Companhia Siderurgica Nacional SA (SID) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the CSN First Quarter 2011 Earnings Conference Call. Today, with us, we have the Company's executive officers. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After the Company's remarks are over, there will be a question-and-answer session. At that time, further instructions will be given. (Operator Instructions).

We have simultaneous webcasts that may be accessed 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 this 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 presents CSN's operation and financial highlights for the period. Mr. Penido, you may begin your conference.

Okay. Thank you all for being -- to participate in this call. I would like to start with a brief presentation about our results in the first quarter of the year. On page three, and this presentation is available on our webcast, we present our -- some highlights of our numbers. I'd like to stress or to highlight the 10% growth in our net revenue, the 3% growth in our gross profit, the 6% growth in our EBITDA, reaching BRL1.5 billion, the 37% growth in our net income, reaching BRL616 million and there was a small reduction of 2%, to -- from 42% to 40% on our EBITDA margin, mostly due to poor mix in terms of products sold in this quarter, which is a normal, say, reaction we have to sell what the market is demanding. But all in all, the numbers were quite strong and our 40% EBITDA margin is also very, very strong.

If we move to page four, we see some more details on how our EBITDA went from BRL1.4 billion to BRL1.5 billion. Basically, considering that the steel products prices were stable in the first quarter, when comparing to the fourth quarter, the volume, we have sold more volume of steel products, which helped the results. We have some more price, a little bit of cost impact, but all in all, we had a positive impact from the steel objective of our company.

In the mining is not in this graph, but I can say that we had a higher volume, higher cost, a little bit better, not so good mix, as I said before. But all in all, the mining impact in the EBITDA was zero, one thing compensated the other. And we have saved some costs at the end of the day. We reached -- went from BRL1.4 billion to BRL1.5 billion.

Moving to page five, we feel that our revenues breakdown is still as expected. 60% of the sales from steel products, 31% of the sales from mining products. In terms of EBITDA, knowing that the margins for mining products are much higher than the margins for steel products, we see that 49% of the EBITDA comes from mining and 43% from steel. All the others, they are around 7% of it.

If we go to page six and if we check with some more details the performance of our steel activities, we see that the volume, the good news that we have reached the 1.2 million tons of sales in the steel products. Our goal for the year, the guidance that we have provided for the year, is to be between 4.8 million and 5 million tons. So we are -- the running rate is fine. We are performing as expected. The EBITDA margin was basically stable from 29.8% from 30.1%. And the revenues went up as a result of the higher volumes. So the performance in these two areas was above our budget and as expected.

If we check, on page seven, the performance of our mining activities, the volume went up from 6.4 million tons in the first quarter to 6.6 million tons. We have a challenge in this segment to grow -- to achieve a guidance of 28 million to 30 million tons, most likely around 28 million tons. The margin was a little bit down, as we said, because of the product mix and some of the internal sales that we have made. But [houses] are going up and adjusted EBITDA was basically flat, compared one quarter to the other quarter.

On page eight, we show our leverage, which is, I would say, quite stable the last several quarters. 4.6 times. Our net debt is, today, BRL10.6 billion, which is, I would say, a comfortable position. That can be confirmed on page nine, where we showed maturities breakdown of our debt, which is very comfortable. We have BRL1.2 billion for 2011 and all the other, the coming years, around BRL2 billion, BRL2.1 billion, BRL2.2 billion, which is a fraction of the expected EBITDA for the period.

So in summary, we have a strong quarter. We, the management of the Company, we feel very comfortable with the performance of the Company and with the guidance that we are providing that we will be able to perform and to deliver, I would say, sound results of the year. Thank you.

Thank you. The floor is now open for questions. (Operator Instructions). Your first question is from the line of Carlos de Alba of Morgan Stanley.

Yes. Good morning, Paulo. Good morning, everyone. I wonder if you can please give us an update on what the next steps are in terms of the growth for the iron ore operations, along with steel and cement. And as well, if you can give us a number for your CapEx expected for this year and next year? Thank you.

I'm sorry. So thanks for the question. Iron ore sales, they tend to be -- to reach 28 million to 30 million tons this year, most likely 28 million, as I said. For next year, we are expecting 33 million tons. And for the coming year, something around 40 million, 42 million, a little bit more. We still don't have a final number for 2013. But for this year is 28 million. Next year, 33 million. That's the short-term goal for iron ore.

In terms of CapEx for this year, we are expecting a number around BRL5 billion. That's the guidance for CapEx. And that's going to be a record high CapEx level for the Company. Okay?

Yes. Thank you very much, Paulo.

Okay. Sorry. Thanks.

Our next question is from Rodrigo Barros of Deutsche Bank.

