Companhia Siderurgica Nacional SA (SID) 2015 Q1 法說會逐字稿

Good morning. Thanks for waiting. Welcome to CSN's conference call recording the first quarter of 2015 results. Today, we have with us the company's executive officers. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After the company's remarks are over, there will be a Q and A session when further instructions will be provided. (Operator Instructions)

Today's event is also being simultaneously broadcast via the internet and it can be accessed at www.csn.com.br/ir. There you will also find the presentation. You can flip through the slides yourself. There will be a replay service for this call on the website.

Before proceeding, let me mention that forward-looking statements are being made and are here are under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on beliefs and assumptions of CSN management and only information currently available to the company. They involve risks, certainties 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, let me turn the conference 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.

(Interpreted) Good morning everybody. Thank you for attending CSN's teleconference. Together with me, I have other executive officers.

Without further ado, let's go straight to slide number 3 where I would like to make some remarks. Actually, prior to talking about the figures regarding the first quarter of 2015, I would like to ratify CSN's resilience, vis-a-vis the challenging economic scenario we have today. Our business model highly integrated once again makes a difference.

Our business strategy in the steel industry is focused on increasing the customer base, seeking to complement domestic sales with sales abroad, mainly by CSN LLC in Indiana in the US. There, we're playing as a local player, thus maximizing our results.

In the mining segment on the other hand, we seek a substantial reduction in production costs including extraction and processing of ore, freight and other port expenses. This keeps CSN among the most competitive mining companies in the world. Additionally, we try to adapt our product mix to the new market reality through more aggregate value products.

I would also like to point out that several measures are underway to gain productivity and operational excellence.

Let's now go to the next slide, where we're going to see the results for the first quarter of 2015. In the first quarter, net revenue BRL4 billion represents 5% more than that of the fourth quarter of 2014, chiefly due to revenues in the steel industry. The gross profit of BRL985 million in the first quarter was 7% above the fourth quarter of 2014. Adjusted EBITDA in the first quarter reached BRL911 million, 10% above the previous quarter, basically to steel and mining. The EBITDA margin reached 22%, an expressive margin if you consider the current scenario.

On slide number 5, you see investments during the quarter. (Inaudible) was reduced as compared to the previous quarter and we focused more on the most efficient businesses and which were more profitable. In the first quarter, CSN invested BRL407 million, and of that BRL123 million in mines, especially dedicated to the extension of Casa de Pedra, BRL121 million in steel industry, especially in the revamping of the coke batteries, and operating excellence BRL90 million in capacity for cement, BRL73 million for logistics.

Slide number 6 shows results per segment.

The next slide, the upper part of the slide where you have the net revenue totaling BRL4 billion, in that 24% comes from steel, 16% from mining, 7% from logistics, 2% cement and 1% energy. In the mid part of the slide you see that the adjusted EBITDA in the first quarter reached BRL911 million, 69% of which is from steel, 16% mining, 11% logistics, 3% cement and 1% energy.

During the first quarter, the EBITDA reached BRL683 million with a margin of 22%. Margin was BRL156 million: 24% in logistics, BRL106 million, a 36% margin; cement BRL28 million, 28% margin; and energy BRL50 million, a 24% margin.

On slide number 7 we have the results for steel. In the first quarter, the total volume reached 1.4 million tonne, a very important increase vis-a-vis the last quarter, with an increase in sales and this also had to do with our strategy of focusing in the domestic market. It's a strategy which started at the end of last year. We are trying to increase our sales abroad. 63% of sales were in the domestic market, 34% in subsidiaries abroad and 3% exported directly.

Steel, on the upper part, you see that the net revenue increased 4% [sic - see press release, "14%"], vis-a-vis the fourth quarter of 2014. This is chiefly due to the increase in the volume sold. It's also important to highlight that our net revenue per tonne was 1% above that of the previous quarter, BRL2162 per tonne.

I would also like to highlight the work we've been conducting in terms of production costs in steel. As you can see by the development, the net production from the fourth quarter of 2014 until now, we reached a 17% reduction in our production which is very important, vis-a-vis the economic scenario that we have. EBITDA reached BRL163 million (sic - see press release, "BRL683 million"), 22% margin.

