National Steel Co Q4 FY2022 Earnings Call

At this time, we would like to welcome everyone to CSN Conference Call to release Results for the Fourth Quarter 2022. 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 listen-only mode during the company presentation. Following this, there will be a question-and-answer section for which further instructions will be given. We have a simultaneous webcast that may be accessed through CSN's Investor Relations' website at ri.csn.com.br where the presentation is also available. The replay of this event will be available as soon as the call ends for one week. Please bear in mind that some of these statements made herein are mere expectations or trends and are based on the current assumptions and opinions of the company management. Future results, performance, and events may differ materially from those expressed herein. I would now like to turn the floor over to Mr. Marcelo Cunha Ribeiro, the CFO and the IR executive officer who will present the financial and operational highlights for CSN. Mr. Ribeiro, you may proceed.

Good morning to all of you and thank you for attending our results call for the fourth quarter 2022 for CSN. Before beginning the presentation, I would like to thank all of you for your attendance and the CEO and Chairman of CSN is with us as well as other executive officers that will participate in the question-and-answer session. Let's begin with the highlights for the period, the acceleration in our financial results for the fourth quarter. We had important frameworks and some impacts, especially because of the rainfall in mining, but we were able to respond well, and we experienced a speed up in volumes, prices, and costs in mining. In terms of steel, we had the traditional good performance, which enabled us to increase our EBITDA by 15% at the end of the year, a growth that should increase its pace throughout 2023. Secondly, we highlight the conclusion of the acquisition process of CEEE with the acquisition of 66% of the capital of the company and also a transaction at the end of the year when we acquired an additional 32% from Eletrobras. We're now owners of 99% of the capital of CEEE, an important player in the electrical sector. It enables us to be self-sufficient, and we can also sell energy at present. The third important impact was a jump in our ESG indicators, work that has been done by implementing policies and goals, along with enhancing the disclosure of our historical practices. We have attained two important indicators. The first we have been recognized as an industry mover, the company that most improved ESG throughout the year. Secondly, Sustain Analytics has included us as the fourth-best company in the segment worldwide, thanks to the endeavors and efforts that CSN carries out on that front. We go on to page four and show you our evolution of our EBITDA quarter-on-quarter. Of course, we had volatility throughout the year. We were impacted by the strong prices of iron ore and steel in the first half of the year. We then saw a normalization in the price of these commodities impacting our profitability. At the end of the year, operationally, we were able to obtain better margins at 27% and ended the year with BRL13.8 million highs in EBITDA, the second best year for CSN, although it represents a drop of 30% compared to 2021. With this, we had a growth of 15% in the quarter in this sequential comparison. On the right in the graph, you can see that the great difference lies in the mining sector where we practically doubled results in terms of prices and volumes. Steel also performed operationally, but with a gradual reduction in prices causing a drop in the EBITDA. We go on to Page five, where we will speak about our cash, beginning with our investments. We accelerated our CapEx in the fourth quarter going from BRL39 million to BRL1 billion or 3X, especially investing strongly in segments besides steel and mining. We had some factors that were not part of our initial forecast. The consolidation of hosting and the rights of use brought us to a new level of CapEx in the segment of BRL1 billion, raising our CapEx for the year to BRL3.4 million, below what we expect to do in 2023. Of course, we will have a speed up in the mining sector with the evolution of the P15 sector in working capital. This quarter, we had very strong demand in our inventories. We reduced inventories of raw material because of the normalization of prices abroad. As you will see in the steel results, we had production. We finished our inventory which was, of course, part of our strategy. We increased production and accounts receivable because of the possible evolution of the mining cost, and all of this was fully offset with the receivables from suppliers leading to an increase in our working capital affecting our cash flow. In the next page, you can see the volatility in free cash flow; the operational cash flow showed full operational results, but with a high level of inventory. That is why we have a negative cash flow. We enhanced cash generation and ended the quarter with an EBITDA of BRL3.4 billion, impacted by variations in working capital, higher CapEx, higher interest rates, and some taxes that seasonally were somewhat higher for 2023. We will stabilize this cash flow. We have a positive result in EBITDA, and this will offset the higher investments. Therefore, a positive cash flow will enable us to reduce our indebtedness that we will see in the following page. On page seven, we observe that this cash flow for the fourth quarter was insufficient to allow us to reduce our indebtedness. Subsequently, it grew from BRL24 billion to BRL30 billion for very obvious reasons. The acquisition in the electrical sector added BRL3.3 billion, besides an important payment that we carried out, all of this accumulating to a total of our net debt that grew by 25% to BRL30 billion. With this, we finished the quarter with a leverage of 2.2 times pro forma for the prepayment of mining that we announced in the first days of January. Ideally, this leverage would have been at two times, which is the range in which we would like to operate. For 2023, we will see a sequential improvement of EBITDA and cash flow, and we will aim to fall within that range with minor variations through the coming quarters. Our liquidity remains comfortable at BRL12 billion due to the prepayment of the BRL500 million, which is very close to our target liquidity, ensuring good coverage in the short term. We highlight our activity in the capital