Companhia Siderurgica Nacional SA (SID) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to CSN's second 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 a listen-only mode during the Company's presentation. (Operator instructions.)

We have simultaneous webcast that may be accessed through CSN's IR website at www.csn.com.br/ir. The slide presentation may be downloaded from the 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 and 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 risk, 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 for 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. Alberto Monteiro, who will present CSN's operating and financial highlights for the period. Mr. Monteiro, you may begin your conference.

Good morning. Thank you very much for participating in CSN second quarter 2011 earnings conference call. Now let's go straight to slide three, which shows our second quarter '11 consolidated results.

Net revenue totaled BRL4.3 billion in second quarter '11, 14% up on Q1 '11. In our Company record, net revenue in the first six month of 2011 reached BRL8.1 billion, 15% more than in the half 2010, and also our record. Gross profit amounted to BRL1.8 billion in second quarter '11 on an 18% improvement over Q1 '11.

Second quarter EBITDA totaled BRL1.8 billion, 16% higher than the BRL1.5 billion reported in Q1 '11. First half EBITDA reached BRL3.3 billion, 7% up on the first six month of 2010. The EBITDA margin achieved 41% in Q2 '11, higher than in the previous quarter. The Company posted consolidated net income of BRL1.1 billion in the second quarter, 85% up on the Q1 '11. It's important to highlight that net income in the first half increased by 32% over the same period last year, reaching BRL1.8 billion.

Let's go to slide four, which shows EBITDA evolution in the second quarter of the 2011. The Q2 '11 EBITDA of BRL1.8 billion increased by 16% over the BRL1.5 billion posted in Q1 '11. Here it is important to highlight the following. First, average iron ore price were around 15% higher than in Q1 '11. Iron ore sales volume included 100% of NAMISA sales, increased by 2% over first quarter 2011 to 6.7 million tons.

The third one is steel product sales volume reached 1.3 million tons, up 7% [from] Q1 '11. The steel prices average around BRL1,900 per ton, 2% higher than in the first quarter '11 thanks to the increasing in domestic price occurred in the middle of the quarter. On the other hand, the increase in steel production cost was basically due to higher output in Q2 '11 when [crude and road] steel production climbed by 10% and 17% respectively over Q1 '11.

Let's move to slide five, which shows our results by segment. Here you have net revenue and EBITDA by segment. Once again, it's important highlight the growth of our mining operation every quarter. In Q1 '11, mining accounted for 31% of consolidated net revenue while in Q2 '11 is accounting for 34%. As for EBITDA, mining sales accounted for 49% of Q1 '11 EBITDA compared to 54% in Q2 '11.

Let's move on slide six where you can see some of our steel segment figures. Let's begin with the graph at the top left. In Q2 '11, steel sales volume totaled 1.3 million tons, 7% more than in first quarter 2011. Of this total, 86% were sold in the domestic market, 10% by overseas subsidiaries, and 4% were exported.

The top right graph shows net revenues growth. Net revenues from the steel segment totaled BRL2.5 billion, 9% up on Q1 '11 chiefly due to the increase in domestic sales volume.

The two graphs on the bottom shows EBITDA. The steel segment's EBITDA totaled BRL733 million in Q2 '11, 6% up on first quarter year 2011, again basically due to higher domestic sales volume. The EBITDA margin stood at 29% in Q2 '11, in line with the previous quarter.

Next we have slide seven, which shows the same (inaudible) for mining. Let's begin once again with the top left graph. In Q2 '11, iron ore sales volume by CSN and NAMISA, considering 100% of the Company, totaled 6.7 million tons, 2% (inaudible) first quarter 2011 in a new record. Out of this total, exports accounted for 6.3 million tons, or 93%. Our steel mill in Volta Redonda, Rio de Janeiro, consumed 1.7 million tons in Q2 '11. This is not shown in this graph, which only gives sales through third parts.

Move on now on the graph on the top right, we see that net revenue increased by substantial 26% over Q1 '11 to BRL1.5 billion, also a Company record mainly reflecting the higher prices in the second quarter.

Now let's look at EBITDA on the bottom of the slide. Second quarter EBITDA totaled BRL1.0 billion, 31% up from 1Q '11. Year-to-date mining EBITDA reached BRL1.8 billion, 124% on the first half 2010. The Q2 '11 EBITDA margin achieved 68% higher than the 55% margin recorded in Q1 '11.