On the next slide we have the same analysis for mining. As I have just said, we have taken a lot of measures to improve the results in mining. In view of the current flat levels, our Executive Board has created a group to work, a multidisciplinary group, aiming to reduce production costs including extraction, freight and board expenses. There are important results coming from these efforts.

On the right hand side, you see that starting from basis at the end of 2014, we managed to reduce production costs by 21%. Additionally, the price index has dropped 62% during the period, while our average price has remained at 16% below in the same period. Our freight strategy is to account for that. Our average price was $41 per tonne. Iron ore sales in total 7.5 million tonnes, part of a strategy, actually we started at 7.5 million tonnes in the fourth quarter and we reached 7.4 million tons (sic - see press release, "5.4 million tonnes") in the first quarter of 2015. This is also due to the quality of the product. As you can see our iron grade has increased to 64% in the first quarter. So this is a variation between the last quarter to our current quarter and the silica content also which is something that penalizes our sales price, it has gone from 5.9% to 5.2%. Mining EBITDA reached BRL156 million in the first quarter of 2015, maintaining EBITDA margin at 24%.

Let's move now to the next slide where we're going to analyze the results for cement. On the upper left, you see the sales volume of 525,000 tonnes in the first quarter of 2015, 4% below what we sold in the fourth quarter of 2014. This is due to sales seasonality, something to be expected for this time of the year. Net revenue BRL101 million was 7% below the fourth quarter of 2014. In spite of the slowdown in the civil construction market, we generated an EBITDA of BRL28 million in the first quarter of 2015 with an EBITDA margin of 28%.

Let's now move onto slide number 10 where you see a chart with the EBITDA evolution. Once more, CSN shows an EBITDA that is consistent, especially if we take into consideration our current economic scenario. Our EBITDA of BRL911 million in the first quarter posted a reduction of 10% vis-a-vis the first quarter of 2015. The factors which contributed to reducing EBITDA were increases in steel processing costs which is basically impacted by exchange rates because the price of raw materials is subject to exchange rate fluctuations and the increase of use of coke by third parties due to the renovations which are currently in place.

Additionally, we had a drop in volumes of iron ore, considering the commercial strategy of focusing on product sold. On the other hand, we had as an offset more prices for steel products and the reduction of costs deployed in mining. EBITDA margin of 22% in the first quarter was 3 percentage points below the margin for the fourth quarter.

Slide number 11, you see the development of our net debt. Our net debt which was BRL20 billion at the end of the first quarter represented a BRL1.1 billion increase, vis-a-vis the BRL18.9 billion at the fourth quarter of 2014. The net debt EBITDA ratio calculated according to the last 12 months reached 4.8 times, vis-a-vis 4 times at the end of the fourth quarter of 2014.

We had an impact in the net debt, the distribution of dividends, the BRL400 million investment with fixed assets, disbursements to the order of BRL700 billion with debt charges and also the exchange rate fluctuations which represented BRL400 million. Our BRL0.9 billion EBITDA in the first quarter of 2015 partially offset such effects from the total debt. 53% was Real-denominated, 47% was in foreign currency. 94% of this debt is long term and only 6% is short term.

This basically closes my presentation and now let's open for questions.

Thank you. We will now start our Q and A session for investors and analysts. (Operator Instructions). Please wait while we collect the questions.

Our first question comes from (inaudible) from Merrill Lynch.

(Interpreted) Good morning. Thank you very much for the presentation. My first question, what is the level of premium at the domestic market and how's the demand environment?

The second question has to do with mining. Could you give us the approximate breakeven considering the current cost structure and what evolution, what kind of evolution you expect for this year?

(Interpreted) Thank you very much for your questions. I'm going to answer the first one and Daniel dos Santos, our Mining Director, is going to answer the second one.

[Cadel], good morning. For household, the premium in the domestic market, considering BRL380 FOB, this premium would be between 8% to 11%. In the case of cold-rolled, imagine something starting at BRL450, BRL460; it would be between 5% and 8%. In terms of galvanized, say between BRL560, BRL570, the premium would be between 3% and 5%. Here, I'm calculating the exchange rate at BRL0.305.