market, especially the local capital market. We took advantage of a very sound window; we issued debentures for over BRL4 billion, helping us to lengthen our indebtedness and making it more efficient. We had a good year in 2022. Our volumes were very close to 2021, especially in the domestic market, with a minor drop of 3%, smaller than the drop in the market that was close to 10%, showing our efforts to conquer the market. We grew significantly in important sectors like construction, leveraging what had happened in other sectors. The, automotive line, the white line, we experienced a quarter where prices internationally weakened. Therefore, we were very careful to prioritize volumes rather than prices. We had a slight drop, but better than 2021. Regarding prices, there was a drop of approximately 8% in line with international prices. The positive announcement is that the international market has made way for new price increases, and as we will see in questions and answers, we have the opportunity for new pricing rounds. We still see very high prices, which should allow us new incursions. We had an EBITDA with a marginal drop, specifically a drop of 13% despite good operational performance and the drop in prices. On Page 11, as you can see, we had production that was 7% below 2021. We capitalized on some opportunities buying slabs in the international market, taking advantage of the drop in average prices. We also had a drop of 5% in slabs and we experienced a drop in the cost of the final product. This has enabled us to maintain average prices. The floor of our profitability remains higher than our historical average BRL819, which is above $150, the average cost. What we observed in 2022, we intend to improve upon with the attempt of increasing prices and, of course, a better quality. In mining on Page 13, we had a very strong quarter from the viewpoint of results and operation. We managed to increase sales in a typically slower quarter due to seasonality. We produced somewhat less due to seasonality, but we were able to sell more, positively impacting working capital because of the improvement in prices. We began the quarter with low prices but saw a price improvement in December. We capitalized on this price improvement, sold out our inventory during the period, and had a slight increase in volume compared to 2021. Our forecast for 2023 looks even better. We will buy from third parties, and we expect improvement in the market at higher prices. We're quite enthusiastic about the margins. In 2023, we anticipate all of this will accelerate to levels above 50%, resulting in higher EBITDA than the BRL1.8 billion we saw for the fourth quarter. On Page 14, this is a comprehensive comparison among quarters. We noted improvement in all areas in terms of volume, in the mix of our own production versus that of third parties, as well as improvements in prices. Now to speak about cement on Page 16, for the first time we consolidated LafargeHolcim of Brazil, now known as CSN Cement Brazil. We reached three million tons for the quarter and ended the year with 7.2 million tons. Of course, if we look at 2023, these figures will change quite drastically, but we also expect significant growth in certain areas. At the end of the year, we implemented some actions within our CSN plant in Brazil to reconnect capacity, leading to a slight reduction in margin. The reconnection of some operations, coupled with the higher cost of fuel, resulted in profitability that was a one-time effect and somewhat lower. We anticipate prices of coke and oil will drop in 2023; we won't have these reconnection costs. Of course, we have many synergies to leverage from controlling the LafargeHolcim plant, which has proven to be better than we had imagined. For example, the cost of our own energy, which we had forecast for July, we have now anticipated to April. We're quite enthusiastic about the cement business in 2023. This concludes our presentation of segments. We would now like to speak about ESG. Good morning everybody. We are here again to present the results for the fourth quarter of our ESG initiatives. This is an area under constant evolution with the aim of providing greater transparency in what is done in the company. I'm going to provide a brief overview of our governance efforts. We've made significant strides in completing the impact and dependency matrix on ecosystem services. We're following the guidelines for TNFP mapping of risks and opportunities, focusing on parameters that relate to nature. In April, our report will address all of these topics. We entered 2022 with CSN mining, and all of its dams renewed. The Vigia Dam completed its works and re-characterization, and we continue to evolve in our operational performance quarter-on-quarter. We entered 2022 with a reduction of 25% in our accident frequency rate compared to 2021, representing the best result in our historical series. We achieved a significant reduction of 19% in the number of accidents involving employees and third parties. Our cement plant began with the 14,000 O1 certification. We're working on projects aimed at reducing the consumption of water and the emission of CO2. This effort extends to each segment. In steel, we've achieved minus 5% versus the baseline in 2018, with an improvement in CO2 emissions, while cement has seen a minus 7% reduction against the baseline of 2020, although there was a slight increase in emissions from mining. All of these trends have been carefully forecast segment by segment, and we have mapped our initiatives over time. It's important to mention that we've identified all company risks, and these will be included in the next integrated report of the company. When it comes to diversity in the social arena, we have grown our percentage of women in leadership positions year-on-year, achieving a 50% increase. We aim to reach 28% of women in leadership roles by 2025. In the social area, we concluded two projects in the last quarter, partnering with the Getúlio Vargas Foundation, and completed our theory of change, which will provide a new instrument for social investment. As mentioned, there has been a constant evolution in the company regarding our main ratings, especially in Sustain Analytics, where we scored the fourth-best result in the segment among 155 companies. We are the only Brazilian company in steel and mining to be recognized in these categories, establishing ourselves as the steel company with the greatest evolution in terms of our ESG practices. Thank you very much.

