Companhia Siderurgica Nacional SA (SID) 2014 Q1 法說會逐字稿

Good morning and thank you for waiting. Welcome to CSN's earnings conference call for the first quarter of 2014. With us today we have the Company's Executive Officer.

We would like to inform you that this event is being recorded and that participants will be in a listen-only mode during the conference 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).

Today's event is also being simultaneously webcast (inaudible) you can have access 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, we would like to say 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's 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. David Salama, CSN's Executive Investor Relations Officer, who will present the Company's operating and financial highlights for the period. Please, Mr. Salama, you may begin your conference.

Good morning, everyone. Thank you for listening to CSN's earnings presentation. Here with me today the Executive Committee of the Company.

I'd like to start on slide number three, where we have the consolidated results for the first quarter of 2014. In the first quarter, net consolidated revenue of BRL4.4 billion had an increase of 20% vis-a-vis the BRL3.6 billion reported on the first quarter of 2013, mainly thanks to higher revenues in mining and steel. When compared to the fourth quarter of '13, the net revenue dropped 12%, mainly due to lower revenue in mining.

Gross profit for the first quarter of '14 reached BRL1.3 billion, 69% higher vis-a-vis the first quarter of 2013. And comparing the fourth quarter of 2013, gross profit was lower 19%.

CSN has reached net profit of BRL52 million (inaudible) above our net profit in the first quarter of last year. Adjusted EBITDA of BRL1.4 billion was 60% higher than the BRL902 million from the first quarter of 2013, led by mining and steel results. Comparing to the fourth Q of '13, adjusted EBITDA was 18% lower.

EBITDA margin on first Q '14 was 30%, 8 percentage points higher than the first Q '13, and 2 percentage points lower than the EBITDA margin of the fourth quarter of '13.

Investments in the first quarter of '14 totaled BRL355 million, of which BRL114 million in [steel] for Casa de Pedra and Port of Itaguai, BRL108 in steel and, basically, caused by renovations on the hot strip mill, as well as on the coke oven batteries, besides [BRL12 million] invested on the expansion of production capacity.

Now let's turn to slide number four, where we have the results for segments. On this slide we have net revenue and EBITDA by the main segments of CSN.

In the first quarter of 2014, steel represented 64% of the net income and 50% of EBITDA. Mining accounted for 26% of net income and 39% of EBITDA.

Now let's turn to slide number five, where we are going to have a breakdown for steel segments. Starting by the top left chart, on the first quarter of '14 the total sales volume of steel was 1.4 million tonnes, 4% lower than total volume in the fourth Q '13, considering the seasonality of sales in the domestic market. Out of total sales, 73% were in the domestic market 25% by our overseas subsidiaries, and 2% exported.

Now on the top right chart, steel net revenue was BRL3.1 billion, 1% higher than 4Q '13, basically thanks to higher prices that reached an average of BRL2,216 in the first quarter, an increase of 6% vis-a-vis the last quarter of last year.

Now, to the bottom of the slide, we have the EBITDA information. On 1Q '14 steel adjusted EBITDA was BRL761 million, 20% higher than 4Q '13, basically thanks to higher prices, and (inaudible) the highest EBITDA since the third quarter of 2010. Adjusted EBITDA margin of 24% on first Q '14 increased 3 percentage points vis-a-vis the fourth quarter of 2013, also the highest EBITDA margin since the third quarter of 2011. These results show a margin recovery for the steel segment.

On the next slide, we'll talk about mining. Once again, I'd like to start with the top left chart. In the first quarter of 2014 sales of iron ore for CSN and Namisa totaled 6.4 million tonnes, 18% lower vis-a-vis 4Q '13 due to maintenance on Tecar at Itaguai Port. Of that volume, 2.2 million tonnes were sold by Namisa. In addition to sales to customers, CSN consumed 1.5 million tonnes of iron ore on the first quarter of 2014.

Still on the top part, but now to the right corner, we see that net revenue of BRL1.2 billion in the first quarter was down 35% vis-a-vis 4Q '13 due to a smaller volume sold, as well as lower prices that have reached $89 in the first quarter vis-a-vis $96 in the fourth quarter of last year. And also, in the fourth quarter of last year we received BRL323 million regarding insurance compensation due to loss of profits from a claim in the (inaudible) and the conveyor belt system of Tecar.

Now let's turn to mining EBITDA on the bottom of the slide. On the first quarter of 2014 EBITDA amounted to BRL585 million, a 43% drop vis-a-vis the prior quarter, and the EBITDA of 47% was 6 percentage points lower.