It's important to say that the premium we have today for our products, our coated products, has never been that low. So in view of our product mix, we can have a mix with more added value, more coated products. We can make the most of this situation because in spite of the slow market, we can take up some space or gain some market share in terms of export.

The import of galvanized products in the last quarter of 2014 was the only product that reached this level, 230,000 tonnes. In the first quarter of 2015, we closed the quarter at 150,000 tonnes, so part of this product will be captured by CSN in the domestic market which helps us a lot in terms of premium.

Hot-rolled premium is still relatively high as far as I see and this inhibits imports due to exchange rate volatility. From the demand perspective at the domestic market, in spite of the weak demand in all areas in the first quarter, we tried to maintain our market share in all our segments, keeping our coated products at 48%, more or less. We had a very important impact from tin plate, a drop of 12% that we will recover now during the first half of the year, but we're going to see some problems in the other markets.

We have just commented that the strategy that we chose last August in the last call -- remember I said that we were going to operate in the American market as a local player -- well this strategy is working out because in addition to increasing our revenue by 12%, our margin is at $220 per tonne.

So what I sent to the US, it did not leave the market. It was sold as more valued product. This is seen in the results posted for the first quarter. So this is the scenario we see.

So we are going to be more concentrated on the domestic market but we're going to export chiefly to the United States as a player in their local market. For Latin America, we have very bold plans to export tin plate. This is an area where we have a very good market share and we have room for growth. So these are basically the two areas where we are focusing on exports.

So now since August last year, we've been trying to reduce costs in mining, more than we have done before due to the drop in prices. This has covered all our fronts from the iron ore extraction to processing, to railways and port, maritime freight and also product quality at the end which does have an impact on prices. This led to an improvement in our mix. We have a breakeven of $43 per tonne in China and our objective is by the end of the second quarter to reach $41 per tonne.

In the case of mining, our focus is cost reduction, product improvement and productivity increase. Today, when we compare the cost curve for the industry, we see ourselves among the five most competitive companies in the world in this area. Thank you very much.

Our next question comes from Alan Glezer from Bradesco.

(Interpreted) Good morning. Thank you very much for the opportunity. My first question regards mining. We see that Platts dropped $12 per tonne. If I see the prices for CSN, I get a drop of $4 per tonne. I think part of this has to do with the rebalancing of the mix, Casa de Pedra and Namisa with a greater share for Casa de Pedra. But I would like for you to give me some color on what is behind this better performance regarding iron ore. My second question has to do with leveraging. The ratio, net debt/EBITDA is close to 5 times.

Was there any action by the company to increase this leverage? Was there anything planned in terms of selling assets or something along these lines? These are my questions, thank you very much.

(Interpreted) Hi, Alan. Thank you very much for your question. The first question is going to be answered by Geraldo, our Commercial Director and Daniel. Then, I will talk about leveraging.

(Interpreted) Morning, Alan. In terms of price, our contract -- some are for future sales, some are for the current quarter, some are for other sales already calibrated before. Also we have some sales at fixed price which we closed them as soon as possible. We did not wait for the prices to drop.

Also at the end of the quarter, we managed to close some freight, American freight, at prices which are closer to the start prices. So this led to our FOB prices dropping less than what the market did. Daniel is going to talk about our product mix which accounts for -- also accounts for some of the better prices arrived at.

(Interpreted) So since last year, the second half of last year, or simply since September last year, we started deploying a number of actions because we looked at our operating model and the market scenario and we decided to take these measures. So the changes in our operating model had a great impact on prices, so we managed to reach higher prices in the market.

In simple terms, we improved the Namisa's products quality, producing concentrated products with 64% of iron and 3% to 3.5% of silica. Before, we had a 62%, which was something that the market was accepting with high margins until July last year. In Casa de Pedra, we have been having very high quality product for a long time.

So what we did was to increase Casa de Pedra's production. Just compare the first quarter last year and the first quarter this year, and you see an increase of 20% in Casa de Pedra. This increase in production was based on high quality products.