Let's move now to slide eight where we have our net debt evolution. We closed June 2011 with net debt of BRL11.3 billion, BRL600 million more than the end of March, essentially due to the following factors. First off, CapEx of approximately BRL900 million in Q2 '11, payments of BRL1.9 billion in dividends and interest in equity, BRL600 million related to the cost of debt, and the last one, increase of BRL300 million in working capital allocated to the business.

On the other hand, CSN generated EBITDA of BRL1.8 billion in the second quarter 2011. And the sale of the Company's interest in Riversdale generated inflow of BRL1.3 billion.

Move on to slide nine. On the previous slide, we look at the net debt. Here it's important to highlight that the net debt to EBITDA ratio came to 1.7 in second quarter 2011 based on last 12 month EBITDA of BRL6.6 billion, slightly higher than first quarter figure. The Company has on a very flexible debt profile. We have cash position of BRL11.7 billion at the end of the Q2 '11.

That brings me to the end of our presentation. Let me now open the conference call for the Q&A section.

Thank you. (Operator instructions.)

Rene Kleyweg of UBS.

(Inaudible) more color on the provisions as they relate to the additional interest expenses on the debt, and also what's -- tax obligations there were in relation to the BRL1.3 billion of revenue from the sale of Riversdale. Thank you.

Hi, this is [Ruggerio]. There is no taxation that, again, because it was, again, abroad (inaudible), okay?

And in terms of the BRL546 million for interest on loans and financing, could you provide a bit more color on that, please?

Hi. I haven't heard you correct. Could you repeat again?

In your financial results, there's a provision for interest on loans and financing of BRL546 million. I was just looking for some additional color on what that is.

Probably it's better if you can send your question later, we can respond to you directly in more detail, because I don't have that detail now. We may have some accounts payable that we put in our (inaudible) program. We have some tax contingent that we transfer from contingents into accounts payable because we had in [originally for the government]. Probably we would -- being referred about that. So if you have any other question, I would appreciate (inaudible) later, okay?

Yes. The reference provision is BRL77 million, but I'll follow up with the guys in the office, so thanks for that.

And Operator, if I could ask one more question just in relation to NAMISA, is there any signs of an update in terms of an agreement on the CapEx program there and providing us with some visibility on the expansion plans for CSN Iron Ore as a whole?

Yes, hi, Rene. This is Ricardo Abramof speaking. How are you doing?

I'm very well. How are you?

Fine. Well, we finalized our discussions with our partners in NAMISA, and as you probably know, as part of this discussion, or as some of the consortium members, namely Nippon Steel and Sumitomo, decided to leave. The other consortium members decided to stay, and they are increasing their participation -- some of them are increasing their participation in NAMISA.

This discussion was exactly in relation to a realignment of the business plan of NAMISA, which means a revision of the CapEx and also a revision of the dates of the startups of the project. And once we have finished the discussions in relation to who should stay and who should leave, now the shareholders of NAMISA are exactly now discussing and evaluating all the CapEx and the impact on the business plan.

So we don't have that right now. We should have that in the future case, to answer you properly.

Thank you. Is that something we should expect? I mean, obviously this has been dragging on for quite a while now. Is that something we should expect in the third quarter?

Yes, yes, I think so. This is, as I told you -- this discussion with the partners, it's important to stress or to highlight that first, okay, the discussions were concentrated on merging NAMISA and Casa de Pedra. That discussion is over since we couldn't come to an agreement on how to do the merger or what would be the merger ratio between NAMISA and CSN.

And since we -- that both sides decided not to discuss the merger anymore, then it came to second discussion would be who wants to stay, who wants to leave. That discussion just finished a month ago, or less than a month ago, and now we are going into the details of the business plan.

But we do -- yes, we do expect that to be ready, if not on the third quarter, on the fourth quarter, okay?

Thank you.

(Operator instructions.)

Alex Hacking of Citibank.

Hi, good morning. Thanks for taking my question. In fact, I have two questions. The first one, are you able to give us any color on why it was that Nippon and Sumitomo decided to drop out of the NAMISA consortium?

And then, secondly, the CapEx on iron ore in the port was very, very low in the second quarter again, same as the first quarter. And I understand that NAMISA's been on hold as you continue the discussions with the partners. But at what point should we expect to see the CapEx for Casa de Pedra and the port project rising to levels appropriate with an BRL11 billion expansion budget? When should we expect to see the money being spent that's necessary for these projects to achieve their targets? Would it be later this year, next year? So any guidance, that would be great. Thank you.

Yes. Let me answer the first. In relation to the decision of Sumitomo and Nippon to leave the consortium, this was basically -- I don't want to answer for them. I think that they have made releases. But what I can say is that this was because of their different view in relation to this realignment of the business plan, okay? So they had different views from the other consortium members and from CSN, and that is the main reason for them not staying with us, as far as I understand.

