Companhia Siderurgica Nacional SA (SID) 2015 Q4 法說會逐字稿

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(Operator Instructions) Today's event is also being simultaneously webcast and can be accessed on the Company's IR website, www.CSN.com.br/ri. There you will also find the respective presentation. Slide selection will be controlled by the participants. The replay of this event will be available soon after its closing.

Before moving on, we would like to let you know that any statements made during this conference call relative to CSN's business outlook, projections, operating and financial goals are based on beliefs and assumptions of the Company management and rely on information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions since they refer to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors may affect the future performance of CSN and lead to results that will materially differ from those in such forward-looking statements.

Now we would like to turn the call over to Mr. Paulo Rogerio Caffarelli, CEO and IR Officer of CSN, that will make the presentation of the financial and operational highlights of CSN in the period. Please, Mr. Caffarelli, you may go on.

Good morning, everyone. Thanks for joining us. We are going to start our presentation with the main highlights of CSN of 2015 on page 3. We generated an EBITDA of BRL3.251 billion, EBITDA margin of 20%. Our net income was disclosed at BRL1.616 billion.

Record iron ore production of 28 million tonnes, and 31 million tonnes between sales and transfers of iron ore. Delivered of iron ore in China at $33 per tonne during the fourth-quarter 2015 compared to the $53 in the fourth quarter of 2014, with a decrease of $20 per tonne. The decrease of 33% places CSN among the five top companies in the world in terms of costs. Steel with a volume of approximately 5 million tonnes of steel sales in the year.

On the next page, page 4, we show you our strategy in enhancing our competitiveness and recovering cash generation. We have three pillars there: operational efficiency; projects delivery and even more deliveries; project discipline and financial management. Later on we're going to talk about each of these items.

On page 5, we show a bit of what we are. We are a diversified Company, extremely integrated, which enables us to have superior quality in the segments in which we operate. Highlight here is still mining.

On page 6, we have the achievements of 2015. One was the conclusion of our business combination with the Asian consortia with mining, railroads, and ports, which brings us new clients and opens new markets.

Also, I would like to highlight the extension of our debt of BRL4.8 billion with maturity in 2016 and 2017 to 2018 and 2022. What we started, which is the beginning of a disinvestment process, we already talked to the bank about selective assets, and also the cost reduction in the steel and mining business.

For 2016, we want to continue to expand our sales, reduce operational and administrative costs, continue with a strong working capital reduction and also a CapEx reduction. Also a reduction of leverage and debt, and also the cement operation ramp-up.

On the next page, consolidated results, we show net revenues in 2015 of BRL15.332 billion; generated EBITDA of BRL3.251 billion; 20% EBITDA margin; and net income of BRL1.616 billion. The EBITDA/net-debt ratio went to 8.2 times from 6.6 times because of a lower generation of EBITDA in 2015 because of the exchange rates and also the business combination, as we know that we had dividend payouts, and also the acquisition of CSN of 4.16% of the consortia in Congonhas.

On the next page, we have the buildup of the net results for 2015. Here we highlight the effects of the business combination. You see that out of this BRL3.413 billion that basically comprises BRL1.59 billion of the variation of the fair value of the shares of 60% of CSN in Namisa, and BRL1.1[5]4 billion in the settlement of pre-existing contracts. We have the income tax of BRL528 million, and we have a net result of BRL2.825 billion which is in our [gearing].

On the next page, page 9, we have financial results in the perspective of IFRS and also managerial with all the details. On the next question, here this is a very important point to highlight: it also referring to the business combination, where CSN in the payout of dividends received BRL3.239 billion. And part of that -- that is, BRL2.726 billion -- were used to acquire 4.6% (sic - see slide 10, "4,16%") of Congonhas Minerios.

Two important points still to mention on this page are the proximity of our managerial and IFRS views, and also consolidation of 100% of Congonhas Minerios cash, considering 87.52. That is an [expressive] share of CSN in those operations.

On page 11, we show our net revenues, EBITDA margin, and EBITDA of the fourth quarter and the share of each of the segments that comprise CSN.

