Earnings Call Transcript - SID Q1 2024

Operator, Operator

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to the CSN Conference Call to present results for the First Quarter 2024. We have the company’s Executive officers with us. 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, we will move on to the question-and-answer section at which time further instructions will be provided. Today's event can be accessed at ri.csn.com.br, where the presentation is also available. The replay service will be available after the call. Before proceeding, please note that the forward-looking statements herein are mere expectations or trends and are based on the current assumptions and opinions of the company management, and that future results, performance, and events may differ materially from those expressed herein, which do not constitute projections. Actual results, performances, or events may differ materially from those expressed or implied by forward-looking statements as a result of several factors including overall economic conditions in Brazil and other countries, interest rate and exchange rate levels, future rescheduling or prepayment of debt denominated in foreign currencies, protectionist measures in the U.S., Brazil, and other countries, changes in laws and regulations, and general competitive factors at a global, regional, or national basis. I will now turn the conference over to Mr. Antonio Marco Campos Rabello, CFO and Investor Relations Executive Officer, who will begin the presentation. You may proceed, Mr. Rabello.

Antonio Marco Campos Rabello, CFO

Good morning, everybody. My name is Marco Rabello. It is a pleasure to share with you the results of CSN. I joined CSN in the second fortnight of March. I would like to thank the team and Marcelo Ribeiro for all of the support that I received in the transition period and for the deliveries that he gave us while he was at CSN. Thank you, Marcelo. On Slide number two, we see the main slides attained this quarter. Despite the fact that we faced several challenges regarding the price of our products, it was important to reinforce operating enhancements, beginning with mining, where we had record sales for the first quarter. The company benefited from this period, selling more than 9 million tonnes. In terms of steel, this is the fifth consecutive quarter of sales, showing the normalization of the operation and the asserted commercial strategy, managing to compensate for a seasonally weaker quarter in the domestic market with increased sales abroad. We captured synergies, delivering a 26% EBITDA margin, something unheard of since we carried out the last acquisition. Lastly, and not least important, we have an ESG highlight with the publication of the 2023 integrated report, including advances in emissions control. ESG is a strategically fundamental topic for CSN. We move to Slide number 4 where we see the EBITDA evolution. There’s an impact of the price of iron ore on our results this quarter, and seasonality played a role as well. The drop in the flat price had an impact on the mining EBITDA and on the consolidated results. There was a difference between the first quarter of 2022 and the fourth quarter of 2023, leading us to an EBITDA margin of 19% for the period. In the next slide, we can see CapEx and working capital. The drop of 50% vis-à-vis the previous quarter is due to a seasonality of CSN that wants to concentrate investments for the end of the year. When we compare this with the same period year-on-year, we made significant advances in investment in steel and coke batteries, centering, and the streamlining of UPV operations. We also had advances and capacity expansion projects in mining, mainly related to new P15 equipment purchases. In terms of working capital, we saw a reduction in accounts receivable directly related to weaker sales performed in the period, especially in mining due to a drop in international prices. We move on to Slide number 6, where we present the adjusted cash flow evolution with a negative result of BRL636 million, impacted by lower operating results but also because of the negative impact of interest rates and hedging with iron. This should be reverted in the coming quarter with the change of prices we have observed in the last weeks. On Slide number 7, we show you leverage evolution and net debt buildup. After two consecutive quarters of a drop in leverage, we had an increase in indebtedness of BRL1.2 billion when compared with the first quarter of last year. This performance was expected due to the drop in prices of commodities. We’re making the most of this moment to reinforce our commitment to continue reducing leverage in the coming quarters and comply with our goals. We anticipate more robust results in the coming quarters with seasonality playing a role in terms of volume and price increases in iron ore and steel. We also have strategic projects mentioned in previous calls. We have a partner in energy and work with strategic investors for a minority stake in mining. These topics are extremely important because we need to have a diversified company with relevant actions in different areas, enabling us to recycle our internal capital. Of course, we will have a variation of leverage in less stable periods. On Slide number 8, you see our debt amortization schedule. We show you the sound cash position CSN has, with several million reals at our disposal. Additionally, the company is very active in terms of rolling its debt, focusing on long-term operations and the local capital market. This quarter, we had the reissuance of bonds from last year, raising $700 million maturing in 2030. Yesterday, we concluded our 15th simple debenture with a total value of BRL800 million, divided into two series with the objective of investing in infrastructure for long-term efficient structures. With this, we conclude the consolidated analysis of our performance, and we now go on to the highlights of the segment. On Slide number 10, we see the steel performance. For the third consecutive quarter, we had growth in sales. Because of the strong dynamism of the foreign market, especially SWT, offset by the drop in the domestic market, there was a significant price readjustment due to competition with imported material and a diversified mix with a higher concentration of lower added value products. This offset the increase in price and enabled us to have a good EBITDA at the beginning of the year. On Slide number 11, you see a growth of 5.7% in steel production, referring to the enhancement of the production process observed compared with the same period in 2023, where we had some bottlenecks. Now, we have a higher dilution of fixed costs leading to a drop in slab in the first quarter of 2024. As mentioned, this decrease was not sufficient to offset the drop in price. Expectations indicate that the costs will fall even further, which should resume our performance in the coming quarter where seasonality will play in our favor. There is also a drop in raw material costs, improving our position once we have quotas for imported products. On Slide 13, we see mining performance despite seasonality. The company maintained operational excellence in recent quarters, delivering another production record for the year, overcoming the critical period of rainfall. The readjustment in the price of iron ore was intense, with a change of $30 per ton in the pricing this quarter compared to the last quarter, offsetting all the issues we faced and leading to a drop in EBITDA, reaching a margin of 40% this quarter. On Slide number 14, in greater detail, you see the impact of this adjustment on our results, especially concerning price provisions. This effect, combined with the impact of seasonality per volume, caused a difference of BRL1 billion between the last two quarters. Looking at the result of cements on Slide 16, despite the seasonality with increased rainfall, the company maintained assertive commercial activity with minor impact on volume compared to what we observed last year when we had more aggressive price strategies. This quarter, we noticed an enhancement in the competitive environment, allowing for a price adjustment in this quarter, resulting in stable revenue despite the lower volume. This slide conveys a sound capture of synergy and operational efficiency gains, achieving an adjusted EBITDA margin over 25% for the first time since the integration of assets. So, we're on the right path to capture benefits with a sound and efficient financial performance. I would like to end the presentation on the segments and invite Helena Guerra to discuss the highlights in ESG.

