenues or if some of those discounts are in financial expenses?

Okay, understood. Martinez will answer you, he has more information about it.

Talking about the market in Brazil, just to give you some net chart or some update about CSN, mainly in the first quarter of 2011 we are planning to have this year at least 85% of our mix focused to the local markets. In terms of pricing we are just in the opposite direction. We are now removing or eliminating some discounts, things we have right now are very close -- minimum, premium, over imported, lending mature in Brazil. Another point that we take into account in our strategy in terms of inventories, right now inventories of the steel distributions are now okay. So we don't have any reason to have discounts in the market.

And another very important part of the equation is the supply demands. We are going to have this year a very strong supply, very strong demand in Brazil powered by building products, construction, infrastructure and at least we are keeping the same levels of home appliances and auto industry in Brazil during this year. So for sure we are going to have a very good market this year. And trend is completely different, we are going to remove discounts in a -- depending on the value chain, depending on the product. And take into account that imports probably will go down more than 50%, more than this, in 2011. And for sure CSN we're interested in capture these value seeds last year. We lost some share for import, mature, mainly in the galva products, so basically this is our strategy for 2011.

Okay, let me know answer your question regarding Uniminas. First, on initial quality you have asked the most and critical question, how can we reach our (inaudible) material from [what] we have done on this investment that we really believe there is a huge [on] value for us, or material value for us.

That's our challenge, that's what we are looking for. Of course we, at this point in time are building our position and we are making our plans so I can't say anything or there is nothing to say at this point in time, but that's -- just keep in mind that's CSN's challenge on how to achieve or how to create some benefits for the shareholders through this position. Just wait a little bit more on it.

Thank you gentlemen.

Your next question comes from the line of Rodrigo Barros with Deutsche Bank.

Thanks for the call. I have one follow-up question for Martinez. Martinez, in the previous call in my question you mentioned that we could see some news from the government regarding these tax audits having to do, in particular in relation to the tax subsidies, that what have -- I wonder if you could give us more feedback of this issue? Thank you.

Rodrigo, as I mentioned during the morning, the call in the morning, we are just working not only with tax incentives trying to ban this type of tax in Brazil but we are also working mainly in the galvanized products in a dumping process. So we are starting the case and probably in the next two weeks we are going to have a response from the government.

Okay, so that's particular to galvanizing.

Mainly for galvanized products.

And Martinez, all this issue, can you explain the mechanism that when the investigation is occurring that eventually the importer has to pay the taxes for a long period until a final decision is reached? Can you explain this, how you are of course doing it without the investigations?

Rodrigo, it's a -- I don't have many details about this investigation but one of the things that we had to take into account is we have the rights and we have the obligation to protect our market here in Brazil. And in some cases it's really interesting that we are facing some different pricing policies for Brazil comparatively for the rest of the world. So we are investigating all of these prices, we are trying to understand exactly what we are doing in the markets. And there is no way for CSN, in terms of galva products for example, last year we had something like almost 1 million tons of galvanized products in Brazil and most of this material, or at least half of this, we had some difficult to understand what they are pricing. So this is mainly the investigation we are taking into account in Brazil right now.

Good to hear, thank you very much.

Your next question is a follow-up question from John Brandt with HSBC.

Hi, thank you. Just a quick follow-up question regarding the IPO of the mining assets. Is it fair to assume that with all the other corporate activity that you have going on at the moment that any IPO is no longer in the cards or has been deprioritized? Thank you.

Okay, we still have the IPO of Casa de Pedra mining activity on our list of -- our to do list, however, there is no date for it. We are negotiating or finalizing a new business plan for the NAMISA together with our -- with the other shareholders of the Company. So it's unlikely to have this IPO in the short term but it's still in our minds. So we do not give up the idea but it's not a priority at this point in time.

Okay, thank you.

You're welcome.

(Operator Instructions). Your next question is a follow-up from the line of Alex Hacking with Citigroup.

Hey Paulo, thanks for taking the question. Just regarding the potential IPO of Casa de Pedra, I guess with iron ore prices where they are if the cash flow from that business seems strong enough to fund all of the investments required, so I guess my question would be what's the strategic logic, right now, behind potentially pushing forward with that IPO?

You have presented a very strong point, and that we are considering. We know, internally, that the cash flows from the mining operations are more than enough to sustain the CapEx program. So this company can fund itself, the growth is, I'll say, minimum of that and can be managed on a very profitable basis. That's one reason why this IPO we have been careful in when if we would do or not, this IPO. That's why it's not a top priority as I just have said, at this point in time. But I confirm the cash flows, they are more than sufficient to fund the expansion.

Thanks.

Your next question is follow up from the line of Renato Antunes with Barclay's Capital.

Hi, thank you for taking my follow up. A very simple question, if you could please on your mining business unit if you could explain what was the contribution to revenues from the assets in the mining operations and with the (inaudible) that would be great?

Okay, what to tell you, that [Boseexcel] is a very small mine in the Amazon region to (inaudible) it's a very small tin mine, so it's immaterial. Although it's a positive result, it's a company that has a positive cash generation. It's important for us because we use tin in our galvanizing plants but it's very, very small when comparing to the size of (inaudible).

And the same applies, not in such an intense way for the port facility. So you can take that most of the (inaudible) model, 90%, 95% of the [helds] comes from the mining activity. That's one suggestion because I -- we got this call, this question from a lot of people in the Brazilian conference call we are going to provide more details on it in the next report. And if you need some -- feel free to call our Investor Relations and they will provide you, I will talk to our comptroller who's here to provide some clarification on it.

Thanks.

Thank you.

Your next question is a follow up from the line of Rene Kleyweg with UBS.

Too follow up on your point about the lack of urgency on the IPO, the iron ore assets, can -- can you just clarify should we still expect the consolidation of NAMISA and CSN despite that or are those assets going to remain separate?

I believe that we can expect it but not in the near term. We are fixing -- not just in here, fixing a new business plan or discussing this new business plan and we believe that as there is a lot synergies and a great value for most of our shareholders, the minority shareholders of NAMISA and ourselves that this consolidation is a natural movement. But we have to respect the move, the speed and the way the negotiations are going. So there is no hurry for it. It's something that may happen in the future, of course, as you know we can run both companies on a separated way but the best way would be to run them together. So you can expect -- but don't expect it in the short term please.

Thanks again.

Okay thank you.

(Operator Instructions). There are no further questions at this time, I will turn the conference over to Mr. Paulo Penido. Mr. Penido you may begin.

Just to thank you all for participating in this conference call and also to remember that please contact our Investor Relations area, (inaudible) in order to further clarify the points that were not, I'd say, not addressed here but we are always available to help you.

Thank you. This concludes today's CSN's Fourth Quarter 2010 and 2010 Earnings Conference Call, you may disconnect your lines at this time.