I think this question is for Jaime Nicolate. If I may, Jaime. Give us a road map on the expansion of both Casa de Pedra and NAMISA on the time line. But in addition to this, if you could explain how much of the future expansion of NAMISA in the next -- and Casa de Pedra in the next phase will be hard to [taburite] or soft at taburite, and what should be the product mix between pallet fleet, intra fleet and [large]? Thank you very much.

Okay, I will start and then John will go finish this. In terms of deadlines, our port facilities service expected to reach 45 million tons of capacity by October 2012, October next year. The mine is expected to reach 42 million tons by July next year and 50 million tons by July 2014. So these are the target dates for the expansion of this facility. So maybe John can give you the answer.

Rodrigo, thank you for your question. In fact we, as you already know, we have finished in the expansion to 40 million tons Casa de Pedra. As we didn't finish our expansion to 45 at the port, yet, as Paulo mentioned, the new capacity will arrive next year. And we are working below the real capacity in Casa de Pedra, because of these limitations in port capacity. But we are in line to deliver the 45 million tons for middle, let's say, third quarter next year.

And regarding the mill's expansion, we are underway to get the environmental approval for the 20 million tons expansion this year. And we'll be reaching the expansion of the new 20 million ton pellet feed plant in NAMISA in 2015, okay? That's our target for NAMISA. And also for Casa de Pedra, I think you have the numbers that Paulo delivered to you that the 8 million tons planned to reach the capacity of 50 million tons. We will be delivering, 2014.

Okay. And John, just to clarify, the two expansions in Casa de Pedra and the one in NAMISA, how much of that would be for the compact materials? Let's say, the hard taburites or compact taburites? Do you have that number?

If -- that station that we will face ahead, we will be focused on the high silica material. Because our -- technically speaking, our tsavorite is not the hard tsavorite, okay? It's easy to grind, okay? We have a very low work ingots, that's the measure of the hardness of the material. But you are right, the extension of this is focused on producing high-quality pellet feed, to produce around 30 million tons of pellet feed, high-quality pellet feed, based on high silica, et cetera.

Okay. Thanks very much.

The next question is coming from the line of Renato Antunes of Barclays Capital.

Thank you. Good afternoon everyone. Thanks for taking my question. I just wanted to touch on a subject, in the Portuguese call you were talking a lot about imports to the domestic market, to the domestic steel market. I just wanted to focus a bit on the competitive environment between the domestic/steel makers. We have recently seen [Argenine venitar] talking about increasing their focus on the domestic market. And I wanted to get your views on how do you believe how the increasing competition between the domestic players will be over the next years. Do you see the competitive environment getting tougher? That's my question. Thank you.

Hello, Renato. Good morning, again. Regarding to imports, we have to emphasize, again, that last year, we had something like 25% of total [effort] and consumption in Brazil related to the imported material. We are going to forecast, this year, something like 10%. So in other words, we are forecasting to recover something like 1.5 million tons a year. It's more than sufficient to compete or to absorb this type of growth, let's say, with the local producers in Brazil. Obviously we have to take into account that our players, both Arcelor and Usiminas, both of them are increasing capacity in galvinized products.

So, I would expect that we are going to have much more fight, let's say, for the galva products in Brazil. But on the other hand we had to also take into account that building products and other markets related to infrastructure to construction to work up in Olympics will demand much more galvanized products from now on to the rest of the next two years. So I think we have the space for everybody to compete in the local market instead of having too much share in the imports material in Brazil.

Thank you.

Okay.

The next question comes from Rene Kleyweg of UBS.

Good morning gentlemen just following up on the CapEx theme. Could you just provide a little bit more color on the --- on what's happening with the pellet plants and also in terms of the expansion of the next phase of the Port- expansion beyond the 45 million tons. And then just confirm presumably the run of mine expansion at Casa de Pedra to feed NAMISA will coincide with the 2015 startup of the processing facilities, yes?

Hi thank you for your question again. We are in the process of negotiating the proposal for the construction of the first pellet plant. Of course the pellet plant has an important increment in the CapEx. The CapEx for the pellet plant is as high CapEx now and the pellet plant if you take into consideration the margins that the pellet has in the market now over the [slinter] fines or pellet fines it not pays for the CapEx of a pellet plant.

If you make the calculation around $40 per ton of premium in a pellet plant you see that there is not enough space to pay for the CapEx of the extension. But anyway we are making the analysis of the proposal for the implementation of the first pellet plant and we have in our CapEx plan to build two pellet plants because that's our plan for NAMISA and that is what we agreed with our partners in the NAMISA business. But we are on the way to construct the first one.

Thank you and just in terms of the port expansion, time frame.