On slide seven, we'll discuss EBITDA trends. EBITDA of BRL1.4 billion in the first quarter was down 18% vis-a-vis 4Q '13. Higher steel prices had a favorable impact on the EBITDA. On the other hand, contributing to EBITDA reduction, lower prices and volume for iron ore, smaller steel volume sold, as well as insurance payment for Tecar posted in 4Q '13.

On slide eight, we will talk about the net debt trend. On March 31st, consolidated net debt totaled BRL15.8 billion, very close to 2013 year-end figure. Net debt/EBITDA ratio was down from 2.91 times to 2.7 times at the end of March 2014.

Also contributing to the increase of net debt, dividends and interest on equity of BRL400 million paid to shareholders, CapEx of BRL300 million, and also disbursement of BRL700 million for debt charges. As an offsetting effect, EBITDA reached BRL1.4 billion in the first quarter of this year.

60% of net debt in March was denominated in reals and 40% in foreign currency, mainly American dollars.

From debt position 88% of the debt is long term and 12% of the debt is short term.

That concludes my presentation. Let's now turn to the Q&A session.

(Operator Instructions). First question from Renato Antunes, Brasil Plural company.

Good morning, everyone. Thank you for the question.

First, about steel, could you speak a bit more about how you view 2014 regarding the demand? This is one of the big questions from the market. And how do you view (inaudible) demand now that we have a few issues with the automotive industry. This is my first question.

Second question, about CapEx, could you speak a bit more specifically about what you expect for this year, also the expansion of the mine, and a change in the (inaudible)? We can see that the CapEx number is low, and I would like to understand how CapEx will evolve as we have the project to expand the mining operation.

Renato, thank you for your question. Martinez will answer the first one about the steel segment, and your second question I will answer, together with Daniel Santos, our Mining Director. Martinez, you have the floor.

Hello, Renato. Good morning. First of all, to understand what CSN thinks about the market in 2014, demand et cetera, first, we believe there is a lot of pessimism in the market because of elections, holidays during the year and the World Cup, the FIFA World Cup. Our view is that 2014 will be a good year. We still have good wages, income, and enough consumption to sustain the economy during this year.

Now the issues in the automotive industry, also considering cars, trucks, buses, we believe it is only an isolated issue. To our mind, the issue will be solved in the next few days so that this industry will resume growth.

Another piece of important information in which we believe, our foreign exchange rate is an outlier today, and we believe the foreign exchange rate will come back to more market levels, will come back to more realistic market levels.

Now, speaking about CSN operations, we are operating at full capacity today, with approximately 100% of our production in the domestic market. Our margins have rebounded because of a new price alignment in the domestic market from 68%, and also because we've had a very strong program of cost reductions in effect. Under this umbrella of cost reduction we have a very daring plan to improve operating excellence, led by our production team.

Just to give you an idea, the margin of flat steel, considering Brazil in the first quarter, is around 30%, which is a favorable level compared to what we've seen in previous years.

Another important point we firmly believe in adding more value. In the first quarter 2014, the coated products represented 40%. In the first quarter 2013, only 35%. So, we've also improved our product mix during this period of time.

We also wish to highlight that our portfolio is quite rich. That is, we are not concentrated in specific markets, so that we have a very good market distribution of products.

Now the good news, as of May the 1st, we've had the first sale from the new operation of long steel and this year we will deliver to the market approximately [160 tonnes] of long steel or long products.

(Inaudible) our operating excellence, we will reduce inventories as compared to the first quarter 2013, and this reduction was approximately 40%, which has, of course, also contributed for our result.

Regarding maintenance, the last maintenance was in the HSM, or the hot strip mill. This was a 10-day stoppage. Our production is 20,000 to 14,000 tonnes per day, so you can actually calculate the production loss we had because of the maintenance on the HSM, which is our bottleneck today, the hot strip mill. So, this slight drop in volume in the first quarter is certainly associated to this scheduled maintenance stoppage.

Also interesting, we had a lower purchase of slabs, 102,000 tonnes, in the first quarter.

So, in general, we have an optimistic view of the market, as we analyze value chains, except for the automotive chain. When you look at construction, white-line consumable goods, also retail and distribution, all of these industries expect growth in 2014.

Of course, we cannot forget about the automotive issue. This market is important. It accounts for 30% of apparent consumption, but, as I said, I firmly believe this is only an isolated issue which will be solved in the next few days.