On the next page, we have an early view also highlighting the share of mining and steel in our Company. Specifically talking about steel on page 13, sales volumes of 4.990 billion in 2015 is in line with the volume of 2014. Net revenue is also in line, as you can see on the top right corner.

Besides the reduction of EBITDA and EBITDA margin, much because of an adverse scenario, we didn't have the best margin -- we did have the best margin among our steel peers in Brazil.

On the next page, I would like to highlight today for the coated products, especially galvanized products and metal sheets, that already comprise 45% of the domestic market and 53% of the total sales. If you take a look on the right, the increase of sales in the foreign markets was correct because of a reduction in the demand in the country. We had growth of exports, up 39% in the year.

On the next page, still talking about steel, in terms of cost production we have the cost of $276 per tonne. That places us in the first quartile of top steel companies in the world.

In mining, page 16, again a picture of our record production in 2015, practically getting to 28 million tonnes. An increase in our EBITDA margins, despite the reduction of the Platts index. That shows the success of our strategy, be it our commercial strategy or operational strategy that were applied along the year 2015.

So, about mining, we have an exercise to bring in [this] presentation the reduction of [price]. And even with the reduction of Platts we can preserve our margins.

You have seen, as an example, when you reduce $8.20 in the Platts index, our margin dropped to -- our revenue dropped by $2 and our margin by $1. An example of that is that for each $5 of Platts variation, EBITDA varies about BRL[4]00 million; for each $0.25 of exchange rate, EBITDA varies about BRL150 million, just so you have an idea of this volatility in the market.

On the next page we're still talking about mining. We have the evolution of cash costs in China and deliveries. As we mentioned in the first quarter of 2014, we had a cost of $53 per tonne; and we got the good result of $33 in the fourth-quarter 2015. I would like to record here that it's very important that in the $33 we already included (technical difficulty), which is very important for the analysis.

Another very important issue was productivity. That grew by 34%, as you can see on the right corner below. That again places us among the main players in the world.

As for Congonhas Minerios, on page 19, we have an information how the business combination that created Congonhas Minerios operated. Here we have the investments and the entries of Namisa and CSN.

And we have for the consequence of this event. That is, Namisa's cash payout, the restructuring of Congonhas Minerios, the acquisition of extra stake in Congonhas Minerios by CSN. Remember that in the final design, CSN is faced with 87.5% and the Consortium with was 12.5%.

Cement, also very important for the Company. It's important to record that the sales volume was basically the same as 2014, even with the cement market dropping in this period by 9%.

We, on the next slide, show the evolution of our production capacity, starting with Volta Redonda, with capacity of 2.3 million tonnes. In 2015 we had also Arcos, with 4.3 million tonnes all together. In 2018 we can get to a volume of 5.3 million tonnes, and that installs CSN again monks among the main players of cement in the country.

Going to our ports, the Sepetiba Tecon, or with regards to the TECON terminal, revenues in 2015 were BRL213 million, EBITDA margin of 30%.

Next, on page 24 we break down our CapEx for 2015: BRL2.170 billion, 27% allocated to steel. In highlights here we have the renovation of our TG20 that will enable us to increase thermoelectric energy with a reduction of 130 million a year, 45% in mining. The highlight here is the anticipation of some acquisitions that were expected for this year and were performed in 2015 because of good operating conditions and after the volume of the cement ramp-up.

In terms of our financial agenda on the next slide, we have cash management, we have our liabilities, we have cost and working capital, and also our partnerships and divestments. With regards to cash management, the name of the game is liquidity at this point.

In terms of debt management, on page 26 we show you the debt profile. Today you can see that 53% of our debt are in foreign currency against 47% in domestic currency. Likewise, 49% of our revenue is in the foreign market and 51% is in domestic market; and EBITDA 44% in the domestic currency and 56% in foreign currency. That shows the balance of our currency exposure.

On the next page, it is still about debt management. Once again, we have the extended debt that we did, the debt from 2016 and 2017 to 2018 to 2022. This is a crucial point in the movement that we are making and terms of the divestment of assets. Also the reduction of advance obligations with clients after the business combination of Congonhas Minerios was a volume of BRL9.3 billion.