Well, so this is in relation to NAMISA and Sumitomo and Nippon. In relation to our CapEx, we have -- at the port for instance, we are expecting to expand to have the 45 million ton phase ready by the second quarter of 2012, then the next phase, which is the 60 million ton, by the middle of 2013, okay? And the last phase, which -- or not the last, but the next phase, which is 84 million ton, some time in 2014.

With this, we will be expanding at around BRL2.5 billion. If you just give me a moment here so I can open something here, yes -- well, so this is in relation to the port.

In relation to the mine, our CapEx at Casa de Pedra is scheduled to be at about four billion tons in order to ramp up, first to complete the 40 million tons, then we have an additional two-million ton capacity, and then an additional 10 million ton capacity, raising Casa de Pedra capacity to 50 million ton by the end -- let me check here, exact the date -- by the end of 2015, we should reach 50 million tons, and this will require BRL4.2 billion, okay?

And this money has already been [disimbursed] with different stages of different projects. So for instance, the 45 million ton capacity at the port, we have already bought all the equipments. We have already contracted several contractors for all the silver works and everything that needs to be done. And the 45 million ton is fully underway, okay, to be started up in the third quarter of 2012.

And then, I think the only missing point here is the [exacted] expansion of NAMISA, what exactly will be the CapEx. This is exactly what has been under discussion with the partners. Although we haven't changed the total expansion capacity of NAMISA, we're still targeted to have NAMISA producing at around 39 million tons, which includes some third-party purchases in this 39 million ton.

What I cannot tell you is now how much we're going to need for that expansion because this is exactly being discussed with the partners.

Okay. Can I just follow up quickly? So if I take just the port and Casa de Pedra, the CapEx is I think, according to the numbers, something like BRL6 billion to BRL7 billion, right, which if it's spread out over four years, between '11 and '15 should be something like BRL1.5 billion to BRL1.7 billion per year, okay? The spending in the first half on these projects is something like BRL150 million, okay, so trending towards BRL300 million per year. Like, where is the gap here? Is there just going to be a very significant increase in CapEx next year? How do I reconcile this?

Yes, that's right. We should see an increase in CapEx on the following years, mainly because, as I explained to you, although you should see also in the second half some CapEx expenditure in relation to the port, okay, in relation to the Casa de Pedra, our 40 million ton capacity is almost ready, okay? We just need some fine-tuning, some commissioning and some equipment, which means that most of the money was already used for the 40 million ton capacity expansion.

Then there are the two stages, which is an additional two million ton, which will be ready by the middle of 2013, and the additional 10 million ton to be ready by the end of 2015. Those two are on the very early stages. So the money that we are expanding -- that we're using now is only for the detailed engineering, analysis of the engineering, so that's why you don't see much money being used as of now. But it should increase on the following year significantly in order for us to reach the targets that I mentioned here.

Okay, so we're looking at a very significant dollar per ton CapEx for the incremental 10 to 20 million tons of production at Casa de Pedra if the 40 million is almost paid for already, right, and we have another three billion to get to 50 million tons? Am I thinking about this right? You've spent about BRL1 billion so far?

Well, let me -- yes, you're not wrong, but you also -- part of this CapEx that we are mentioning here, what, four billion ton, it's going to be used for a new tailing dams and new wasting deposits, which is not only needed for the expansion, but it's also needed for the continuation of the existing production in even the 40 million ton capacity.

Okay, thank you. I apologize for so many questions. I just wanted to have clear in my mind. Thank you.

(Operator instructions.)

Alexandre Miguel of Itau.

Hi, good afternoon, everyone. My first question related to the steel business. I'm not sure if Martin is there, he could comment a little bit on the competitive environment in the domestic market in Brazil. I think the Portuguese call you mentioned the threat of increasing risk of imports. And given that many companies are now targeting their volumes to the domestic market, if this increase in competition in the domestic market could be a further threat to domestic prices. So if you could comment on this environment here, that will be my first question.

Hello, Alexandre. Good morning, again. Good afternoon for you. And I would like to respond to your question related to the local market competition.

Alexandre, as I mentioned in the morning, global crisis stronger than we expect, and we are very, very concerned about what been effect of the true consequences here in Brazil, not only take into account the steel business, but also considering the whole industry.

