National Steel Co Q2 FY2025 Earnings Call

Good morning, and thank you for holding. At this time, we would like to welcome everyone to CSN's earnings conference for the second quarter of 2025. Today, we have with us the company's executive officers. We would like to inform you that this event is being recorded. We have simultaneous webcast that may be accessed at ri.csn.com.br, where the presentation is also available. The replay of the event will be available after closing. Before proceeding, we would like to state that some of the forward-looking statements made herein are mere expectations or trends based on current assumptions and opinions of the company's management. Future results, performance and events may differ materially from those expressed herein, which do not constitute projections. In fact, actual results, performance or events may differ materially from those expressed or implied by forward-looking statements due to several factors such as general and economic conditions in Brazil and other countries, interest rates and exchange rate levels or prepayment of debt pegged in foreign currencies, protectionist measures in the U.S., Brazil and other countries, changes in laws and regulations and general competitive factors at a national and international level. We will now turn the conference over to Mr. Marco Rabello, who will begin the company presentation. You may proceed, Mr. Rabello.

Good morning, everybody. It is very satisfying to present the results of CSN for the second quarter 2024. We begin on Page 2, where we show you the highlights for the quarter, showcasing our strong resiliency. The company had an EBITDA growth in all segments, except for mining which was exclusively impacted by a drop in iron ore prices. This performance reflects excellent management of costs and expenses as well as diversification of investments with synergy and a very assertive commercial strategy. We have experienced significant increases in competition with imported material, especially reflecting the tariffs increased by the United States. CSN reached an EBITDA of BRL 2.6 billion with a margin of 23.5%, an expansion of 5% and 1.4 percentage points compared to the first quarter '25. Additionally, we're progressing in our deleveraging with active cash management and a reduction of gross debt. In this quarter alone, the company reduced gross debt by BRL 5.7 billion, even with the incorporation of new assets like Tora, bringing leverage below 7 points compared to last year, making CSN closer to its goals for the year. Looking at our mining segment, we achieved the second highest sales volumes in history, demonstrating operational excellence throughout the last few months. This increase in production and diversification of fixed costs had a significant cash impact, bringing costs down to less than $21 per ton this quarter, positioning CSN competitively within the global mining landscape. However, despite improved volumes, mining EBITDA decreased due to declining iron ore prices this quarter. In steel, we are proud to present our performance for this quarter. This has arguably been one of the most difficult periods in terms of competition in recent years due to a flood of imported materials in Brazil. Regardless, we adopted a conservative approach prioritizing value over volume, leading to a strong performance with prices up 4.5% compared to the second quarter '24 and a 79% increase in EBITDA year-on-year, reaching a 10.8% margin. The cement sector also showed resilience, with a quarterly growth of 8% in sales volume and a net revenue increase of 10% compared to the first quarter '25, offsetting some cost pressures from raw materials and achieving an EBITDA margin of 24%. Finally, our logistics segment achieved a new EBITDA record aided by strong rail performance and contributions from our recent acquisition of Tora, reaching BRL 519 million in the first quarter with an EBITDA margin of 44.1%. Outcomes in the energy sector were extraordinary due to price increases, resulting in an EBITDA fivefold higher than in the same period of 2024. To summarize, the adjusted margin reached 23.5% for the second quarter, highlighting our diversified operations that grant us greater resiliency amidst market pressures. We have an 18.2% growth in CapEx versus the last quarter and stable CapEx year-over-year, focusing on expansion and productivity improvements. Our net working capital increased by 25% compared to the same quarter last year, impacting cash flow negatively due to investment volumes and financial expenses. In the following slide, we review our net debt and leverage metrics. The left-side graph illustrates another reduction in leverage from 3.33x in the first quarter to 3.24x this quarter. This achievement stems from effective cash management aligned with strong operational results. We are committed to continuously improving our efficiency while reducing gross debt. This quarter alone, we reduced gross debt by BRL 2.1 billion, totaling BRL 5.7 billion year-to-date. Our infrastructure project is nearing completion and will lead to upcoming negotiations for formal responses by year-end. With the debt from CEEE considered, our leverage could drop to 3.2x, representing a 29 basis points reduction for the period. Now, viewing our indebtedness profile on Slide #8, we see that we maintain a comfortable position concerning short- and medium-term obligations, ensuring we can meet our commitments for the next three years while working on extending our amortization terms in the local capital market. Next, we highlight our commercial activities in the steel segment. The figures show an 11.5% reduction in sales compared to Q1 '25 as we focused on prioritizing results over volume amidst intense competition characterized by an influx of imported products. Although we’ve lost some market share, we are addressing the lack of adequate protection that jeopardizes domestic producers by facing a flood of imports. Subsequent to discussing steel production volumes, we see production drops due to maintenance shutdowns. Interestingly, our production costs dropped during the quarter while we witnessed nearly double the performance metrics seen in the previous quarter due to operational enhancements. Our financial performance closely reflects this, showing revenue declines caused by lower volumes but demonstrating recovery due to improved pricing strategies. Looking forward, we have a unique outlook amidst rising competition. The market's current state is unfortunate but our operational efficiency and cost management should help us navigate these challenges. We continue to focus on producing higher profitability products while working against the tide of import penetration. Our expectations for the third quarter include operational excellence and enhanced cost control while striving for margin recovery. We are optimistic about potential price recoveries as production patterns stabilize. Ultimately, our focus remains firmly on fostering a resilient domestic market amidst competition.