On the right we have a comparison, a picture of the schedule of amortization of our debt: what it was like and what it is today. You see that now we have a reasonable time in terms of the year of 2016/2017 to do what is necessary to do for us to have our deleveraging.

So at this stage, we have in the bottom the average debt maturity, the average debt cost. Maturity of 7.6 years; the domestic currency cost is 107.5% in CDI; and the average cost of the debt in foreign currency, 5.79%.

Talking about cost reduction and working capital, the main focus is to manage our working capital. We want to reduce our inventory of about BRL1 billion and also very strong focus on reducing 35% our fixed expenses. This is important to mention that these account for 30% of our costs to date.

Later on we have the assets that we preselected for a possible deleveraging. Here I would like to mention that we are not just selling in a hurry. Sometimes the market wants to pressure us. We want to sell our assets, but with quality, because our assets are quality.

On the next page, our operational strategy for 2016. The highlight here is a reduction of our CapEx. We said that in 2015 was BRL2.170 billion and this year it's going to be up to BRL1.3 billion. So this is a focus on sustaining and high-capacity projects that will enable us to produce better results.

On the last page, we conclude by talking about our sustainable actions and integration in the communities in which we operate. Well, this was our presentation for today, and now we are going to open for questions. Thank you very much.

(Operator Instructions) Marcos Assumpcao, Itau BBA.

Good morning, everyone. My first question is about the finance expenses. We saw it will exclude the exchange variation. You had a drop of BRL500 million per quarter.

If we do an annual account and divide by the gross [adds] of the Company, I got to a cost of debt that was very low in Brazilian reals. Could you explain if this number is the same is sustainable, please?

And the second question is about iron ore. What is your expectation for the purchase of iron ore by third parties for 2016? We saw that the volume dropped a lot in 2015. It was probably responsible for the drop in volume of sales of CSN in 2015 although the production went up. Thank you very much.

Okay, Assumpcao. Thanks for your question. I'm going to answer the first question -- or Guilherme is going to answer the first question, our IR manager; and then Daniel is going to talk about iron ore purchases.

Hello. Your comment is correct. In fact, when you take a look at the financial expenses, as of today, this number is about BRL3.3 billion a year; and the number that you mention of about BRL500 million was impacted this quarter by the write-off of provision of about BRL170 million related to Namisa.

Before the Business Combination, CSN was provisioning this amount. After the completion of the business, we wrote off this amount. So it's a nonrecurring expense. I'm going to Daniel now.

Hi, Marcos. Your comment is correct, although we had a record production for CSN, 28 million tonnes last year, the iron ore market did suffer a loss. Several high-cost producers shut down, some temporarily, others for good.

So the supply of iron ore in the Brazilian quadrilateral region has been below historical levels. We do have some contracts that have already been signed for this year and next year, and we have some commitments that led us to estimate the volume of third parties, so 6 million tonnes.

So our guidance for next year is an even higher production. Despite the record of 28 million last year, we're going to produce 30 million tonnes this year. Out of the 30 million tonnes, 5 million tonnes is going to go to Volta Redonda; 25 million tonnes to the port; and 6 million tonnes of third parties, direct purchases and port services that we are going to have.

So shipments of about 31 million tonnes, which is quite a relevant number, and a very good number if we consider the scenario.

Well, thanks. Just to add to that, if the iron ore price continues at this level that we see today, do you see a risk of those numbers going up for the purchase of third parties and port services a bit higher, and the [total] number going up?

And just as a follow-up, very quickly, in 2015 you have had the acquisition of new equipment for the mines, and that led to a raising capacity. At what level you get the 30 million tonnes, or can you go up?

Okay. Little by little. Your current question. Platts has been surprising. It's been a bit above the expectations of everyone in the markets; and that leaves us in a very privileged position. Because many went down last year, but we did our homework. We can talk even a bit more about that later on, but we are in quite a competitive position. And we do have the means to increase even more, perhaps by means of some partnerships to this window of opportunity this year and next year, with partners in the region.

The dynamics is going to be a bit different than previous years. Very [hardly] those high-cost producers at [Chensou] are going to go back to the production they had before. Most probably we're going to have some kind of partnership or long-term business with some producers.