According to our numbers, first half of the year we had already experienced something like 830,000 metric tons of total direct imports in Brazil. Comparing with the same period last year, we had already reduced it something like 50%. But take into account the news that we received from line up -- from some line-up ships in Brazil. We are considering that we are going to have something like 212 or 230,000 metric tons in August. It's a very harmful sign for us. It's a red light for us.

I don't believe that we are already fixed the problem of direct imports in Brazil. If you take into account the numbers of hot bands -- or excuse me, hot rolled coils, considering a price of, let's say 680 FOB price, or 730 CMF price, we are really experiencing in Brazil a range of 5% to 9% premium over importer [land and mature].

So not take into account the situation is not so bad. But on the other hand, most of the importers are now offering the credit line for our (inaudible) in Brazil. So now we have to fight against not only the prices but also the payment terms. So some trading companies in Brazil are offering something like 880 days for payment terms. It's another [fad] for us, so we are concerned about direct imports.

Talking about indirect imports, it's not necessary to mention that we are completely upside-down. In terms of industrialization in Brazil, in the case of auto market, for example, in the case of auto parts, systems and auto industry, some parts of the whole chains are just working with 10.5% of local Brazilian contents. It's very low comparing with other parts of the world.

So considering these situations, all the steel makers, not only in Brazil but especially in Brazil, we need to understand or to act in the markets very [surgical] in some value chains. We don't need to do something much stronger in distribution or building products, but we need to understand what the whole industry companies will be in the second half.

In terms of pricing, we are working with stability for the second half. And we have a very heavy project to reduce our costs in Brazil. So we are working not only in labor costs, but also in some contracts, in some variable costs, so that we can be prepared to compete. But trying to summarize prices, stability in the second half, be cautious with direct and imported.

And another point that I would like to mention, Dumas (inaudible) president had already announced yesterday, some, let's say, trade remedies, trying to soften the imports in Brazil. But obviously, we are in the right direction, but the intensity is very, very smooth and very poor comparing if we are -- necessary to do in Brazil right now.

But CSN, just CSN is working right now in the anti-dumping process in galvanized products. We (inaudible) Galvalume Hot Dip. And let's see what's going to happen with our situation during the second half relating to this process.

Okay. and just could you add, Martinez, on the -- given this competition environment with the imports, can you mention how is the market, among the domestic news, if any of them are being more aggressive trying to get market share from the other, and as we see some companies reducing exports and trying to dip more into the domestic market?

Another important point, Alexandre, as I mentioned, Brazil is a [fortunate country] that we have the local markets very, very strong comparing with the rest of the world. All of the segments, including consumer products, building products, are going to show by the end of this year growth comparing with last year.

Another thing to think about it, our operating consumption in Brazilian flat products will be something like 415 million tons a year. Comparing with the last year, we are going to be flat in terms of operating consumption. But in terms of internal sales in the local markets, local markets will grow in sales something like 10%, and CSN will follow the market. We are not interested in gaining market share, losing money. There is no sense to do this. We are very, very profitable company. We would like to remain considering steel as a business, at least with 30% of EBITDA margin. There is no sense to do lower than this, in my opinion.

And the most important thing to be done right now is trying to -- not only to gain market share, but we need to increase the size of the pizza, pizza size, let's say. We need to fight against indirect imports. We need to fight against some illegal -- let's say illegal is the right word -- illegal imports in Brazil. We need to work very, very close with the government not only to understand the steel business. It's good, but it's not sufficient. And we need to understand exactly what the value chain will be in Brazil, and if this value chain will remain competitive in the next years.

So basically that's the point that -- but in terms of volume, CSN will keep the guidance, five million tons a year, and 85% to 86% related to the local markets. Maybe, depending on the situation, we analyze the possibility to export something to our parent companies in US or Portugal -- subsidiaries, excuse me.

So basically this is the whole scenario, Alexandre. I think I have already answered your question in a good way.

Sure. Thank you, Martinez. Thank you very much.

Rene Kleyweg of UBS.

Thank you, gentlemen, for the opportunity of a follow-up question. Just in terms of NAMISA, my understanding was that NAMISA effectively had preemptive rights on port capacity this year for around 17 million tons. I'm just a little bit surprised in terms of the volume, NAMISA participation in the overall iron ore volumes for the quarter. Could you give us some indication of what we should expect from NAMISA sales volume in the second half of the year?

Rene, this [Abramofis]. Let me answer your question.

Our sales guidance for the year is still in the range of 31 million tons of total sales, which more or less 1.5 million is what we think we're going to sell at the domestic market, and then the balance, okay? We originally have planned 20 million ton for NAMISA, and that's around 9.5, 9.6 for CSN.