Good morning, everybody. The results of the last quarter reflect the significant progress in our ESG journey. We have successfully reduced our occupational health and safety incidents by 30% compared to 2020, achieving a much higher standard. Moreover, we have seen fewer high-potential severity events, which is a key focus for us in 2025. In our environmental agenda, we are pleased to report a decrease in water intensity in steel production as well as progress in our decarbonization efforts, though we did see a slight uptick in emissions from our steel plant due to volume increases. Notably, we recorded an 11% reduction in GHG emissions relative to our 2020 baseline. Our tailing dams remain stable, and the decharacterization is on schedule in accordance with our established plans. In terms of diversity, equity, and inclusion, we've made tremendous strides with over 520 new women joining our workforce since 2024, marking an impressive 80% increase in female representation since this initiative began in 2020. We've also seen a 5% growth in women in leadership positions. We're proud recipients of the Hugo Werneck award for sustainability and, overall, our commitment to advancing ESG principles remains strong.

Thank you, Helena. I would now like to introduce our Chairman, Benjamin Steinbruch.

Good morning, everybody. I would like to highlight some key points presented by Marco. Firstly, our operational results have been impressive across all activities, with substantial improvements in industrial performance, reduced costs, and enhanced productivity—this remains our primary focus. We previously shared good results in both mining and cement in terms of cost and productivity, while steel is showing significant evolution. We aim to maximize production efficiency while streamlining our equipment use. The excessive influx of imported products continues to pose significant challenges. Our industry is currently facing unmanageable levels of imports, directly impacting domestic market conditions. We are fighting against this surge and have engaged with government channels, though progress has been slow and without tangible outcomes. While other nations have taken protective measures, we are still awaiting necessary actions from the Brazilian government. Domestically, cement production has shown strong demand, and while our market prices remain competitive, we anticipate adjustments will be necessary. Mining has performed exceptionally and, despite fluctuations in market prices, we expect a recovery as stability returns with operational efficiency. We remain committed to deleveraging and optimizing cash flow while navigating market uncertainties. We believe that improved market conditions will culminate in better financial metrics. We are striving to fulfill our commitment to corporate health while maintaining the highest possible quality in our products. I would like to thank all of you once again for your participation today, and our team is available for follow-up questions.

If possible, I would like to have more details on your eventual partner in infrastructure. How much could you reduce your leverage because of this and your sale of stake in Usiminas, will you reduce your stake to 0? Or will you comply with the CADE antitrust company of 5%.

Yuri, thank you very much. Thank you for the question. Regarding the first question about infrastructure, we have 7 logistics assets, 2 of which are in the final stages of construction. The Transnordestina is concluding the last 2 stretches of construction, projected for full commercial production by 2027. The infrastructure package could potentially provide liquidity of BRL 8 billion and reduce leverage significantly. Concerning Usiminas, we have not finalized our next steps regarding how much will be sold and in what manner.