Ladies and gentlemen, we will now go on to the question-and-answer session for investors and analysts. Our first question is from Rafael Barcellos from Santander Bank. You may proceed.

Good morning to everybody. Thank you for taking my question. My question refers to steel. Could you provide insights into the purchase of slabs quarter on quarter and what you are doing in the first quarter considering that we're already in March? If you could speak about your priorities at present in terms of your capital spending, what would be ideal for the company at this moment?

Good morning, Rafael. This is Martinez speaking. In terms of cost, as mentioned by Marcello, we had a significant reduction in the cost of slabs in the fourth quarter. Our efforts focus on continuing this cost reduction. In the first half of the year, we expect this reduction to continue, which is fundamental to preserving our EBITDA margins. In the fourth quarter, our slabs reached BRL3,900, but we are working to reduce this cost further. We carried out our strategic acquisition of slabs, around 400,000, and we've already utilized 3,000 tons, leaving us with 100,000 tons still available. We're also analyzing other possible acquisitions of slabs to balance out the prices effectively. Additionally, we are working on reducing conversion and manufacturing costs as well as the transition between hot and cold slabs and upstream products. Regarding our capital spending, minimum cash was the question. We maintain that due to the volatility in Brazil, it's important to ensure we have cash set aside. The ideal range would be BRL15 billion, which serves as an important insurance policy during these present days. We are channeling our best efforts into reducing cash levels while making our fundraising and investments more efficient. For the time being, these instruments are only available for companies that have an investment grade, which we possess. Throughout 2023, we aim to maintain a minimum volume of BRL15 billion. I hope that answers your question. Is anything else missing?

Do you think it's possible to have additional cost reductions in the first half of the year to complete this?

In the first quarter, costs should stabilize. In the second quarter, we foresee the possibility of achieving greater cost reductions. I'll comment on our price outlook for the first quarter. We believe we have the capacity to improve, but in terms of costs, we expect stability in the first quarter with the prospect of further reductions due to lower raw material acquisition costs, which we have already sourced. This allows us to reduce costs for raw materials in inventory. We anticipate more sales in the second quarter, and the use of slabs will offset any variations we might experience in the first quarter. Our acquisitions were quite advantageous in terms of cost reduction.