But we do have flexibility, agreed, between CSN and between NAMISA that we change that on quarter-by-quarter basis depending on what each company produces and what the market needs, okay, what are our commitments, what are the fulfillment of our commitments in that specific quarter. so that's the reason why -- because of that flexibility, that's the reason why we see, on the first half of the year, NAMISA and CSN on a more or less six million ton of export each one.

So that flexibility will stay there for the balance of the year, but from now on, we expect to start doing more volume to NAMISA than to -- other than to CSN. What will be the final figure for the year will depend on, again, what each company will produce vis-a-vis our commitments, and for instance, in case of NAMISA, NAMISA buys iron ore from third party. So depending on exactly how much it buys, or the quality it buys, this can affect NAMISA's blending and NAMISA's production. And that's why the flexibility is there.

So in this case, we are acting almost as a merged company, okay? Of course, that flexibility has limits, but it's there, and we are acting as merger because what we are doing here is the best for both company and the best for the market.

Okay, thank you. And just to follow up on an earlier answer as regards to the expansion to 45 million tons by the second quarter of next year at the port, I'd heard comments internally that engineers at CSN thought it could be as late as the first quarter of 2013, and I think recent guidance was more towards the end of the third quarter, beginning of the fourth quarter. Just in the interest of making sure that expectations are managed correctly here, is there any reason why the timeframe here is moved forward? And do you have a delivery schedule, let's say, for the loaders in terms of when they arrive on site, that that gives you the confidence to be operational by the third quarter in terms of the increased capacity? Thank you.

Well, hi, Rene, (inaudible). I don't know, let me -- because I'm not on the same room as the other directors, so let me ask if (inaudible), who is the director responsible for the port, if he is there. If he is there, he will be the right person to answer your question, okay?

Martin, [Daniel] (inaudible) the information.

Good morning, Rene. It's [Daniel Santos], (inaudible) for the iron ore operations in Casa de Pedra. I'm representing [David] because he had another commitment and another appointment, and I could answer his question.

The idea is to keep -- the plan is to deliver this 45 million ton capacity in the third quarter of 2012. That's the plan that [you] have established. And we decide to speed up the actions and implement some operational improvement program to assure that we will achieve this objective.

Sorry, so just to clarify, it is operational in the third quarter but installed by the second quarter, or you mean you finish the construction in the third quarter, operational for the fourth quarter?

We will finish the construction in the third quarter of 2012.

Thank you, sir.

Renato Antunes of Flow.

Hello, good afternoon, everyone, and thanks for taking my follow-up from the Portuguese call.

My first question is related to your long sale operations, and I just wanted to get a better color on your strategy to the recently acquired assets in Spain. In the past you mentioned the possibility of potentially shipping [rebars] from Spain to Brazil, and I just wanted to know if that's still being contemplated and if there's any expected timeline.

And the second question goes to Martinez. You made a very detailed explanation of the domestic market. I just wanted to get more color on the inventory levels throughout the flat (inaudible) chain, if you can comment on that, especially when you think about end clients and also inventories at the steel mills. That would be great. Thank you.

Renato, this is Martinez speaking. About the business in Spain, we don't have anything to talk about it right now. We hadn't already finalized the business, so I have no reason, or I have no reasons to have any comments about this.

Since we make up our decision, obviously we are going to communicate the market in a proper way. We don't have any plan to analyze the possibility of imports, rebar or [wire rolled] or profiles to Brazil. We have to take into account that we are going to have another -- we are going to have a plant, the first plant in Volta Redonda, starting up next year by November or October, something like this. And we are going to be a local player in Brazil. So Europe is another business plan, another decisions, and that's it.

About inventories, I don't know if I catch correctly your question. In terms of these two inventories, in the distribution market, fortunately, we have something like 3.4 right now, 3.4 months of inventory. And in our forecast, in our planning, we are forecasting to close the year in a range of 2.8 or 2.9. I don't think it's going to be a big deal to be concerned with steel inventories and distribution markets.

In the industry, industry basically is not working with inventory, so it's a very good [news] relating to the steel consumption, the steel business in Brazil. So basically, this is the answer related to inventories.

Thank you, Martinez.

There are no further questions at this time. I will now turn the floor back over to Mr. Alberto Monteiro for closing remarks. Mr. Monteiro, go ahead.

I'd like to thank you for all participation in our conference call, and remind you that our IR team is always at your disposal for any questions. You have a very good day. Thank you very much.

Thank you. This concludes today's CSN second quarter '11 earnings conference call. You may disconnect your lines at this time.