Helena Guerra, Executive Officer

Good morning, everybody. Thank you for the opportunity to present our results for the quarter. I couldn't begin the call without first referring to our solidarity regarding the disaster in Rio Grande do Sul. It is an economic and humanitarian tragedy due to climate change and reinforces the need to address climate change while society must adapt to avoid the impacts of this new reality. Our deep solidarity and help go out to our associates in the region. Even in extremely difficult working conditions, our employees have worked consistently and competently to maintain our dam stable amidst the new rainfall volume to ensure that our company could be properly mobilized through different actions to help the people of Rio Grande do Sul face this disaster. Although the call is for the first quarter of 2024, it's important to highlight the publication of the fourth edition of the CSN report, which was published yesterday. Both reports have been reviewed by outside auditors and we’re complying with our obligations up until 2026. We refer to the concept of double materiality. It considers the impacts caused by the company’s environmental frameworks, risks, and impacts to the business, especially financial risk with double materiality, which is part of the European system approved in 2023 and will become a mandatory practice. This has been incorporated into the 2023 report. During the quarter, we have had actions focusing on health and safety. We reported a decrease in the frequency of accidents. One dam, improved back in December, has reached a level of stability, which was confirmed through an external audit. All of our dams are now at the highest level of safety. We also highlight progress in our safety operations. In the first quarter of 2024, we surpassed our goal regarding vehicle accident frequency, achieving a historically low rate of 1.62 accidents, and we also saw a substantial reduction in the severity of accidents thanks to the program initiated in December called 'safety improvements' aimed at reducing potential accidents in environmental management. More than 500 tons of cement were produced according to the best standards in the world. In terms of emissions, we achieved commendable results in Minas Gerais, yielding nearly 2,000 cubic meters an hour, ensuring availability of water at Casa de Pedra, which is fundamental for the project. We have also seen progress in diversity, with women’s participation rising to 62% in the CSN group, and women holding 10% of leadership positions compared to the same period last year. Furthermore, we have made strides with the evolution of our CDP grade, recognized as a global leader in environmental management, especially related to water, safety, and climate change. Thank you very much.