Our next question comes from Daniel Sasson from Itau BBA.

Good afternoon to all of you. Thank you for taking my questions. My first question is to Martinez. Now in Europe, everything is slower. Last year they ended at 7.5 million of capacity in terms of steel, and it's coming back slowly. Prices are recovering as a counterpart, and the situation will be very positive in terms of the demand for rebar. We will have four million tons to build this coming from Turkey. When we look at Brazil concerning the pillars you are discussing, coal is still at 375, iron ore at 129, 130, and exchange rates also at 129, 130. With these price levels in Brazil, a BQ is at 4700 while the Chinese BQ is at 680, making the premium slightly negative.

The scenario indicates that if we consider slightly stronger demand, which I believe will materialize in March, January and February saw the sector behave quite well. We saw improvement in March, which could allow us to increase between 7.5% to 10% starting in April. This is possible because of the market dynamics and the long-scale scenario; premiums are negative. Currently, if we consider the Turkish rebar, which used to be the cheapest, that option no longer exists, and premiums are down to minus 14%. Summarizing, if demand begins to increase somewhat, with growth starting in March and stabilizing, and if the market becomes stronger in the automotive sector and civil construction, where we observe improvements, I think that starting in April we could witness a price increase of about 7.5% to 10%. However, the circulation of long steel is more complicated because supply and demand dynamics are complex. In France, the situation differs; some plants, especially our own, are being remodeled including the blast furnaces. We also faced issues in specialty steel, which were somewhat depressed, but these issues should all be resolved by March. Overall, I view the scenario positively, and Brazil cannot lag behind. Our country must recover as well, as forecasts suggest that growth will be in the range of 1.5% to 2%. Last year Brazil faced a drop of 4%, particularly in steel. If we're capable of achieving 1.5% to 2% growth, we can recover prices and return to historical margins of over 20%. This is the overall scenario regarding the cost of slabs produced and purchased.

Yes, yes, absolutely. That was very good. Thank you, Martinez.

Our next question comes from Mr. Carlos de Alba, Morgan Stanley.

Thank you very much. I just wanted to discuss a couple of things regarding cash generation, the CapEx, and working capital for 2023. I wanted to see if Marcello could confirm if the CapEx guidance remains intact for mining and steel for the overall company this year. Regarding working capital, you mentioned the need to reduce it, and the fourth quarter wasn’t exactly what the market expected. Can you inform us if this is something the company believes can be achieved already in the first quarter, or will it take longer to adjust the working capital to more comfortable levels? Finally, regarding cement profitability, I noticed the EBITDA per ton has decreased in the quarter. Is this the result of consolidating the Lafarge business, or is it just the market becoming more challenging? If you could discuss the outlook for profitability in that business in Q1 and throughout 2023, that would be very useful. Thank you very much.

Thank you, Carlos, for your questions. Regarding the CapEx guidance, it remains at BRL4.4 million, focusing on mining, particularly the acceleration of the P15 project. So, to answer your question, this guidance will not undergo revision, neither in mining nor in other sectors. The fourth quarter was impacted by some issues regarding the segment or RTGs, our cranes, the right of use, and the acquisition of products in our cement business, but these were one-time effects that ended with the fourth quarter. In 2023, we anticipate an increase in mining investment, reaching BRL4.4 million as stated in the guidance. Regarding our working capital, we ended the quarter with our stocks above BRL11 billion. We expect a normalization of inventories, which should reduce by BRL600 million, along with raw material costs. We still have expensive inventory costs related to coal and coke that will also contribute to price adjustments. We aim to reduce these lines by BRL2 million over the coming quarters. This reduction will not have a direct impact on cash generation; we have a proportional impact on suppliers. However, we believe the variation in working capital should be stable throughout 2023, without the volatility we saw in 2022. Regarding the EBITDA per ton of cement, the consolidation of the cement Brazil plants will tend to reduce the EBITDA percentage per ton. Yes, we are describing a negative impact because we are dealing with capacity-integrated plants. The instability observed in the fourth quarter was not merely due to this consolidation; it was affected by the previously mentioned higher cost of oil, fluctuations in volumes caused by heavy rainfall, and one-time costs from reconnecting some capacity in our plants. Our ability to navigate above 30% profitability once we are fully integrated remains a goal.