There aren't many left in the region, but the iron ore is still there, the opportunity is there, and we do have the means to capture the opportunity. So I do think we do have the capacity to even have higher volumes for this year.

As for your second question with regards to capacity, we have investments in the mine. But also in previous we had investments in the plant. We have installed capacity to produce above the 30 million tonnes.

We have to complete some investments in the port terminal which connect production units to (inaudible). So after we finish this work in the port terminal, we can raise the capacity by at least 20%.

Well, thank you very much, Daniel; thanks, Guilherme; thanks, Caffarelli.

Caio Ribeiro, BTG Pactual.

Good morning. Thanks for taking my question. My first question is about the price scenario for the domestic market. We saw some articles recently talking about increases of the plant; it's still up 10%, 11%. If you're following those increases and if you're being able to pass on prices, if you have a good situation to increase your prices.

And if you can also please talk about volumes in the domestic market and how you see your order book in the quarter, if it's better than the fourth-quarter 2015. What do you expect in terms of growth of volume for 2016? Thank you very much.

Well, Caio, your two questions are going to be answered by our corporate officer for steel, commercial part.

Hello; good morning. Well, very quickly I'm going to tell you what's happening in the world scenario.

In China, just so you can have an idea, the hot-rolled coil went from $245 to $315. So we had an increase of $60 (sic).

In the American market, with closing of the market for several countries because of (inaudible), it was $420 to $480 -- again, $60 up. If you take a look at the scenario for May to August, we think it can get to $550. So the world scenario really went up to the hot rolled coils.

If you look at our competitors in the domestic market, Usiminas with dramatic losses and even Arcelor in the world with losses, it makes no sense in a scenario like this to be [still]. Brazil has everything: raw material, technology, costs. So we are going to increase our prices by 10%.

We are going to increase our prices. This is necessary because the industry needs the increase to continue to have margins and continue to invest. Without the increase there is no margin, there is no investment.

So today, the margin is not a necessity in terms of premium. Just so you can have an idea, the premium over in [corrugate metalanes] material is a negative premium. So, today the increase of price of 10% is necessary for us to go back, to have a margin, and continue to invest.

As far as the Brazilian scenario is in the first quarter, I think that industry utilization in Brazil is around 60% in the whole steel industry. Some industries are very much affected, like the truck business, automotive; some are a little better. So if the government does not make a very big mistake in equating employment production and consumption, the trend is for the economy to pick up gradually in the first quarter.

In the case of CSN, what we feel is the following. First, there was a very deep drop in imports. Last year we had imports of about 2 million tonnes; and January, February, and March we are going to have accumulated volumes that are very low in terms of imports, which is not enough to offset the drop in the markets. They [affirm] steel consumption in Brazil is going back to levels of 2007, 2008. So this price scenario in the international markets and our portfolio of debt could basically have 40% exports and 60% domestic market is quite favorable for the year.

And, the share of coated products both in the domestic and foreign markets is going to be balanced. So the whole of the scenario in the domestic market will enable us to reduce intermediate inventories, finished product inventories, and will practically give us the necessary cash in terms of inventories.

Okay, perfect. Thank you very much.

Karel Luketic, Bank of America.

Good morning, everyone. Thanks for taking my questions. I have two.

First, if you know about the estimated amount of debt that CSN could raise in terms of divestments. And the second question is about your reduction of cost strategy, if you could give some details about timing and the eventual amounts that we could expect. Thank you very much.

Karel, this is Caffarelli. As far as the sale of assets, we showed you in the presentation the assets that were preselected. The initial approach is to bring assets that are not part of our core business, which is the case of TECON; the exceeding part of MRS; our stake in the generation of energy; Metalic, another asset that is on sale.

But once again it's very important that these sales take place in a process with their due time. At moments of crisis, buyers tend to offer prices that are below what we consider the fair price of assets.

So that's why I said that we do have the time and we want to have the sales to be as good as possible, with prices as close to the price that we consider to be fair.

As for the reduction of costs, your question is quite interesting. Why is that? Today we are working on an increase of sales, and we also estimate a dramatic reduction in costs.