The port expansion for the next year there's a quarter of next year we'll be reaching the 45 million tons capacity. The 45 million ton capacity expansion is very close to the 60 million tons capacity in terms of equipment. Then the 45 will bring almost all the equipment necessary for the 60 million ton expansion. That should be delivered in December 2013 one year ahead of the 45 million tons expansion.

Thank you.

(Operator Instructions). Your next question your next question is from the line of Alexandre Miguel of ITAU.

Hello good afternoon everyone thanks for the call. My first question Paulo is regarding your cash position. I would like to get more color on your strategy regarding your cash position since I understand you have already reached cash position and intends increase at least $3 billion for the next quarter with the -- that you raised and also with the sale of [Reversdeau]. So I just understand what your strategy that you would likely be maybe increase dividends or invest in another thing or pay down some debt?

Okay, Alexandre our position our policy for cash position has been always to be --- to maintain the Company liquid. So CSN intends to remain liquid but not as liquid as it is right now so you're right to ask the question. We the [score] of position enables CSN to be able to look for M&A opportunities on comfortable base as we are doing in the [Forsukalados] case right now. This position also leaves us on a very comfortable base to deliver the organic growth of say growths that we have in the mining business that we just explained in the last few questions the growth on the long steel business and the growth in the cement business that we have announced.

So the current cash flow position will gradually return to a lower level but again a lower level but preserving our high liquidity and we don't plan to pay special dividends. The dividends they were already announced we plan to just to remain paying a decent level of dividends or I'll rephrase it a rich level of dividend as we have been paying the last few years. And to have the comfortable position and I'm just summarizing answer in term of M&A and in terms of looking for the organic growth problems that we have. You can say that we already pre-financed these opportunities.

Okay and then on M&A Paulo any business or regions that you'd be interested -- more interested maybe coal again or any other regions that you are focused.

Yes the regions are the traditional regions that we had covered before, the US and Europe. The business mostly steel and cement but we will be paying close attention to the coal area. I'm not saying that we are going to buy but we are considering some coal opportunities to have some active participation in some coal mining companies and we are not planning to run any coal mining company but in order to hedge our necessities we may be considering to buy some participation in mines.

Okay, and my second question is on the production of sale schedule of iron ore if you can give us the breakdown of the stake of NAMISA and Casa de Pedra in the guidance that you provided for 2011, '12 and '13.

Okay guidance of iron ore sales as I said it is between 28 and 30 million tons most likely 28 million tons, being close to 20 million tons NAMISA sales and 8 to 10 million tons in Casa de Pedra.

Okay for 2012 any color.

For 2012 minimal 33 million tons of course we're going to work to do more but that's the port -- we are limited by the port capacity. As we said before the extension to 45 million tons is scheduled for October next year. Of course we are working to anticipated that's why I say minimum 33 million tons. And I would say a similar breakdown 20 to 21 million tons for NAMISA and the rest for Casa de Pedra.

Okay perfect, thank you, Paulo.

Thank you Alexandre

The next question is from Rogerio Zarpao of Banco Safra.

Hi everyone thank you for the call. I just have a short follow up question with John from the previous call. John you very clearly the difference in the poor mix iron ore business affecting company's results in the first quarter. I would just like to know if coupled with that if there was any difference in the percentage of the volumes sold on a monthly basis versus volumes sold on a quarterly basis for the period? If could you revert back to fourth quarter you commented on during the last call that there was a higher percentage of the volumes on a monthly basis. I would like to know if it happened the same thing this time and if so what was the percentage between monthly volumes and quarterly volumes for the quarter. Thank you very much.

In fact as we explained in the morning that was not the difference. As I mentioned our price for this quarter was pretty much in line with the last (inaudible) as I explained (inaudible) reached almost $128 per wet metric ton. But on top of these things that we mentioned the poor mix and also the sales from CSN to NAMISA we have to put another important thing to our net revenues in net revenues in reais.

There is the appreciation of reais against the US dollar because our sales are in US dollars and just this almost 1.8% appreciation of the Brazilian currency in this quarter generated less around BRL32 million in our net revenues for this quarter. That means if we didn't have this factor our EBITDA would be around BRL824 million for this quarter. Then this is a mix of things that we explained and on top of that the appreciation of the Brazilian currency the reais against the US dollars. But again the majority of our sales in this quarter has been the quoted basis price.

Okay, John, thank you very much.

Your next question is from the line [Corele Lokepic] with Merrill Lynch.

Hi, Paulo, and thank you for the call. And I just have a follow-up question actually. I think you might have mentioned this. We were wondering what the rising the domestic steel prices were -- was on the first quarter and what you're expecting again on the second quarter? Thank you, Paulo.

Okay, I will hand this question to Eneas, who is our Metallurgy Director, please.

Thank you.