Our next question comes from an unidentified analyst.

Good morning and thank you for taking my question. Could you speak about the synergies from the integration? What factors will point to the realization of these synergies? What strides have been made and can you provide guidance for 2023 in the cement sector?

Hello, Vanessa. Good afternoon. We anticipate much higher realization of synergies than originally projected. These synergies are centered around self-production of energy with reduced energy costs across all of our operations, better logistics, and competitive commercial strategies. We have synergies regarding acquisitions, seeking larger volumes of raw material in the short term, as well as comprehensive operational opportunities. As mentioned by Marcello in the presentation, we are quickly implementing initiatives that will come into operation over the next weeks. Therefore, we see a wide variety of synergies leading toward the expectations shared during the CSN Investor Day with a target margin of 30%.

Do you believe that in 2023 we will already see an increase in margins?

Certainly, yes. The results of the fourth quarter were likely a one-time effect, but we expect to navigate above 30%. Over the last three years, CSN has concentrated on maintaining that 30% margin, and with the realization of synergies, we are confident that we will return to that level and are working in that direction.

The next question comes from Thiago Lofiego from Bradesco BBI.

Good morning, everybody. My first question pertains to the cement outlook in terms of demand and prices throughout the year. It could be a somewhat more challenging market. How will you balance increased utilization rates with operating in a challenging market? Additionally, regarding cement, what are your thoughts regarding your IPO plans? The second question addresses capital allocation regarding greenfield potential in the United States and the type of growth you're expecting.

Good morning. This is Martinez. When we began the cement business, we prepared ourselves for challenges. This is what our chairman has always emphasized. The cost of entry in the cement market has proven to be our best challenge. This cost enabled us to participate in a very competitive market with other large players after our acquisition of LafargeHolcim. In addition to our pleasant surprises within the Vargo plant regarding logistics and energy issues, we foresee this aspect will become increasingly valuable. We execute a strong regional strategy aimed at increasing market share in the southeast retail sector, alongside expanding our footprint in the historically underserved northeast region. The competition is intense; however, we managed an 18% price recovery in 2022. The market currently stands at 2.7 with regulation in some areas, but we observe a strong market with plenty of room to grow, making further operations possible. Regarding prices, our focus is on managing costs for mineral resources that have reached very high levels, which we must navigate carefully. Petco will not exert the same pressure on us as in previous years. We are prioritizing operational efficiencies and market access to balance our growth. Regarding the IPO, we will continue to pursue profitable, sustainable growth while maintaining prudent leverage levels as highlighted during the CSN Investor Day. Should we have an initial public offering, it will be contingent upon reducing our leverage. We're proactively managing this element, and with the healthy internal growth we are cultivating, we believe we are well-positioned to accelerate our efforts in the United States as we find opportunities there.

Our next question comes from an unidentified analyst.

Good afternoon. Thank you for taking my question. A question for Martinez: what challenges do you face in increasing prices in comparison to Europe, the United States, and China?

