Companhia Siderurgica Nacional SA (SID) 2014 Q2 法說會逐字稿

(Interpreted) Good morning, ladies and gentlemen. Thank you for waiting. At this time, we would like to welcome everyone to CSN's second quarter 2014 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. (Operator Instructions).

We have simultaneous Webcast that may be access through the CSN's Investor Relation's 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 facility for this call on the Website.

Before proceeding, I want to mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reforms Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CSN management and on information currently available to the Company.

Forward-looking statements are not guarantees of performance. 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 cause -- could also affect the results, 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 Investor Relations Officer, who will present the Company's operating and financial highlights for the period. Please, Mr. Salama, you may begin.

(Interpreted) Good morning, everyone. Thank you for participating in CSN's earnings conference call. Here with me are the company executive officers. We will begin on slide 3, where you can find consolidated figures for the second quarter of 2014.

In the second quarter, the consolidated net revenue amounted to BRL4 billion, in line with the second quarter 2013. Compared with a net revenue of BRL4.4 billion in the first quarter, net revenue in the second quarter was down 7%, basically explained by a low revenue in the steel and mining segments.

Gross profit in the second quarter 2014 reached BRL1.3 billion, 26% up compared to the second quarter of 2013 and in keeping with the gross profit of the past quarter.

Adjusted EBITDA in the second quarter was BRL1.3 billion, up 19% compared with the BRL1.1 billion posted in the second quarter 2013, while the EBITDA margin grew 6 percentage points.

Compared with the first quarter 2014, adjusted EBITDA was down 9%, mainly stemming from lower iron ore prices, partially offset by an upturn in the EBITDA posted by the steel segment, which led to the margins to remain stable at 30%.

Let's go to slide 4 now, where we show you investments made in the first half of 2014. In the first half of 2014, CSN invested BRL915 million, [highlight] going to investments in mining, accounting for 40% of the total, reaching BRL365 million. Additionally, BRL239 million were invested in the steel operation, BRL127 million in expanding our cement production capacity, and BRL161 million in port and rail logistics.

Please go to slide 5 now, where we break down our results by segment. Let us begin with the upper part of the slide. Net revenue in the second quarter totaled BRL4 billion, of which 64% came from steel, 25% from mining, 6% from logistics, 3% from cement, and 2% from energy.

In the mid-portion of the slide, we see the EBITDA for the second quarter, which was BRL1.3 billion, 56% coming from the steel operations, 31% from mining, 7% from logistics, while the cement and energy segments contributed with approximately 3% each.

In the bottom part of the slide, we have the quarterly performance of the EBITDA and EBITDA margin. In the second quarter, the steel business posted an EBITDA of BRL793 million, mining BRL442 million, logistics BRL105 million, cement BRL34 million, and energy BRL37 million.

It's important to note that the EBITDA margin grew in all segments where CSN operates with the exception of mining, due to lower iron ore prices in the international market. In steel, EBITDA margin reached 28%, in mining 40%, in logistics 38%, in cement 30%, and in energy 43%.

Now, please go to slide 6. Here, we give you the results of steel business in more detail. Let us start with the chart in the upper left-hand corner. In the second quarter, the total sales volume of steel was 1.26 million tonnes, down 9% compared to the volumes sold in the first quarter 2014, basically explained by (inaudible) economic activity in the domestic market with fewer business sales in the quarter. Of the total, 73% of sales came from the domestic market, 25% through our subsidiaries overseas, and 2% for export sales.

Still on the top of the slide on the right-hand corner, we see that net revenue of the steel business totaled BRL2.8 billion, a 9% reduction vis-a-vis the first quarter, basically due to the lower sales volumes. In the second quarter of 2014, the net revenue per tonne was BRL2,214, in keeping with the previous quarter.

Now, in the bottom part of the slide, we will analyze the EBITDA. In the second quarter, adjusted EBITDA for steel operations was BRL793 million, up 4% compared to the first quarter 2014, primarily explained by lower production costs.

This has been the highest EBITDA since the third quarter of 2010. Adjusted EBITDA margin was 28% in the second quarter, growing by 4 percentage points from that posted in the first quarter this year.

We will now do the same analysis for the mining segment. Once again, let us begin with the chart on the upper left corner. In the second quarter, CSN's and Namisa's iron ore sales totaled 7.2 million tonnes, therefore 13% higher than the first quarter of 2014. Out of the total volume, 2.4 million tonnes were sold by Namisa.

In addition to sales to our customers, CSN used another 1.5 million tonnes of iron ore in the second quarter of this year.