So, a (inaudible) which is our flagship is improved and so we have some advantages due to that. There is another initiative, which also helped us a lot. It doesn't impact prices, but it does impact margins -- that we are here focusing on our competitiveness, our breakeven, and this is the renegotiation of freight. We've been working very hard on that since the end of last year and we managed to reduce these prices substantially. So we were at $22 and now we are reaching $10 to $12, which is what the stock market is also practicing.

In terms of leveraging, I must say that this is cause for concern for us for all company management. We're very much concerned with this aspect. We are working to reduce leveraging gradually. So there's some different measures that are being taken. I could say that this is a complex process of liability management.

As an example, I can tell you that we have reviewed our CapEx. The Board has approved a CapEx of BRL1.6 billion, way below the BRL2.2 billion that we had for last year.

We are also analyzing other alternatives to reduce this leveraging. We do not rely on one single business actually, so there are different measures being taken, in order to diversify our business in view of the current economic scenario. We are reducing cost, we are adjusting our CapEx and we're also looking into other alternatives, in addition to renegotiating debt, so making for longer debt, increasing the terms of debt and also looking for cheaper loans.

So we're doing all these things together. We also have an objective. I don't want to give you any deadline for that, but we want to reach a ratio of 3 times. I cannot give you a firm date for that to occur, because it all depends on the number of processes which are going on. But I can assure you that at some point we are going to post this decrease in our leveraging reaching three times EBITDA.

(Interpreted) Next question comes from Ivano Westin from Credit Suisse.

(Interpreted) Thank you for your presentation. I would like to ask about Casa de Pedra. David, could you tell us how the negotiations are going and about Namisa's cash? Is there any definition in terms of a possible distribution, as the case may be? You also talked about the reduction of CapEx in 2015. What's the breakdown? What's expansion? What's maintenance per unit? Could you give us this breakdown?

(Interpreted) Let's start talking about Namisa. This process will go on during this year, actually during the first month. We have introduced our new master plan.

Our master plan includes a production plan for the next five years, a budget, projected budget, the organization structure and also discussions on funding for the project. The master plan was presented to CSN's Board, and to the consortium board as well, our partners therefore. It was approved at the beginning of May.

Right now we are meeting some requirements in terms of authorizations, regulation, which is authorization from [CATI], from [CITI], from all these agencies. We see as the possible guidelines at the end of this year. This is when we would drop down these assets and the new mining company would then start operating.

This is more or less the schedule we have projected for this year. You also asked about this year's CapEx, right? BRL1.2 billion. So basically we're talking about what BRL820 million expansion and BRL530 million in current investments.

In fact, BRL327 million are for steel, BRL587 million for mining, (inaudible) around BRL113 million and cement, BRL200 million. The remainder is small projects, always trying to improve performance and reach operating gains.

What's the maintenance CapEx for mining? This year, we expect something around BRL150 million.

(Interpreted) Next question comes from Marcos Assumpcao from Itau BBA.

(Interpreted) My first question addresses your debt, CSN's debt. Could you tell us what's due in the next two years, and if you need to refinance, what's the estimated cost for refinancing this debt? Regarding iron ore, what was the embedded freight for iron ore?

The $2 reduction in terms of breakeven, where does it come from? Is it a result of cost reduction, of exchange rate fluctuation or what? Where does it come from?

(Interpreted) Well, the $2 reduction comes from the different sources that I mentioned. So there are some actions regarding iron ore quality, which is part of the reason, a reduction in the maritime freight, reduction in production cost. Also the railway MRS and our port also is partly to account for that. But the bulk of this is production cost and freight reduction.

I'll ask Gustavo Souza, our Executive Director who is in charge of controlling -- he's going to give you the debt breakdown.

(Interpreted) Our gross debt, around BRL30 billion. For 2015 we have BRL674 million, and for 2016 and 2017 BRL2.5 billion and BRL4.3 billion respectively. As we have already said, we're taking a lot of measures for financial efficiency, so we're working very strongly to reduce the debt level.

Also, talking to the banks for rolling the debt. So far, our proposals have been met with a good mood and so we think it's manageable. When we think about the rolling costs, cost for credit in Brazil is the cost that every large company has.