We expect the export levels of CSN will exceed those of last year. We continue receiving materials from Turkey, for instance. Additionally, regarding capital allocation, what are your priorities in the upcoming quarters? Is there room for growth, and is your cash position acceptable? With a general assembly approaching, what is the outlook for this? Clearly, in the first quarter, we should experience a natural carrier effect; we increased prices this year between 3% to 5% compared to the fourth quarter, which is already a positive sign. Regarding price increases for frac steel, the demand in March has already improved, indicating a more favorable environment for price adjustments. However, the premium is currently negative, which complicates matters. In my opinion, maintaining negative premiums is counterintuitive, as the demand exists. Concerning CSN's export levels, last year we fully utilized our quota to supply the USA with 250,000 tons of galvanized steel. This year, we're considering sending 400,000 tons as a proactive response to market conditions and internal pricing mechanisms. This shift is part of our strategy to evaluate market conditions effectively. In terms of other long steel markets, we have adequate rebar to sell in the domestic market. We are entirely sold out in Brazil, which is quite fragmented. Exporting does not make sense for the moment; hence we will prioritize the domestic market. On the subject of capital allocation, we remain focused on ensuring a balanced approach, particularly with our leverage being in the range of 2 to 2.2 times. We remain committed to cash generation and prime stock options. Following the capital allocation exercise we carried out last year in September and December of nearly BRL8 billion, investing in LafargeHolcim and the electrical sector, we expect this will positively impact our consolidated results in 2023.

Thank you. Thank you very much. That was very clear.

Our next question comes from an unidentified analyst from BTG Pactual.

Good day or good afternoon to all of you. Quick questions and a follow-up. We have heard from your clients and distributors recently that CSN has delayed some deliveries due to purported operational problems. Could you clarify if there was indeed a factor impacting your delivery rates and whether this issue has been resolved? Has it affected your performance in the first quarter in the domestic market? As a follow-up, Martinez mentioned expecting stable costs in the first half of the year for slabs produced. Could you share more detail on total COGs, including slabs from third parties?

Regarding the COGs, we refer to the consistent cost of slabs at BRL3,900 per ton in the first quarter. Regarding the operational problems mentioned, there is more noise than substance; we had some transient issues that indeed had a minor impact, but these have been resolved. In the second quarter, any operational hurdles will be fully addressed. Early in March, these issues were mostly resolved. These disruptions predominantly affected special steel linked to other markets, but they did not influence our distribution network significantly. We are continuing forward. Although there was a limited impact felt by smaller clients, we have rectified the situation and will have everything back to normal soon. Regarding the COGs, we expect cost levels to hold steady throughout the first half of the year, despite minor operational impacts that are being managed.

As we have no further questions, we will return the floor to Mr. Marcelo Ribeiro, the CFO and IR Executive Director for his closing remarks. You may proceed, Mr. Ribeiro.

Thank you all for the questions. I would like to turn the floor over to our CEO and Chairman, Benjamin Steinbruch, for his closing remarks.

I would like to thank all for your attendance at our fourth quarter 2022 conference call for CSN Mining and CSN. I would like to reiterate the commitments we made formerly regarding leveraging. We're at two times, and if we consider the prepayment of iron ore, that figure could drop to 1.2 times. We experienced substantial growth in the second half of the year and anticipate significant synergies that will be reflected in our results as a consequence of our acquisitions. Furthermore, we are hopeful for opportunities that may arise in the future, concerning a potential strategic partnership opening for our cement and energy sectors. We remain committed to maintaining leverage at a manageable level of 1.0 to 2.0 times at most. Concerning ESG and technology, our results have significantly evolved in these areas. In terms of technology, we will fully leverage green steel production processes that are less environmentally harmful in our iron ore, steel, and cement production processes. Our performance in 2022 could have been better. We did not capitalize on some opportunities and faced operational challenges that were quickly addressed. However, we demonstrated improvements in the fourth quarter and expect stronger results starting in the first quarter due to synergies from cement integration and energy incorporation into our operations. Both sectors will benefit from better prices than those previously witnessed. As raw material prices remain stable, we are optimistic about achieving our results and will focus on building profitability both globally and locally. Our outlook for 2023 is optimistic, considering we've adopted all necessary measures and are geared towards maximizing the outcomes from our previous efforts. We hope to display promising results by the second quarter of 2023. We remain committed to deleveraging and maximizing productivity while employing innovative technologies. We believe that as a large company, we are navigating growth in a complex market where the dynamics make operations more challenging. However, we are confident in our acquisitions. With minimal operational missteps in 2023, we believe we will deliver exceptional results. Thank you once again for your participation in our conference call, and we look forward to releasing our first quarter results soon. Thank you.

The conference call for CSN ends here. You can now disconnect your lines, and thank you very much.