In April, we concluded the maintenance work of the (inaudible) cost, bringing the shipment days in Itaguai Port back to normal.

Still in the upper part of the slide, this time on the right, we can see that the net revenue of BRL1.1 billion in the second quarter went down 10% vis-a-vis the first quarter this year, due to lower prices, with an average of $73 per tonne in the second quarter vis-a-vis an average of $89 in the first quarter of 2014. And this was partially offset by the higher volumes sold.

In the second quarter, EBITDA totaled BRL442 million, going down 25% quarter on quarter, whereas the EBITDA margin of 40% went down 7%.

Now, on slide number 8, we show the consolidated EBITDA performance. EBITDA of BRL1.3 billion in the second quarter went down 10% vis-a-vis the first quarter of 2014. The lower EBITDA resulted from lower prices of iron ore and the lower volume of steel sold. These effects were offset in part by lower costs in steel operations and the higher mining volume sold.

Now, let us move onto the next slide, where we show the performance of our net debt at CSN. On June 30th, 2014, the gross debt was BRL28.6 billion, remaining flat vis-a-vis the end of March 2014. The net debt in turn totaled BRL16.7 billion, an increase of BRL900 million vis-a-vis the first quarter of the year.

Our net debt was affected by a CapEx of BRL600 million, disbursements of BRL600 million with debt charges, BRL400 million with a share buyback program, and an increase in working capital amounting BRL200 million. These effects were partially offset by the EBITDA ofBRL1.3 billion in the second quarter of this year.

Of the total gross debt by end June, 60% was denominated in reais and 40% in foreign currency, particularly US dollars. 87% of the debt is long term, and 13% short term. The net debt-over-EBITDA, ratio based on the adjusted EBITDA of the last 12 months, was 2.71 times, therefore flat vis-a-vis 2.66 times posted at the end of the first quarter of 2014.

This basically concludes my presentation. Now, let us move onto the question-and-answer session.

(Interpreted) (Operator Instructions). Rodolfo de Angele, JPMorgan.

(Interpreted) Good morning. My question is about cost. This quarter has a more challenging business scenario. But, despite all that, the cost (inaudible) for steel and mining went down. I wonder if you could elaborate on the main drivers, anything special or nonrecurring?

In addition, if possible, I would like to hear a comment on the expectations, commercial expectations, for the second quarter in terms of demand and price. Thank you.

(Interpreted) Rodolfo, thank you for your question. (inaudible) Martinez is going to answer your second question first about the market right now. And then I'll come back telling you about what we're doing to lower our [protection] cost.

(Interpreted) Hi, Rodolfo. Good morning. First of all, as to the global scenario, what we see today is extremely fierce competition and a war for competitiveness in the international environment in our segment.

We believe that, in the second half of the year, there will be improvements due to seasonality. Historically, the second half is better and, also, more numbers of working days. The first half was very much affected by the World Cup and other events. And actually, very little was done for the last 12 months.

As of September, this scenario will improve in our opinion. The government did sign and we also have some loan and credit flexibility vis-a-vis reserve requirements with banks. By and large, I believe that, by year end, there will be improvements, some productive change are about to recovering the inventory.

Inventories have been generated. And we believe that part of the volume will also come from recovery and replenishment of inventory. CSN will be fully focused in the international market, as it's been for five or six years.

And in the second quarter, maybe David will give you more detail on cost. We optimized or maximized the cost-price ratios. In the past, we didn't have elasticity of volume in the second quarter. And we prefer to focus on cost and price.

For price, as you could see in your earnings release, we have a rebound in the second quarter of 2.4, extremely positive. And in addition, we also had the cost-reduction program. The outlook is that margins will be flat. CSN keeps on having coated product or [tin] product --

(technical difficulties)

-- this last quarter, we also had the long steel product. And now, we have another product in our portfolio. So, basically, this is the scenario that we are envisaging for the third quarter. David now is going to tell you about our cost-reduction plan.

(Interpreted) Rodolfo, actually, we have been working for some quarters now to have a strong program for cost reduction at the Company and also focus on productivity gains. This is clearly bringing positive results to the Company.

Actually, we had a reduction in the second quarter of 2% our protection cost of [lab], which now would be around BRL950 per tonne.

Now, just to give you some examples, obviously, part of the raw materials are also in our favor. But, in addition to raw materials, we also have a number other actions being implemented at the Company. Let me begin by addressing raw materials first. And then I'll be talking about the other cost reduction programs.