Antonio Marco Campos Rabello, CFO

Thank you, Helena. Before we proceed to the question-and-answer session, I would like to give the floor to our President, Benjamin Steinbruch, for his remarks.

Benjamin Steinbruch, President

Well, good morning, everybody. Thank you for participating in the CSN earnings call. I would like to review some key points before opening the floor for questions. I highlight what was mentioned in the previous call regarding mining, where we achieved record production. However, we faced a timely negative impact on prices, with a reduction of almost 20% directly affecting EBITDA. This impact from the first quarter will be eliminated, as prices have increased by 20% once again. We believe the negative impact on EBITDA from the first quarter will turn positive in the second quarter, considering that production in the mine is running well and cost control measures are in place. This positive effect on EBITDA will be driven by the ability to ship more tonnage through our ports. Regarding steel, there was an increase in production, but we placed a great emphasis on product mix and price adjustments due to competition from imported products. The government has begun to address this issue. We foresee a more favorable domestic market projection leading to better results in the second quarter. In cement, conditions seem normal. We are experiencing growth in both output and margins, successfully raising prices, revealing cement’s true potential. With synergies captured, we have a solid position through the integration of Lafarge Holcim and our previous production plans. The EBITDA continues to be affected by the drop in flat prices. However, regarding investments, we remain on course with our normal investment policy for 2024. The P15 investment has already been fully contracted, and all equipment installation is progressing rapidly, with expectations for P15 to become operational very soon. It is our main investment from both quantitative and qualitative standpoints for the entire group, especially in mining. We continue to work on coking coal, centering, and high furnace developments as well. Leverage remains a significant point of concern, and we are committed to maintaining it below three times. We continue to uphold this commitment despite the increase to 1.3 times due to the decline in EBITDA and the 20% drop in iron ore prices. We believe that the market will be able to quickly recover from these losses and return to the targets set in our budget. Regarding mining, we are confident all variables are in play and functioning well, improving results territorially with cement. We are also capturing synergies and nearing nominal production volumes. When faced with production losses, we still aim to keep up with our set targets while managing to optimize our costs. We experience no significant complications in our business operations as we maintain control over production. However, in the steel segment, there have been delays with converters and coking processes. While we possess the strategies to overcome these challenges, we depend on timely equipment repairs and replacements, which can be delayed in the capital-intensive sector we operate in. This will temporarily impact our output, as we await the delivery of necessary spare parts. We are working to mitigate third-party market issues and have had success; our purchases are notably below our operational costs, setting us up for recovery in production that has exceeded expectations thus far. In terms of commercial outlook, the market is highly competitive, especially due to imports. It is disheartening that the Brazilian government’s response to imports has been slow. We need to be vigilant as China continues to exert pressure on our market with its exports. We must ensure the local industrial sector remains protected and competes effectively with foreign products. As China aggressively seeks to dominate various markets, it is essential for us to act swiftly to protect the Brazilian economy as a whole. Now, we will open the floor for your questions.

Operator, Operator

Thank you. We will now go on to the question-and-answer session for investors and analysts. Your first question is from Daniel Sasson from Itau BBA. Your microphone has been unmuted.

Daniel Sasson, Analyst

Good afternoon. Thank you all for taking my questions. My first question relates to the final comments made by Benjamin regarding the competition from China and imports that the sector has faced over the last year and a half. To Martinez, could you comment on the new scheme announced by the government last quarter? Can this change the competitive landscape regarding imports, or is it merely an initial step that requires further action? Will this stabilize sector margins, or is it still a small step? My second question is directed at Benjamin. Could you share your thoughts on opportunities for growth, particularly concerning organic growth? Are acquisitions on your radar at the moment? How do you balance this ambition for growth with maintaining leverage below three times? Essentially, at what point will you see fit to deleverage to generate value? What could this mean for transactions in the short term?