Corele, good afternoon, again. Good afternoon, just to emphasize, we are taking into account in our strategy that we have --

(Technical difficulty)

Initial line disconnected. Ladies and gentlemen, today's conference call will resume momentarily. Ladies and gentlemen, thank you for your patience. Today's conference call will resume momentarily.

(inaudible)

Okay, you may continue.

Hello?

Okay, hi, sir. You may continue.

Okay Corele, this is Martinez and just to emphasize, we are very concerned about import. Hello?

(Operator Instructions). And your question is from Corele Lokepic with Merrill Lynch.

Hi, Martinez, I think we're back on.

And, Corele, your line is open.

Hi, guys, I don't know if you're not listening to me right now. But, Paulo, Martinez, are you guys listening to me? Okay, hello?

Sorry, you're very -- we're not connected here.

The line is connected.

Paulo, Martinez? Okay, no problem. We will just call you guys later, thank you.

This is CSN back to the line. Are we connected at this present time? We were answer the call from Corele. Hello?

(Operator Instructions).

(inaudible)

And, Corele, your line is open.

Hi, guys, are you listening to me now?

Yes.

Sorry, Operator, we were -- oh, there we go.

Okay, I will turn the answer to Mr. Martinez regarding the price and NAMISA market, please.

Yes, well, the forecast. We are very, very concerned about the imports in Brazil, as I mentioned in the previous conference call. Last year, we had already worked with 25% of imports in Brazil and we are forecasting to have something like 10% to 12% of imports in Brazil this year. In terms of pricing, we are interested in keeping a premium of all imported land material in Brazil in the range of 10% or something like this.

10% to 12% is already our strategy for all of the markets. Obviously, we also need to into account and take into consideration that we have -- are very well connected with the customer chain and we are still understanding exactly what is [guarding] each line in order to treat everybody the same way. So, we started with distribution and building products. We are, now, talking with other industrial segments and we have already started the negotiations with auto makers in Brazil. So, this is our big pictures about the price in Brazil, okay.

Okay, great, but I just, sorry, a quick question. Just we saw that some wrong news about it --. Hello?

Hello.

Your next question is from the line of Rene Kleyweg of UBS.

Please follow up on the previous question, in terms of what price increases or what you expect to see in terms of the domestic realized prices for the second quarter and whether the price increase is now a two stage process? And, also, just to follow-up, on the economics on the pelletizing side, as you pointed out, the economics of a pelletizing plants are not that attractive. But, there's a lot of pelletizing capacity coming on or pellet fee capacity coming on-stream. So, I was just hoping to get a better right sense of your commitments or your obligations under the agreement with NAMISA in terms of the two pelletizing plants.

With just getting straight to the point, around 7.5% to 10% in the second quarter. Obviously, you have to take into account in your calculation that the distribution and building products would present something like 33% of our mix. We are not cheap and we are not talking about price increases in auto makers right now. So, basically, this is the information I have available for you.

Rene, this is Jaime again. In answer to your follow up on the pellet plant, for sure. The volume in the market is growing and there is no new volume of high quality iron ore in the market. More and more, the consumers will need to use pellet [feed] in order to mix this with low grade iron ore in order to produce steel in a very competitive way. The way to use pellet feed is to transform pellet feed in pellets, that's the way. The pellet can be built by the steel plant and, also, by the producer. We will use the new pellet plant, our partners they use the pellets in order to balance their mix.

But, it's difficult for the mine producers, today, to justify an extension in pellets just, consider this premium of the pellet over the single file. But, I think this will bring an opportunity to increase of the premium of pellets in the market in the future, okay. And because, if the price of pellets is not sustainable, but, as I mentioned, we are in the process of analyzing the proposal and we will build it because we believe that market for pellets will increase in the future, the premium, okay.

Thanks, Jaime. I guess the question is whether the premium increases over the cost of pellet feed, right, and when pellet feed starts to trade at a discount to center feed. And that's where it becomes the miner's problem, again, as opposed to the end consumer, right?

Yes, again, because the reference for the premium is not the feeder find is not over the pellet find. I believe in the market for pellet finds, the markets will be strong because they need to mix high quality iron ore with the low grade iron ore. And the way to do that is using pellet feed, okay. You can add the pellet feed, blended with center finds in the feed requirements, but that it is just a small percentage. However, you can use the pellets. But, the reference in the market now for the premium is the center find.

Thank you.

(Operator Instructions). There are no further questions. I would now like to turn the call back over to Mr. Paulo Penido for closing remarks. Mr. Penido, please, go ahead.

Okay, I would like to thank you all for participating in this call and, remember, that our investment relations areas is ready for any further questions for you -- from you. Thank you all.

Thank you. This concludes today's CSN First Quarter of 2011 Earnings Conference Call. You may disconnect your lines at this time.