When you break down CSN's costs, you see that 70% of cost are connected to production, and they are indexed in terms of coke and coal for steel, for instance. It is a commodity, and we depend on exchange variation.

So what do we have left? First, the sale of inventory. So we have lots of coke and coal because we are going to use part of our sales with inventory that we already have. The one that I mentioned before.

On the other hand, we have 38% which are costs not directly related to the production activities. These costs are costs we are working on.

That is a dramatic decrease of contracts of about 35%. It doesn't mean that we are going to get the discount, but it is a change of permanent scope in the provision of services taking for operational efficiency. That is fundamental in a moment that you reduce revenues and you reduce EBITDA.

So we have to look inside and we have to work in a very dedicated way to reduce costs. This is happening already in 2016. Perhaps in the results of the first quarter, we can already show you a bit of our -- or a taste of this reduction, because of us [revealing] scope and really working with the reduction of our contracts and suppliers.

Okay. Thank you very much.

Leonardo Shinohara, HSBC.

Good morning; thanks for taking my questions. I would like to know about sales in the foreign markets. You had sales of approximately 45%. I would like to know what exports are going to be like with the antidumping measures in the US.

And the second question on the same line, I would like you to comment about the news we had about the accident in the plant. I hope people are recovering; and I would like to know if that will have an impact on galvanized products.

And one more question about iron ore, if you allow me. There was an increase in the Platts index. What do you see in the short, mid-term, long-term of the price levels for the Chinese market?

Hi, Leonardo. This is Caffarelli. I'm going to start talking about the accident. Indeed this is something that mobilized as all on the weekend.

Our first concern at first was to provide all the assistance to the family. The four employees involved are in hospital in Santa Cruz. Fortunately, thank God, we are following them: there is one at a more critical state; the other three are recovering.

What I would like to tell you with regard to that is that the operation is coming back on April 10. It is going back to normal. We did not have losses.

We have also expenses in the (inaudible) of the operations between BRL10 million and BRL20 million. But again our greatest concern was to mention no [offers] to provide assistance to all the employees and their families.

And now we are going to talk about sales to external foreign market.

Hello, Leonardo. Good morning. Of course these measures that are being imposed to Brazil, [developing] antidumping and countervailing duty are [affect] us, especially in the case of the hot rolled that we sell, send to our company in the US.

And we don't think it is correct. We are defending ourself.

This is a process and it's still going on. What we want, at least for those products that we send to the US to be processed, that we have some kind of waiver or differentiation in treatment.

Of course, I'm not working with that scenario. What I have been doing is to focus all our exports to the US in coated products. So today we are working with prepainted Galvalume galvanized material; and now we have the new steel in the market, which is the metallic sheet. Today in Brazil we have a capacity of 1 million tonnes of metallic sheet, metal sheet.

We are operating with half the [productivity] in Brazil, and I'm opening markets everywhere: in Latin America, in Mexico. Mexico still has -- there is a [sicard] of 15%, and with this level of the exchange rate and the dollars and the competitive costs that we have, being in the first quartile, I can be very competitive in the market.

And another thing, I am not a foreigner in this market. In Mexico I have offices, I have [all] employees, I have sales teams. In the US we have very strong sales teams based in Chicago, New York, at [LLC]. So I am a local player.

What we want is to grow in the US. We are going to grow. Today we have 45% of our sales focused there, and the trend is to grow even more, with more value-added products in the US.

Brazil has no other way. Export is part of Brazil's business case, and this is also true for CSN, at least for the next two years while the internal situation in Brazil does not get better.

As I mentioned you, our consumption in Brazil went to levels of 2007. We are talking about (inaudible), so we have to count on exports.

And CSN is going to work strongly with costs. We have a very, very competitive plate cost; we have galvanized products; we have products for automotive and appliance lines. And this is what we want to work with in the United States, Mexico, and Latin America.

Now Daniel is going to talk about iron ore.

Good morning, Leonardo. As we mentioned in previous calls, we have been doing our homework. We have been very judicious in our work with plenty of dedication in our team to the Company, and that led us to very competitive costs.

Since September 2014, we understood that the Platts in export is going to go even further down than people are talking about. We started this additional work, and with that we positioned ourselves that we are prepared for any market scenario.