Just to give an idea, right now, we are working with the coke coal lower than $10 per tonne. Our coke is below $210 per tonne. We also have a good supply agreement for natural gas with Petrobras. In addition, we also see a significant reduction in the [main mantle OI, even though they were down].

And we're also working to lower our inventory levels, particularly raw materials, and the [stock will] materials for supplies.

Coming back to your first point, in terms of cost reduction plans, just to give you some numbers, for the last 12 months, we renegotiated more than 470 contracts for the Company, greater than BRL1 million in total. And up to now, the total accounts for a reduction, a price reduction and a [scope] revision of BRL150 million.

Another program that is also being implemented is about an extension in the maturity terms with suppliers. I could also mention other things, too, about gains of efficiency at the Company. For instance, we implemented a metal reclaimer system. And this should bring annual gains of at least BRL16 million.

So, in addition to the financial impact, we also have something very positive in terms of environmental preservation and also increase in thermal efficiency of blast furnace 2 generators. This is also bringing significant gains over BRL4 million or BRL5 million. In the end, there are several programs that are in progress right now.

Results are beginning to appear. And like I said, this is also going to be our focus. We'll be very strongly engaged in order to cut down on costs. And I can also say that everything is sustainable. We expected to be maintained for future quarters.

(Interpreted) Thank you. Just as a follow up question, what about prices for the second half? What is the trend for the domestic market?

(Interpreted) Rodolfo, in reality, the clarity, if you think about hot bands from $530 or $520, cold-roll products around $590, $610, galvanized $720, the current agreement is between 11% and 16% [with the] exchange rate of 2.25. Basically, that's the price range.

And the [pre-] range we've had vis-a-vis imported [and clear] products, our prices in the domestic market today -- I mean, the unit net revenue net of taxes and [gross] financial expenses for hot rolled products range from 1,890 to 1,974, cold rolled up to 2,305, galvanized 2,016, 2,700. So, basically, this is the price range we have.

And the scenario for the third quarter is stable. And we don't have any other [reclaimer] or recovery of prices this quarter because we have already captured 2.2 vis-a-vis the first quarter of 2014.

Please note that our price from the second quarter of 2013 vis-a-vis the first quarter of 2013 was increased by 22% and, from the first to the fourth quarter, around 8%. So, basically, this is the scenario for premiums. That's something we follow up which is important.

Imports grew a little bit in the second quarter, basically 26%. That's something we are watching very closely because CSN is very much affected. The bulk of imports are related to [plated] products. And indirect imports remain at 1.2 million tonnes of -- in terms of the steel content. By this scenario, we maintain our guidance for sales volume of 6 million tonnes for year 2014.

(Interpreted) Renato Antunes, Brasil Plural.

(Interpreted) Good morning, everyone. Thank you for taking my questions. My first question is about CapEx. This quarter, CapEx from mining Casa de Pedra is slightly increasing. What about the outlook of CapEx disbursement and what it is up to now is in line or keeping with the budget?

The second question is still about mining. I wonder if you could tell us the outlook for sales for future quarters, maybe next year. And what about the impact of the port capacity in the region? Will that have a negative impact to some extent? Thank you.

(Interpreted) Renato, thank you for your question. I'll be answering the first question about CapEx. And then I'll ask Geraldo to ask your question about mining.

As you could see, the first quarter 2014, we invested something around BRL915 million, strong focus on mining BRL365 million, BRL240 million in steel operations, BRL160 million in logistics, and BRL127 million in our expansion for cement.

In reality for the full year, we did not revisit our CapEx. It remains the same for the full year. We announced something BRL1.5 billion in mining, BRL600 million for steel operations, and BRL400 million for cement.

This CapEx in reality is being met within our schedule of execution. And if you consider all the actions that we've been performing vis-a-vis our cost, in other words, more than anything, we want to improve in a sustainable manner and always with full control over CapEx and now in terms of production costs.

Geraldo's going to answer now your question about iron ore and mining.

(Interpreted) Renato, how are you? In terms of sales of iron ore, in the first half of the year, at the critical path, we had a poor capacity. We've been having some problems that we reported in previous calls. But for the second quarter, we expect to run above or between 3 or 4 tonnes per month, reaching 45 in the year.

As to volumes, if you check steel in China, it has been growing quarter on quarter. China is having record steel production, even though the growth is not at the levels that we expected (inaudible). Steel production has been --

(technical difficulties)

-- so increasing production having an impact on price.

Now, we'll go into adaptation in the market, our funds. And we expect the price or the index to be around $100 per tonne by year end. The startup of the new port with the ramp-up process is being followed up. The expansion of domestic mining in Brazil, and we don't believe there will be a strong impact on our ports.