Renato, now let us talk about CapEx this year. You have actually seen that in this quarter we disbursed BRL355 million, basically in mining BRL114 million, where we include Casa de Pedra mine, and also Itaguai Port, another BRL108 million in steel operations.

Our guidance for this year is BRL2.8 billion, and the highlight is mining, accounting for BRL1.5 billion in new investment. Also, BRL628 million will be invested in the steel operations, BRL400 million in cement, and other projects account for the remaining BRL239 million, adding up to BRL2.8 billion investments.

Now, mining is highly relevant in 2014. Investments of BRL1.5 million out of BRL2.8 million, so it is our number one project in 2014, and let me now ask Daniel dos Santos, our Mining Director, to provide more details about these efforts to expand our capacity in Casa de Pedra. Daniel?

Hello. Yes, we have good news about the expansion of Casa de Pedra mine. We now have this construction work being conducted in the dam. We needed more capacity to store tailings, which is quite common in this area of iron ore exploration. Now we have been able to implement a greater capacity in our tailings dam, as we've finished the construction work of Casa de Pedra dam.

The construction work ended in March, in the first quarter. We finished the elevation work, but as we had a drier season in January and February, we were able to advance this construction work so that it was concluded before the deadline.

In terms of the final disposition of tailings, we have enough capacity. We have a comfortable position, not only for 2014, but also in the long term.

In addition, as we've had a drier summer, we were able to move faster with some other projects. When you look at sterile material, or materials that cover the ore during mining operations, we've been able to make a lot of progress in the development of our main deposit of sterile material in Casa de Pedra.

So, both the tailings dam and also these new deposits have enough capacity to support our production plan for 2014 and further on in the next five years. So, we are in a very comfortable position because the efforts in the last two years were actually very big efforts, but now we stay at an advantageous position. We were quite successful in this efforts.

In terms of ore production, as I've mentioned, we are currently about to conclude the installation of additional lines in the Casa de Pedra processing plant. We already have the benefit of some lines that have been delivered. That is, we made progress, as you can see, looking at our product mix in the first quarter. The quality of our pallet feed is really very high, and now, in the second quarter, we will begin to deliver the new loading lines in the railway yards.

So, we have a few contracts being negotiated. We will soon be able to sign these contracts to be able to start the operations, to start the construction work now that we will begin the dry season between May and October. So, we will need this CapEx as David mentioned in the dry season, in the Brazilian winter between May and October, which is the best time for construction work.

We expect to conclude Casa de Pedra expansion until the first quarter next year, and with that, and with the strategy we've adopted of delivering line-by-line, production will increase gradually along this year, according to our plan.

Thank you.

The next question comes from Mr. Thiago Lofiego from Bank of America. Please, Mr. Thiago?

Good morning. I have two questions.

I'll go next to Martinez. Can you comment on the premium of the domestic market vis-a-vis imported, and do you think there could be price pressure for the next months due to the value, the amount of the exchange rate, and also the realized average price for the second quarter, considering the carryover that we had in the beginning of the year?

And now my second question is to David. Can you elaborate a little bit more about Namisa (inaudible), that merging of Namisa and Casa de Pedra? How is that going?

Good morning, Thiago. About the premium, if you think today in hot band the FOB price of $530 per tonne and freight of $45, we would have $575. That hot band here in Brazil would cost around $760. If you consider today the price that we have in the domestic market until the same comparison basis, not considering (inaudible) taxes, the price is around 8% to 9%.

When the importer brings the product in, usually they have to finance, and then the price is added for $10 to $15 for 90-day payments. So, basically, cold-rolled products and zinc or galvanized is a little bit higher. Zinc galvanized is a little bit higher, around 8% to 9%.

And, as I said in the beginning, when I was talking about the first question, we believe in an improvement of the foreign exchange rate. This really is an outlier exchange rate, and the scenario for the exchange rate is price stability, but we are going to do adjustments in any type of deviations, whether in the dollar or in the cost. The idea is to keep the margins we're able to recover in this first quarter, whether it is coming from the price or the cost, which is very important.

Thiago, about Namisa, what I can tell you that is both parties are still negotiating, and we are analyzing all possibilities in terms of merging. We have a schedule for us to reach a consensus up to September. We have already extended that date, but you should understand that this is a complex negotiation and involves a lot of people, high values, but what we can see is that there is goodwill among all involved, and we expect to come into a good agreement in the negotiations.

Thank you.

Our next question is from Marcelo Aguiar from Goldman Sachs. Please, Mr. Marcelo, the floor is yours.