So any large company that goes to the market have something close to CDI BRL108 million to BRL115 million of DI. If you're talking about before market, right now for Brazilian emissions, we're not in a very favorable moment, but we are checking what our alternatives are. So in addition to that, local market and foreign market, we have other alternatives.

We can have better rate efficiency if we use securitization structure, if we use the credit risk of our customers or customers where we have long term contracts. So we are making an effort to reach a better financial efficiency, and in the next quarters I'm sure that we're going to present better figures.

(Interpreted) In the first quarter, you have already engaged in a strong rolling effort and this has had an impact on the results, because today you have around BRL3 billion for the next two years, between 2015 and 2016. In the previous quarters, I think that figure was a little higher. So it's just to confirm -- yes.

(Interpreted) We had some amortization in the first quarter, BRL1.6 billion and funding, BRL400 million. Our goal is to grow as much as possible in the best terms possible, analyzing all the possibilities that we have commented on. Our objective is to level the curve, to flatten the curve that we have for the next two years.

(Interpreted) Just a follow up regarding iron ore. Is there any counterpart, any offset in terms of these measures to improve iron ore quality? So if you reduce silica and -- do you have any decrease in production? Is there any downside to it?

(Interpreted) This is Daniel speaking. If you remember what we were trying to do until the second half of last year, we were buying iron ore in [Tasu] region. So this offer in Tasu disappeared because the players in the region were no longer competitive and their offer was [interested] which was standard, on average, 61% to 62% iron.

Casa de Pedra has always had better quality than that, so this is why we could afford to buy this ore mixed with other material and get to a volume which was above market averages. This is what we were doing up to the moment when had a drop in the spot market in mid-last year. This led us to review our operating model and so we stopped buying ore and this is what lead to the current situation that we're at: improving and making an effort to improve our Namisa product which is close to what we had in Tasu.

So in Namisa, we do see a reduction in volume, but the most important aspect is the iron decrease. If you compare Casa de Pedra first quarter last year to first quarter this year, you see an increase in production of 20%. So our objective is to keep on increasing production where the best margins are.

(Interpreted) So when you reduce purchasing from third parties, what's the guidance for sales or exports for 2015?

(Interpreted) Our guidance is BRL26 million and total freight BRL28 million total embarkment. Thank you.

(Interpreted) Next question comes from Leonardo Correa with BTG Pactual.

(Interpreted) My first question to Daniel. CSN has been expanding its mining business for a while. We see that other players are changing their profile growth a little bit.

In other words, they are reviewing some of the production. Let me -- I wanted to understand what you want to do. Are you still trying to reach the 40 million tons in Casa de Pedra as soon as possible or do you see things differently now? In order words, have you changed in terms of what you see for growth profile, CapEx expenditures?

Second question is more strategic. Asset sales, one of the pillars for you. Perhaps this is a great cause for concern, something the market has been focusing on. You have a high level of liquidity in spite of your debt. You have a possibility of selling assets, which is very relevant too. So Usiminas come from a quicker market, but I'd like to talk about other opportunities, other business possibilities which perhaps would be lower priority for you.

Finally, I'd like to focus on cash flow. I know that this is sometimes considered a minor detail, but when I look at your cash flow, I see BRL400 million in terms of reducing the capital of your controlled -- but could you give us some color on this account?

(Interpreted) Thank you for your questions. Gustavo Souza is going to talk about the financial aspects and Daniel is going to talk about the mining business.

(Interpreted) So in terms of cash flow, your last question, according

to IFRS this cash flow is coming from Namisa to CSN. So in December 2014, we've started counting the date for the merger.

One of the points was the dividend distribution of Namisa to its partners, so CSN and the consortium, $300 million, so $180 million converted to the exchange rate when the decision was made in the first quarter of December, which will yield or give you the BRL400 million you talked about. Right? Is that okay? Can I move on? Yes.

Regarding the leveraging issue, the assets, sales, this is a long term vision. Let me try and give you a wrap up everything that you talked about. So we have a challenge, which is to increase the EBITDA in our other areas. This is our greatest effort. We are obsessively focusing on that improved quality to get better prices.

So the first part is operations, when we are truly sure this is in our hands and we are delivering on this promise. This is the first aspect. It's something we can do, it's something that's in our hands.