Several competitors in the domestic market, small players in Brazil, what we see is that, due to their costs and the margins, I mean, due to the sales prices today, the margins were slightly complicated because smaller operations tend to have higher costs.

So, today, we feel that there is a retraction in terms of the iron ore availability, not due to port constraints, but due to the prices that our competitors would have, prices ranging from 90 and 100.

So, additional capacity in the port for competitors, we don't believe this will have an impact on our exports. Like David said before, we're working on several cost-reduction programs. So, we're comfortable with our volumes by year end and also for next year.

(Interpreted) Thiago Lofiego, BofA Merrill Lynch.

(Interpreted) Good morning, everyone. I have two questions, one going back to Martinez. Perhaps, Martinez, if you could elaborate on the premium of 11% to 16% for domestic steel compared to imported steel, is there any risk that the premium will be lower in the current scenario, or you think that this is a fair situation?

My second question goes to David. Perhaps you could break down the line of other operating expenses. In second half, significant cost reductions in the quarter, could you perhaps elaborate on what was positive and what was negative in the negative BRL30 million in other expenses? Thank you.

(Interpreted) Hello, Thiago. This is Martinez. Well, the way I see it is the premium of 11% to 16% is the limit. Obviously, uncertainty and possible dollar exchange rate instability in coming months makes this premium possible to happen. But we believe that the premium will remain flat in that range in the third quarter.

Now, looking forward, it will depend on what I usually say. Costs are dropping. Competitive moves up the chain, the raw materials, feed stock, the dollar exchange rate, market situation, which is also very important, and all of that plays a role. And we're expecting a third quarter to be better.

By year end, when the markets are a little bit more stable, we believe that, by year end, we should finish with a positive outlook. But the premium, today, I'd say that 11% to 16% would be (inaudible) finish the materials where CSN has a significant market share.

(Interpreted) Thiago, this is David. Regarding your question about other operating expenses, well, there is an unusual great variation among the quarters because, in this item, we have subgroups. And it is basically adjustments to provisions that we make in the Company. And we'll talk about all sorts of provisions, (inaudible) provisions, lawsuit provisions, labor claims, and the balance for this quarter.

And this is an ongoing evaluation work of these provisions. We work constantly with the auditors so that we can have the most accurate provision by the end of each quarter. And indeed, we had a reversal of about BRL120 million in (inaudible) of our reserves for the environment issue that's impacted the figures for the quarter. And it was a positive factor. And it was basically (inaudible) to the other numbers. I think that this is -- the number that I mentioned is the one to be highlighted.

(Interpreted) So, how recurring is this? You mentioned BRL120 million positive, but there was a negative part as well that contributed to the BRL30 million negative that you reported. So, I want to understand how recurring is this negative factor?

(Interpreted) Well, what I can tell you is what has been recurring quarter by quarter has been something ranging from BRL30 million to perhaps BRL50 million. This we could call a recurring factor in this figure. The rest, we're talking about one-time off adjustments, adjustments that we have to make along the way. But this is nothing recurring quarter after quarter.

(Interpreted) Thank you.

Marcos Assumpcao, Itau BBA.

(Interpreted) Good morning to all. My first question goes to Geraldo regarding marketing. The iron ore sales guidance, if I'm not mistaken, is 37 million tonnes in the first half. First quarter, you did 13 million, or 13 million in the first half. So, the remaining would be 24 million. But you said you're going to maintain the guidance. Should we expect an average volume of 12 million a month?

(Interpreted) Yes. Like I said [before], as of July, we will be operating at 35 million tonnes a year. And [with that], we expect to have 20 million tonnes and to reach a good amount in the end of the year.

(Interpreted) And as for the port revenue, a week ago or two weeks ago, there was a [Vale] auction, a recent Vale auction. And considering the current iron ore prices, the auction, the winning bid was lower than the prices. Do you think that this will be a new trend if the iron ore prices remain at $100, as you said?

(Interpreted) No, like I said before, in the Vale auction, the lot that ended up being sold, well, even with the startup of a new port, this will not necessarily impact our export process or our sales for that matter. We believe that our sales are independent of that. As for the prices of port services, there will be more supply that might have an effect on the port service prices. But we believe it will be a marginal difference.

(Interpreted) Perhaps the last, the [reference] Vale auction will be a good reference price looking forward?

(Interpreted) Well, our procurement department has been signing some agreements to buy ore thanks to port services. Our price will not be necessarily following Vale's performance. An agreement we signed a while ago for prices that were even better than the Vale prices. The Vale price has a stock price and a market condition with a price close to 90. There's still a good influence of that in the Vale auction.