Thank you for this opportunity. About price in the domestic market, it's a question for Martinez, can you elaborate a little bit more on a slower demand scenario in Brazil? And you always have that expectation of the depreciation of the foreign exchange rate, but what happens if there's lower demand in Brazil? Do you see higher competition among Brazilian players that could cause a drop in prices in the Brazilian market? And also, I would like to know how do you see imports in the Brazilian market?

And my second question has to do with mining, so Daniel. Daniel, you talked about the lines delivering. Can you tell us how many lines you have operating now, and how many will be operating from next year on, when I believe you're be reaching 40 million capacity in Casa de Pedra? Just to have an idea of the sizing, what you have operating today, and how many lines you'll have operating in the future?

And also, you talked about CapEx for 2014. Can you talk about the CapEx for the long term, 2015, 2016? That would help.

Thank you.

Marcelo, thank you for your questions. Actually, well, I'll start by the last question, talking about CapEx. We don't have right now estimates for 2015 or 2016, but in general I should say that we do not expect something too different from what we have already done last year, and also that should happen along this year. And as soon as we have more details and other figures available, we'll disclose them to you.

So, Martinez will address your first question, and Daniel the second question.

Marcelo, good morning. I will start by imports. First, with good news. Indirect import, which is a figure that I always mention on the calls, and I say that this is the problem of our industry (inaudible) processes. The problem is what we already have in Brazil that is finished, the final product, the finished product, that considers it.

The first quarter of 2014 had an import, indirect import level of 1.2 million tonnes. If we annualize the figure -- and, obviously, this is not a simple math -- but that already shows a drop in the indirect imports of 11% vis-a-vis 2013, which was 5.6 million tonnes. So, that is excellent news, because it shows a recovery of some sectors in the industrialization, and, therefore, this volume ends up being a provision or is provided by local industry.

So, about direct imports, that has increased from 6% to 7% in the first quarter of 2014 vis-a-vis the fourth quarter of 2013. Basically, in coated products.

Now, about solid products, that is not an import where you're bringing the coil. In spite of having 40% of our mix in that sector of coated products, we deliver much more than coils, also serving white-line, auto sector, civil construction. So, the package of services that we have to the market does not explain any type of increase in imports.

In addition to that, in this insulated market, we should have good news this quarter. We are fighting a series of imports that are coming below the (inaudible) used in the Brazilian market, so CSN is refusing or, better, is going to the correct agencies so that we could have the same comparison basis off of those imported products to Brazil. In my understanding, these are fraudulent imports in terms of the specs, and they could cause problems in your future.

About the market premium, we talk a lot about the foreign exchange rate, but when I talked about a premium of 8% to 9% in the hot band, I am considering the exchange rate of 2.23. Considering 8% to 9%, and let's not forget about the $10 to $15 of financing for those that import, so it's not worth it to increase that import level. The risk is too high when compared to the benefit that the importer might have when thinking on a short term.

And finally, how about the demand? No matter what is the demand, CSN is going to operate at full capacity, providing products for the domestic market. And I would say, once again, there is a lot of pessimism in the market, but the distribution sector is going well. In the last quarter, it was better than last year.

Machinery replacement, capital goods, civil construction, white-line -- all of those have posted growth. We are only having a specific problem in the auto sector, and I believe this is going to be addressed very quickly. That market represents 30% to 35% of the steel consumption, of the apparent consumption. That is very important, not only for steel, but also for the whole Brazilian economy.

Okay, Marcelo, let us now speak about mining. Let me provide you with some background information before I answer your question.

In the first quarter, we have produced at a very strong pace in Namisa mining operations, and also at Casa de Pedra, and we continue to deliver our expansion program. Our production has been growing ever since January. The first quarter closed with very strong pace. We reached 27 million tonnes in the end of the first quarter, and this number will continue to grow as the new lines come into operation.

And also, with the new facilities -- I'll provide you with some more details on the new facilities, especially at Casa de Pedra. We have a high level of inventory at Casa de Pedra, and also at Itaguai Port, and if you ask about it, we will keep our guidance of 37 million tonnes of sales in the foreign market, or the international market.

The port has an installed capacity of 44 million since late last year, when we concluded the expansion work, and we also have third-party ore we've purchased to achieve our targets this year and also next year. So, our port capacity surplus will be filled in by providing port services, as we've done in the last six years.

In the last week of March, and also during April, we came to a point at the port where we truly used the full capacity of Tecar equipment. So, as we could conclude, the implementation of the new installations.