Now, when we have a situation like this, that Platts is even better than we expected, so the exchange rates with the dollar a bit better, then things start to be even more favorable for the business. And this joint effect of those two points multiply and there is a [ripple] to our results.

So if we have accumulation, considering the production we are expecting for next year, costs as they are today and as we are addressing the Company, and dollar at $3.80, $3.70, and the Platts we see today we are talking about double the EBITDA compared to the EBITDA we had last year.

Well, thank you very much. A very good answer. Thank you.

Alan Glezer, Bradesco BBA.

Good morning, everyone. Thanks for the opportunity. I have two questions about costs.

The first is the cost of iron ore. We saw a trough of $2 per ton between the third and fourth quarters of the cost delivery in China. I would like to know about this $2. What did you see in terms of the drop in freight and exchange rates, and how much came from CSN in terms of reduction of costs?

The second question is about the cost of steel. If we take a look at the cost per tonne, it went up about 5% quarter-on-quarter. I would like to know where the increase came from, in the increase of [tonne] and steel.

Was this because of an increase of your fixed cost? Was this because of the dollar rated input? Where does the increase come forth in steel? Thank you very much.

Hi, Alan, I'm going to answer your first question -- I'm sorry, Daniel is going to answer your first question, and then Guilherme is going to talk about the cost in steel.

This is Daniel; good morning. Well, the homework we have been doing is (inaudible). The drop in Brazilian reals was quite significant.

Our cost, just so you can have an idea, went down from BRL41 per tonne in June to BRL39 in October because, again, of a series of actions that we have been implementing in the different (inaudible). So it's not a little work. It's a lot of work.

We have been working on changes in our operations for differentiated products, products with higher margins, trying to work with lower costs, and reductions of costs related to more day-to-day expenses: the relationship with our suppliers, discussing our prices, reduction of inventory in the business. So it is a very broad line of work.

Then we are working in all the phases of the process. We were quite successful in reducing logistic costs and also production costs.

The work is not finished. We still have things to do. Just to remind you that [feed] grades went down by about $2.

So, we are doing our homework and this will continue along the year. We still have some amount to capture in all the phases of processes in terms of cost. Guilherme?

Hi, Alan. As for steel costs in this quarter, as we saw we had an increase basically related to raw materials because of the average consumption of imported costs. Remember that we have important coke and coal that was about $3.25 for the exchange dollars, and now the exchange was $3.65, so impacting raw materials; and also an increase in maintenance costs in the quarter; and depreciation over a lower base of production.

On the other side, we have some positive effects looking to the future. We completed the TG20 in the quarter, [disturbing] that we have just finished renovation, have the capacity of 160 megawatts. And if you consider the average cost of this energy including [burdens] and fuel you're talking about a difference in cost of energy of about BRL150 per megawatt.

If you analyze the difference, you're talking about the potential reduction of BRL150 million a year in energy. So this is something that we have been reinforcing because of the maintenance of our operational assets.

Just a follow-up in terms of Namisa. I would like to understand what your strategy is for Namisa in the current price conditions. I would like to know if your strategies to increase the volume of Namisa with the reference price that we have today could make sense. Thank you.

Well, since December last year Namisa no longer exists. What we have today is an asset that is the merger of the mining assets of Namisa with the mining assets and iron ore assets of CSN. \

So, based on the reality what we have is the total integration of this asset. And when we have the integration, this is what we call a change in our operational model. We have the opportunity of working a different way, and this is what we have been doing.

The Engenho mine was the mine that belonged to Namisa. It was integrated to Casa de Pedra, and with that we could reduce our costs and improve the quality of our product.

Some facilities of Namisa that were high cost are being used to support the production of Casa de Pedra. For instance, we have a facility that's called [PD] that we used the full capacity of the terminal, shipping iron ore to complete the idle capacity of Namisa with Casa de Pedra. So we are using all the possible synergies that the integration will allow us.

Okay. Thank you very much. You were very clear and I thank you for the answers.

Humberto Meireles, Goldman Sachs.

Good afternoon, everyone. Thanks for the opportunity to ask a question. I have three questions.