But looking more towards the long term, we believe the prices will be a little higher --

(technical difficulties)

-- Has been done over the quarter so that we can have a more competitive structure in the current market scenario.

(Interpreted) Thank you very much. So, indeed, the cost fell more in other operations other than steel.

(Interpreted) Actually, in steel, that's the 2% I mentioned, which was only (inaudible) slab production. But I have (inaudible) the cost. So, we'll progress and so on and so forth. But, if you add all of that, the numbers above, [then] it's close to 13% overall.

If you want, later on, I can break down all the --

(technical difficulties)

-- Figure. But the September figure I gave you is just the production cost of slabs in the first quarter versus the second quarter of this year.

(Interpreted) Thank you. And my last question, we have heard some rumor regarding the merger of companies (inaudible). Do you think that CSN would be interested in this?

(Interpreted) Well, as for cement, we continue to work on this --

(technical difficulties)

-- What we call the [fast E] system. But in addition to that, you can follow market movements. If a good opportunity comes up, we will look into that, but always in compliance with our philosophy, i.e. seeing whether they make sense, if it creates a value to the Company.

(Interpreted) This is Martinez, Marcos. And to add to what he said, first, we believe (inaudible) in this business. If you all look at the growth of our margins in the second quarter 2013, the cement market was around 22%. Today, in the second quarter of 2014, our margin is 30%.

And something else, CSN is going to be an important player in civil construction because I have cement. I have rebar. I have [finished] products for tile coverage, (inaudible) cement is part of CSN's strategy to be a strong player in civil construction.

In addition, infrastructure projects in Brazil are only getting started. They need to happen. We work on one part of the equation, consumption, unlike China. They get infrastructure. Now, they're working on consumption. So, if you imagine that civil construction, how the civil construction market will grow, CSN is a player. And we would be candidates to possible acquisitions in this area. Of course, (inaudible) considering it.

(Interpreted) Thank you, Martinez, Geraldo, and David.

(Operator Instructions). Leonardo Correa, BTG Pactual.

(Interpreted) Good morning, everybody. My first question is about Namisa negotiation. If I'm not mistaken, in the last quarter, you would expect the conclusion for September or by year end. So, what about negotiations? What is the status, and any possible delays, particularly to close the deal?

And the second question is about the volume of iron ore. We've been following up the port expansion. I'd like to get more color about the expansion of Casa de Pedra mine. What is the current capacity at Casa de Pedra? And how much do you expect to improve by year-end 2015? And what about the expansion of the [waste dam] and also the [razing] of the dam? These are my questions. Thank you.

(Interpreted) Thank you for your questions. I'll be answering the first question about Namisa. And then I'll ask Daniel dos Santos to answer your second question and give you more detail on the status of our expansion min project.

About Namisa, last week, we had another round of negotiations, which are underway. The parties keep on negotiating and actually analyzing all the alternatives available. So, we expect the parties to come to an agreement by late September. As we think, we keep on searching for an alternative until the end of September.

Now, I'll ask Daniel. Daniel, can you help me answer the question about mining?

(Interpreted) Yes. Can you hear me?

(Interpreted) Yes, I can hear you. Please go ahead.

(Interpreted) Okay. Leonardo, let me break your question in three processes, first about the mine, the plan, and then the expansion. For the mine, we bought a fleet, a new fleet last year. It came to us by late 2013. And then we did the handling, the assembly, equipment are fully operational.

In terms of mine equipment, we already have everything ready to roll. When you increase the handling capacity of the mine, you need areas for (inaudible) because we process hematite and high-grade products today. So, the areas for deposits and disposal, they're also operational, and they're being used. Obviously, they were previously licensed.

And in the mine in the first half of the year and by late last year and the beginning of this year, we also have three mobile crushing units that are greatly contributing to improve our production pace and also help in to build the port capacity.

As to the plans, we've been working on an expansion for quite a while now, with addition of eight lines out of which two are already operating since May. We'll be delivering the other two lines by December and the remaining four lines in the first half of next year. And then we'll have shipments. They have to take all the material to the port.

So, the mine, we produce at the plan, and we have to ship everything to the port. Now, we are in the handling phase of the work. We expect to have the peak of the work in the first half of next year, the first quarter to be more precise, so we can deliver railway shipment capacity, which [24 million tonnes] so we can match our expansion plans to close.

As a result, if you add, like Marcos Assumpcao asked, what we did in the first half with the pace that we can see at the port, now, we're 45 million for the second half of the year and the increase in production that we experience right now at Casa de Pedra, 35 million tonnes can be available for export.