Since was done for the first time, we had a few maintenance issues, as we mentioned in the press release, especially related to our conveyor belts. As we've mentioned, this problem was solved in the end of April, and now in May we are operating at a very fast pace, in line with what we planned for. All in all, regarding mining operations, we've been able to attain the planned results despite these issues we had in Tecar in March and April.

Now, regarding the details of this expansion in Casa de Pedra, bringing it down to very simple terms so that I can explain to you the new lines, I mean, I should actually have a chart with flowcharts so you would understand the processes in Casa de Pedra, but in simple terms, the production of lump ore and since we have seven production lines that have already been in operation, and now we're implementing eight new lines.

Out of these eight new lines, four are currently contributing, not in full capacity, but they are already contributing significantly for us to reach our production targets. Up until October, the other lines will probably be ready to operate. This is sinter feed and lump ore. You also have to consider the fines generated from this process.

But now, with a new process, we'll generate two new flows. One will be tailings going to the dam. The other one will be feeding the concentration circuit to produce pellet feeds. So, we do concentration by flotation, and there, in the flotation area, and bringing it, again, down to very simple terms, we currently have seven lines in operation, but there are five new lines to be implemented until June. So, by late June, our flotation loop will be ready and it will add capacity in the production of pellet feed. But, more importantly, it will help us improve the prices of products sold.

Basically, this is what I can tell you about Casa de Pedra. In the second half of this year, as we've announced previously, we will begin the conclusion of the electric electromechanical assembly of the railway yards installation. So, with that, we will have concluded the expansion of Casa de Pedra. As you can see, we are now coming to the end of the construction work in this expansion program, which shall be concluded, as announced, so that we will be able to use our full port capacity as soon as possible.

Our next question comes from Mr. Ivano Westin from Credit Suisse. Please, Mr. Ivano?

Good morning, everyone. Thank you for your questions.

The first is about purchasing slabs from third parties. You already mentioned that it was 102,000 tonnes for this quarter. What can we expect here? What is the Company's target? The Company wishes to go back to self sufficiency in slabs, can we expect a higher reduction in the next months?

And that will be my second question for you, you talked about cutting in costs. What can we expect there? You have reported a significant reduction in the first quarter, also a reduction in SG&A. What can we expect for the next quarter?

Thank you, Ivano, for your questions. Martinez will address the first one, and then I'll talk about the expense cost cuts here in the Company.

Ivano, just to go back a little bit, we were purchasing slabs last year, and I won't go too deep in that, but there are several reasons that this started. Since the last quarter of 2012, we had the renovation of the blast furnace, the quality of the iron ore, the reclaimer, the beginning of maintenance of coke ovens, and then we also had a renovation of the hot roll mill that started in December.

So, the trend is to reduce purchasing slabs by the end of the year, and we want to be self sufficient in the slab production, as we always have been. Obviously, any kind of market opportunity will be analyzed, because, in spite of having purchased the slabs last year and this year, we did have a positive result to CSN.

So, in summary, we'll go back to being self sufficient, but we'll also take into consideration opportunities in the market to purchase the slabs.

Ivano, about costs and expenses, I've been saying that we are doing work on that area. I've been saying that on the last calls. We have started those efforts a little while ago, and there are several ongoing programs, both for production, as well as for administrative area in terms of cost reduction.

And I believe the results are starting to show. You saw that we had a favorable impact. Sometimes it's difficult to exactly quantify the figures, because that involves a series of programs that are running simultaneously, but what I can say is that we still have that purpose, that objective. That is going to be soon both in the operational, as well as in the administrative areas.

We are aiming for that goal along this year, and along next year, as well.

Thank you very much.

(Operator Instructions). Thank you. Since there are no more questions, I would like to turn the floor to Mr. David Salama, Executive Director, Investor Relations, for his final remarks.

I would like to thank you all for participating on this call, and just would like to go back and highlight a few topics, showing our point of view.

You have seen that we are at a strong pace in mining. Our production is back to normal. We did have a specific problem along the first quarter due to the port shipments, and that has been solved already. And something else that I would like to highlight, our commercial strategy for mining along the first quarter, that also has brought important results, and it has helped increase the profitability in mining.

On the other hand, for steel, as I just said, we have a lot of programs for cost reduction, and we foresee a favorable scenario ahead. We have seen some reports that are not as optimistic, but we still carry out that optimism for the year. And that's why we bring you these figures for the first quarter.

So, that was the message that I wanted to convey, and also to say that the IR team is available for all of you. If you have any other questions, we'll be available to address them. Thank you very much, and have a good day.

The conference call for CSN earnings results is concluded. Have a nice day.