In terms of competition, I would like to understand if the recent decision regarding dumping in pipes has permitted new dumping situations for coated and hot-rolled products. I was expecting weaker results in terms of margin, so insights on trends for future quarters would be beneficial, possibly indicating margin expansion.

Ricardo, I will begin with the first question. Currently, Brazil is experiencing a chaotic import scenario which has altered the market dynamics significantly. We are engaging directly with the Ministry of Development and Industry to advocate for antidumping measures, yet they have been delayed for too long. We are seeing high tariff discrepancies, with our government not currently acting under appropriate urgency. Commercial defense measures, including antidumping processes, should be enforced effectively given the prevailing circumstances. As for margins, we retain positive results in the steel mill through product diversification and prioritizing higher-margin offerings amidst increased imports. For the third quarter, we foresee sustained demand with potential price recoveries needing careful monitoring.

I would like to discuss the steel segment's positive cost efficiency gains. Can you elaborate on the measures being taken, and what is the expected evolution? Additionally, can we expect CapEx flexibility and are there any plans for asset sales to alleviate cash flow strains?

Thank you for the questions, Marcelo. Starting with the steel mill, we have shut down one blast furnace enabling us to optimize operational efficiency, particularly in cost. We are utilizing locally-produced sinter, which has positively impacted operational costs, and we foresee continued reductions in slab production costs. On CapEx for the year, we are working tightly around an expenditure between BRL 0 and 6 billion, but we are inclined towards the lower range. Most of this investment is targeted at productivity improvement projects. Monetization and asset sales discussions are also in progress to further improve cash flow. In addition to that, there are several short-term initiatives aimed at deleveraging, including asset sales and infrastructure financing, which we're planning to expedite in line with market conditions.

Could you provide insights on the long steel market dynamics and the recent aggressive price increases? Additionally, have you addressed your positioning with the government as it pertains to protective measures for the sector?

In the long steel sector, we have seen prices drop significantly due to market conditions, driving our decision to maintain distance from unprofitable areas of the market. We are working with increased pricing strategies going forward but must acknowledge that past market conditions have not supported healthy margins. Conversations with government officials have highlighted the need for more effective foreign trade measures in light of rising imports threatening local producers.

Despite discussions with the government about the increasing import volumes on the market, we need greater commitment and action to safeguard local production and jobs. Our main concern remains high import levels that affect Brazil's steel industry's health. Operational discussions have to focus on protecting the market effectively, particularly focusing on bolstering our domestic sectors to strengthen competitiveness.

Can you provide updates on P15 mining milestones and explain how you're leveraging the improving cement and logistics segment to maximize productivity?

Regarding P15, the infrastructure aspects are accelerating and nearing completion, with major equipment now contracted or on site. The projected timeline for operational delivery remains around Q4 2027.

In cement, we're seeing remarkable growth with strategies focusing on value and volume mix. Although we face challenges from competition, our expansion efforts have been fruitful, especially with growth observed in new segments. We will continue to work towards enhancing our profitability through effective operations along with maximized distribution and logistics setups.

What’s the company's stance regarding Chinese policies, particularly those affecting Brazilian steel and iron ore? Additionally, how is the company adjusting to lower-grade iron ore market performance?

We're observing positive developments in China’s steel production landscape, which may favor Brazilian exports. Volume reductions in China should positively impact our pricing. We are focused on optimizing our operations around lower-grade iron ore production and have noted demand fluctuations but are confident about our projected stability and efficiency gains as we proceed.

I have some follow-ups regarding the sale of the stake in Usiminas and potential partnerships you may explore. What’s the rationale behind the sale, and is this linked to CADE mandates? On steel margins, can you outline how the volume-centric strategy may evolve over time?

The recent sale of our Usiminas stake was structured in alignment with our agreement with CADE and reflects our commitment while navigating limited liquidity in the market for shares. Our strategy moving forward maintains a strong emphasis on operational excellence and optimizing margins rather than focusing solely on volume. Our operating strategy will dictate responsiveness to market conditions.

In closing, I appreciate everyone’s participation in today’s earnings call. We remain committed to delivering value and ensuring our team has the resources needed to navigate market challenges ahead. Thank you for your attendance.

Thank you. The earnings call for CSN ends here. We would like to thank all of you for your attendance. Have a very good afternoon.