(Interpreted) Okay. Thank you very much. Just a follow up question, if I may. Coming back to David, David, what about net debt over EBITDA? First quarter, it was close to 2.7 times. And even considering now the buyback, are you being more aggressive now at CSN? BRL600 million were involved in the buyback. And we also have higher costs due to net financial expenses. So, what about the limit of net debt over EBITDA? And maybe you could also comment on this limit that you [decide] to run your business. Thank you.

(Interpreted) Leonardo, actually, it's good to go back in time a little bit. In reality, one year ago, our net debt over EBITDA ratio was 3.9 times. And now, we've been doing our efforts in order to lower this ratio, taking into account all the investments that we have to do and also our cash use.

Our expectation in reality is to close the year lower than 2.5. This is our expectation. And we'll be working to do that, taking into account the whole CapEx required to expand particularly our mining activities.

Now, a couple of words on our buyback program. This is a sign by our management, our Board of Directors, that our shares, our quota at a lower level considered to be the fair value. In addition, for remaining shareholders, we have a higher potential dividend for future payouts.

(Interpreted) Thank you.

(Interpreted) Thank you.

(Interpreted) Ivano Westin, Credit Suisse.

(Interpreted) Good morning, everyone. Ivano is speaking. Just a follow-up question about the expansion of mining activities. If you look the earnings release and explanation of projects in progress, the capacity of what Casa de Pedra, you have the conclusion in 2014, 2015, Tecar also 2015 and 2016. What about install capacity for Casa de Pedra in 2016? What about Tecar capacity? And what is the corresponding CapEx necessary?

The other question is about the ramp up of the long steel plant. Could you give us a guidance of the sales volume in the second half of this year and next year? Thank you.

(Interpreted) Ivano, thank you for your question. If I may, I will ask Martinez to answer first your question about long steel products. And then Daniel dos Santos will answer your second question about our expansion schedule for mining.

(Interpreted) Great. Thank you.

(Interpreted) Ivano, the guidance for the long steel plant we expect to be about 60,000 to 70,000 tonnes for the second half, virtually rebars and the majority of the volume, and nearly 20% for wire rod.

We're still working on the approval of supply. It's a length [process]. We are approved for higher [segments] for [having] engineering and infrastructure work. And in the second half, we'll be concluding the approval process of more [thinner] products used for light civil construction.

Sales, total sales in the second half volume wise remain low because it was just the approval. For next year, it's too early to say anything about volumes. We're still working on the figures. But our production capacity is 500,000 tonnes. I believe that, by next year, possibly in the second quarter, we'll be having full capacity.

Daniel, can you answer please the second question?

(Interpreted) Good morning, Ivano. Today, installed capacity for shipment, rail shipment is 24 million tonnes at Casa de Pedra. We're working in the mine and in the plant. In the mine, we have already done most of the work. And we are implementing additional lines so we can meet the full capacity.

The next step in the second half is the mobilization and handling of work to expand the rail shipment and therefore reach the level of 40 million tonnes of the plant.

You asked about 2016, right? When we work on our plans on a midterm basis, for 2016, our projection is an installed capacity, because in this case, we have to take into account that some of these works will be [seen] with a ramp-up phase in the first half of 2016 and [late] 2016, to expect to deliver a production capacity of 37 million tonnes at Casa de Pedra.

(Interpreted) Great. What about Tecar capacity, Daniel?

(Interpreted) Tecar's capacity, we have the full installation for 45 million. We'll see with the ramp up process for Tecar. And it depends a lot on what we achieve or what we did in the past for mining, particularly in Casa de Pedra and also or relations with suppliers. But, we already have the full equipment and installed capacity in Tecar for 45 million.

We have another project approved by the Board. And now, with the arrival of the next budget cycle, we expect to have the project concluded by year end.

(Interpreted) It's clear. Thank you, Daniel. Thank you, Martinez. David, if I may, can I just have another question? It is not so clear the merger between Casa de Pedra and Namisa. Could you make additional comments on the current scenario of the negotiation? And what about the timeline or the deadline? It was September, right? Do you maintain this deadline?

(Interpreted) As I said a while ago, last week, we had another round of negotiations. Actually, these negotiations are quite complex, involving several groups. We're making headways in our negotiations. And we are considering all the alternatives possible in terms of a merger.

Our expectations, our deadlines continue December this year. So, by late September, we expect to see or to have a definition of all this.

(Interpreted) It's clear. Thank you.

(Interpreted) Marcelo Aguiar, Goldman Sachs.