The second aspect, when you look at leveraging, you back to the previous question. So we are working in terms of rolling the debt, so that we have time to make any necessary moves that we need to make. I do want to tell you right here what would be ideal assets, but first of all, our homework, in terms of operation is being made.

We are not under pressure, because of our debt. The first thing that we're going to do is to roll our debt. We operate in five different segments. We have very high quality assets and we're going to see what our basic partners will be, the best conditions for sales.

We're not going to act under pressure. We're not going to sell under pressure. It's important to make this clear.

It's important to show the market that we have results resilience. We're going to analyze this debt within this long term strategy of ours. Now then, going back to the mining aspect and the strategic points that you mentioned.

(Interpreted) We have to see the very two different groups that operate in the market. We have traditional producers, CSN among them, and we have those who have seen this period as a window of opportunity. They did what they had to do and now they are removing themselves from the market.

CSN is a traditional producer. However, it stands out the three Australian producers and our most important competitor in Brazil, because we are more agile. We are able to adapt to the market very fast.

CSN still has the strategy whereby it maintains the company competitive for any price scenario whatsoever. So in general terms, we're not going to make any changes to our strategy. We believe in a growth strategy for Casa de Pedra and for our mining business as a whole. We believe in that and we manage to bring to our business large partners. Our partners at Namisa, who are now working with us to create this new mining company.

Now, this aspect of the traditional manufacturer helps us operate in the transoceanic market and we have to offer good quality product always. Due to the fact that we have very good quality products, we are going to maintain the program for Casa de Pedra. Of course, we're going to adapt our face to the moment, but we're going to seek as much as possible a proactive return regarding Casa de Pedra. Thank you.

(Interpreted) Now, thinking in terms of the assets, when you compare Casa de Pedra, of course, there is a great difference vis-a-vis CSN or PSM, which is now Namisa, which would be a lower quality asset, less competitive than Casa de Pedra. So, CSN, if it's still operating at 5 or 6 million tons in the scenario or are you adjusting this production in view of the current scenario?

(Interpreted) Could you please ask your question again because we did not understand it.

Yes. Sure. Regarding mining assets, so you have Casa de Pedra, which is the best quality, your flagship, competitive in any scenario, but you also have a part of the mix, which is Namisa and the old production, old CSN production, which we believe has different cost levels. So are you adjusting the production capacity vis-a-vis the new price scenario?

(Interpreted) CSN is always working to maximize the profitability of its assets. This is nothing new. What we do is to try to synergically integrate our assets. So Namisa is still operating. Of course, we've got to adjust here and there in terms of the lines.

But we're totally integrated with Casa de Pedra and due to the fact we keep our competitiveness in both companies as if they were a single company, which actually they are. This is how we see our business. So much so that if you see cost curve, we are perhaps the fourth most competitive. Anyway, we're among the five best companies. This is after we had the posting of the Australian competitors.

So we're perhaps the fourth most efficient. This includes all assets. So we try to operate with synergy, seeking the best value possible. So we're going to extract as much value as we can from all mines, all businesses, also businesses that we have not announced yet, because there are some which are under exploratory terms and they will be able to replenish our reserve.

(Interpreted) Thank you very much. If there are no more questions, let me give the floor to Mr Salama, who is Executive Investor Relations Officer for his closing remarks.

(Interpreted) Let me highlight the fact that we are doing our homework. We have already delivered a very good cost reduction. We'll keep on reducing costs among this year.

We are focusing on an increase of our operating EBITDA. In other words, the company is very sound, in spite of the challenging economic scenario that we have ahead of us. Our investments are focused on higher result assets.

We are very disciplined regarding investment. Let me repeat that we are very concerned with our leveraging levels, but this is a healthy thing. We're doing our homework, as Gustavo said, in terms of trying to roll the debt.

We're also looking at other alternatives and we're analyzing all the possibilities we have. We expect to keep on delivering consistent results in the next quarters. Let me thank everybody for attending the call. Our team is totally available for any questions you may have. Thank you very much and good afternoon.

(Interpreted) Thank you. CSN's audio conference now comes to an end. Please disconnect and have a nice 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.