First, in your balance sheet in terms of intangibles, there was a significant increase quarter-on-quarter of BRL4.3 billion. If you could give us a bit more color on that, what's the reason for the increase.

In terms of cash flow, I have a question in terms of credit from related parties. You have a positive inflow of BRL3.5 billion. Also I would like to understand what that stands for, where the credit comes from.

And finally, a follow-up in terms of steel costs. I would like to understand if you are going to change the way you account for the purchase of iron ore, if it's after you complete the quarter -- that is, when the quarter has 100% of the consolidated results of Congonhas -- if you are going to have any change in terms of the account effect.

Well, the two first questions that are intangibles and cash flow are going to be answered by [Caio], our accounting manager. And then Daniel is going to talk about how we're going to account for costs and prices of iron ore for the steel part of the Company.

Well, intangibles for our balance sheet with the significant increases of spreads generated in the Business Combination operation, (inaudible) at fair price of Namisa, Congonhas, and the operation generated this asset of BRL3 billion, of BRL100 million in the balance sheet.

As for cash flow, the BRL3.5 billion referred to the dividend that was paid out because of the business combination operation. Namisa had the payout of dividends before the operation took place [capacity].

This is Daniel. As for the transfer to Volta Redonda, since December it became a sale; and till December last year we delivered at cost, and now we have a sales contract. This iron ore is sold at market price to Volta Redonda.

So just to be clear, the components of an increase of cost and steel is the accounting effect of this iron ore coming to price market. And looking further on, we should expect a higher cost because you're going to have three months with 100 of iron ore being sold at price market.

Going back to COGS, on that we have other factors that are positive. First, we had a maintenance downtime, and so we decreased the purchase of coke and coal. We used more domestic raw materials.

Also we had to ramp up gradually the coke that we are using, and that's where we improve our competitiveness. So we are [filling] capacity, reducing the mix, and that has been also positive in terms of costs.

Okay. Thank you very much.

[Ara Quill], Barclays Company.

Hi there. Thanks for taking the questions. A couple from my side. I just wanted to try to better understand exactly what the strategy is here for reducing leverage and exactly what the target would be for that, for year-end 2016. Am I right that thinking that you guys are hoping to grow EBITDA through pretty stringent cost reductions and also through increased volume and price increases?

I'm just trying to better understand, I guess, where you think the traction really comes from, particularly when I put it in the context of a very weak macroeconomic backdrop that we have in Brazil and how exactly we're going to push price increases on the order of 10%, given the global oversupply, the current stronger BRL, etc. So maybe we can start there.

Well, so her question was about leverage and also the reduction of expenses, basically focusing on our cash burn. First, it's important to say that when we talk about deleveraging, the first trend is to think about the divestment of assets, because the sale of assets is a significant point.

But we also have a series of other measures that happen together with this (inaudible), such as increase of sales, as we already mentioned; the search of new markets for us to distribute our products. This is a very important process in CSN.

We are reducing expenses. I mentioned a reduction of 35% in our expenses.

Avoid buying raw material from third parties, try to optimize production, and further on. So when we talk about deleveraging, we are talking about a set of objectives. The Company in a very joint manner -- talking about all participants, steel, mining, cement, logistics -- is really engaged in trying to really zero our cash burn.

As for your second question, which is -- I'm sorry; going back still about expenses, as I mentioned in the past presentation, we think that as of the presentation of our results in the third-quarter 2016 you will be able to see the expressive reduction of expenses that we are talking about. The name of the game, as I mentioned before, is liquidity; but we have to look inside and cut any kind of expenses to try to reduce our cash burn.

Thank you very much.

If there are no further questions, we are going to turn the call back to Mr. Paulo Rogerio Caffarelli, CEO and IR officer of CSN, for his final consideration.

Well, first of all, I'd like to thank all participants in our conference call. Thank you very much for your attention.

Also I'd like to thank all my colleagues that have been with us to try and have the best possible conference call and answer all your questions. Regardless of that, if you have any more questions with regards to our operations, performance, please do contact our IR department. Thank you very much, and I wish you a good day.

Thank you. The conference call of the earnings of CSN is now closed. Please disconnect your lines and have a nice day.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.