(Interpreted) Thank you for taking my questions. I would like to go back to that cost discussion mentioned in the beginning of the Q&A. It is not common to see a steel company posting a 9% volume drop and a cost per ton (inaudible) when you look at the coal prices, they tend to fall in the end of the first quarter and stay at around $120.

Normally, there is a turnover of the inventory of three to four months. So, I would like to understand, David, was there a higher consumption of finished goods that you had in your inventory? And then your cost per ton was very low because you were perhaps selling products that were produced at a somewhat lower cost because it's really intriguing to understand your cost performance. That is my first question.

(Interpreted) Marcelo, as I said, this is the result of a number of factors and things that are happening in the Company. (inaudible) there was a drop in the cost of raw materials. I gave you an idea of the price level at which we are negotiating our feed stock. And in addition, [with all this work] that we are focusing on cost reduction and efficiency gains.

(Interpreted) I do not see any of the normal movement in terms of the inventory. That could one way or another explain this. You normally have the bigger impact of the cost of production in the quarter. So, in your opinion, the cost performance is 100% recurring, and in the case of coal, starting at 110, you are buying it at 110, or are you consuming it at 110 in the second quarter?

(Interpreted) Actually, as of now, we are buying it at this range, 110. Now, obviously, you have to add the other costs so that you can have the coal in the plant. But, like I said, this is an ongoing work that we're doing. And we believe it is sustainable for the future quarters.

(Interpreted) My other question would be regarding working capital. Your working capital has been substantially increasing, 55 to 75 in practically all of the segments. I'd like to understand, is the Company making any efforts to try to perhaps improve the management of the Company's working capital? Do you have any guidance regarding that?

(Interpreted) Actually, our working capital in this quarter was impacted by the growth of the inventory of our finished goods. If we look at the inventory of feed stocks and raw materials, you see that we do not see inventory growth there. And this is somewhat in keeping with what Martinez said, i.e. the company is getting ready to supply a bigger demand in the second half of the year. We are expecting a rally in demand. And so, CSN will be well positioned to meet the supply.

Marcelo, the secret of any business is to sell at a high price and at a low cost. In the second quarter, we maximized the price-cost equation because I didn't have any elasticity in the demand by volume. On the other hand, we are (inaudible) lower-cost (inaudible) to increase my inventory of finished products, finished goods.

So, I closed the second quarter with 180,000 tonnes of finished goods in the end of June. And this number increased to 300,000. So, we have material manufactured at an extremely low price. And we are positioned for a rally in the second half of the year. This is our crystal clear strategy.

(Interpreted) Yes, and one last question in mining, if I may. It became very clear that you have an ability for mining. I would like to understand you regarding your contracts for purchasing from third parties. I just want to understand if you're going to meet your goals for volume for this year and next year.

How many contracts do you have? And what would be the maturity of these agreements? Are they six months, 12 months, three years? I just want to get a sense of your volume of sales expectations because you're building up your volume base on purchases from third parties.

(Interpreted) Marcelo, I will ask Daniel dos Santos to answer your question. Daniel, over to you.

(Interpreted) Well, Marcelo, we took advantage of the beginning of the year when we had very favorable conditions to renegotiate our agreements and contracts.

We were expecting that the second half wouldn't be performing that well in terms of the market. So, we (inaudible) forward some important negotiations. And so, for those critical contracts, we set a schedule of negotiations which ended in June/July, and we were able to close an agreement with the most important suppliers [to us], contracts that we consider long term, two to three years of maturity, and really the length to ensure the volumes that we need for this year and next year.

In terms of our purchasing ore, that's not an issue. What we see happening, and we need to (inaudible) because we will need to redistribute our volumes [is] regarding port services. We saw that last year the recent auction, which showed that they were only able to sell one out of two lots. So, this is something we attended to. We are working on the pricing of port services so as to avoid the prices in the future [and to make the mine our gain] in the foreseeable future.

(Interpreted) Thank you.

Carlos de Alba, Morgan Stanley.

Thank you very much. The first question has to do with the share buyback. At least, could you explain to us why management or the Company's Board of Directors has decided to do a (inaudible) share buyback when they could have reduced net debt? Right now, the Company's spending about BRL1.2 billion in interest expenses per year. So, just I wanted to understand if you can talk about the logic.

The second piece, second question, is regarding an impairment of available for sale securities that was added back in the cash flow statement. It was BRL52 million in the second quarter. Can you talk about that? Is that related to USIMINAS shares? And in what line does it appear in the income statement because it was added back to -- in the cash flow to net income for the period?

And then finally, regarding the negotiation with Namisa, does the Company, does CSN [would] offer shares to the Namisa partners of CSN as a whole, or the negotiations are exclusively limited to the iron ore businesses? Thank you.

(Interpreted) So, we had two questions coming from you Carlos. One is referring to the share buybacks program. The second question dealt with an impairment that we had in our investments and adjustments into our investment. And the last question, you asked for more detail regarding the negotiations with our Namisa partners.

Okay. So, let's take this step by step, Carlos. Let us begin with your first question, the share buyback program. Actually, as I said before, this was a clear decision by our Board of Directors. Their perception is that there is an important gain to be derived, given the current price of CSN shares. They are being traded today at a certain price.

And the Board of Directors believes that the price is below the fair value and that it should increase. And this is considered so. And it's a necessary investment at this point because we will bring a good result to our shareholders, regardless of our debt level. Our indebtedness is being managed.

We have already posted a reduction in our net debt over EBITDA ratio. And we expect to end the year with plus [then] 2.5 times.

Your second question, here, we have a principle of mark to market our investments in USIMINAS shares. This is done -- this position is assessed every quarter. So, our last mark to market was then at 775. The share price has dropped to 692. And that's why we have this impairment of this BRL52 million in our results. So, basically, it is an impairment of the UNIMINAS investment.

And finally, your third question, regarding the negotiations with Namisa. What I can tell you is that all of the alternatives are on the table. But at this point, I cannot make a correlation with the share buyback program.

I never said that.

Carlos, please, can you repeat?

I don't know. Just the follow-up question, on the BRL52 million impairment, I would like to understand where that BRL52 million charge was booked in the income statement.

(Interpreted) This is in the line other operating expenses.

All right. Thank you very much.

(Interpreted) It's [of] the group of corporate expenses. That's where we booked that charge.

Hello, [Mr. Wright], you can -- you may proceed with your question.

Thanks. Yes, I have a couple of questions. One is you have, in the short term, that you have the bond maturity this January. And you have a local currency debenture that's due in I think the end of March next year. And they total about, well, $640 million. So, how do you intend to address those?

And then can you guide me on how you intend to get leverage to 2.5? It's 2.7 now. If I annualize this quarter, it's 3.2. My expectation is that EBITDA could fall year over year in the next two quarter and that leverage is going to go up. So, one, how do you address the debt maturities, the US dollar bonds and the local bonds? And then how do you bring leverage down to 2.5? Thank you.

(Interpreted) [So, I ask] two questions. The first question is about the maturity that you have early next year. In reality, right now, we're still working on to redefine the best option for the Company, as you [speak].

The second question is also about leverage or net debt over EBITDA and how we could come to 2.5 by year end. Basically, this is also due to our outlook for EBITDA growth last quarter, in the last quarter. As we mentioned before, we expect to have improvement by the end of the year. And as a result, we expect to have an impact on the Company's EBITDA.

If I can follow up, is that possible?

(Interpreted) Would you mind repeating your question, please?

Yes, if I can follow up, if I assume that net debt is constant at BRL16.7 billion, okay, what I need is an EBITDA for the full year of about BRL6.7 billion. And year to date is BRL2.7 billion, which means I've got to have about BRL4 billion of EBITDA in the second half of the year, so about BRL2 billion each quarter. So, that seems to be difficult.

(Interpreted) [Roy] asks again how we will be able to achieve this or to come to a specific EBITDA in the second half. In reality, I'd rather not to work on EBITDA projections. What I can tell you is that we're doing our job. And our goal is to close the year with this ratio at 2.5. And this will -- .

-- Okay -- .

(Interpreted) -- By increasing our EBITDA. If I may, I'd rather not work on any projections of these numbers.

Okay. Thank you -- .

(Interpreted) -- The management of the Company.

(Interpreted) (Operator Instructions). Thank you. There are no further questions, would like to give the floor back to Mr. David Salama, IR Officer, for the closing remarks.

(Interpreted) Today, we could share a couple of things, great effort in order to lower costs and also improve our efficiency. When it comes to mining, our port is already running at 40 million tonnes. And by year end, we expect to have more improvement, including our sales. The government has already started to implement a series of incentives to our economy. And we expect to have positive impact so we can close the year with even better results.

So, now, we would like to thank you, all, again, for joining us at this conference call. Please don't hesitate to contact our IR team any questions that are pending or any questions that you might have in the future. Have a good day.

(Interpreted) Thank you. This concludes CSN's conference call. You may disconnect your lines now. Have a good day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.