Luis Martinez, Director

Hello, Daniel. Thank you for the question. To address the commercial defense topic, I will add to what Benjamin has mentioned to help you understand the global perspective, particularly as it pertains to CSN. Currently, CSN's portfolio indicates that 50-51% comes from reverted material linked to pre-painted and tin products. The global situation regarding commercial defense is critical for survival; the United States has managed this issue more effectively, integrating measures of national security. This has become an urgent global consideration. As for China, we observe a concerning trend, with monthly imports of flat steel into Brazil reaching unprecedented levels, where 70-80% comes directly from them. It signifies that we have effectively become the dumping ground for subpar materials, impacting what we have developed in Brazil. Competing technically has become incredibly challenging for us. Brazil stands unique, as it appears only we remain open to unfettered imports from China. Serious countries protect their industries, investments, and employment, while tracking global competitive conditions. Historically, CSN has not needed protection. We’ve reliably performed within the first quartile of pricing and achieved operational excellence without needing external shields. Unfortunately, the current political context has influenced our position concerning these imports. Current government strategies appear misguided, with imported products flooding the local market without adequate barriers. We must intensify our approach to import quotas and legislative action moving forward to protect the industry effectively. As Benjamin noted, Brazil has begun addressing steel imports but much remains to be done. We are entitled to expect these protective actions for our local market as global trading practices shift dramatically.

Daniel Sasson, Analyst

Thank you for your insights, Martinez. Very clear.

Benjamin Steinbruch, President

Further to what Martinez mentioned regarding imports, I recently returned from visits across Europe and the United States. Conversations reveal heightened anxiety surrounding Chinese imports. Their exports to Europe are surging, creating stiff competition for domestic products. I had the opportunity to drive a Chinese car that was named Car of the Year and was astounded by its quality and performance. The brisk market activity from China is an ongoing global challenge that demands vigilance. The entire European automotive sector has expressed trepidation over the impending impact of Chinese exports. It's a scenario that is unfolding rather quickly and widely. Brazil needs to have a robust industrial policy to safeguard our interests amid these trends. There’s more than one piece of our industry at stake here, and we must respond strategically to manage the consequences efficiently. Now, regarding Daniel's inquiries about leveraging or growth opportunities, we prioritize maintaining leverage closely below three times at all costs. Although we’ve seen short-term declines due to commodity fluctuations, we aim to return to our targets without compromising our structure. Any acquisitions or expansions will be carefully assessed to ensure they don't dilute our leverage strategies. Future investments will need to prove significant synergy with existing operations, resulting in sustainable value-enhancing activities.

Daniel Sasson, Analyst

Thank you for your comments, Benjamin.

Rafael Barcellos, Analyst

Good morning, everybody. Thank you for taking my questions. I wish Marco Rabello immense luck in his new position and extend my gratitude to Marcelo for his contributions to CSN. My first question goes to Marco. Could you share your initial perception of CSN and which projects you plan to devote the most time to within the company? My second question regarding the steel market is directed at Martinez. Could you provide an overview of the market? We’ve heard your perspective about the new quota system resulting from import influx, but could you elaborate on internal dynamics related to demand and pricing? We saw a drop in prices this quarter; what do you foresee regarding this dynamic for the second quarter, and what is your pricing strategy concerning CSN's market share of key products?

Antonio Marco Campos Rabello, CFO

Thank you for your wishes, Rafael. While this is my personal viewpoint, I see that CSN is positioned with key advantages related to significant pillars of both the national and global economy, creating vast opportunities for growth and value unlocking. We have considerable Capital Expenditure planned for this year, particularly in mining and steel, where we intend to secure funding with optimal terms and structures. Our primary focus will be to maximize returns from our CapEx initiatives. We anticipate capitalizing on efficiencies across all segments, with improved profitability noted in the steel segment. Despite prior production bottlenecks in the last year, our goal is to support ongoing acquisitions through sound financial structuring, ensuring profitability across segments while maintaining leverage.

Luis Martinez, Director

Hello, Rafael. This is Martinez again. Regarding the international market, our operational excellence has tremendously contributed to our volumes; we experienced the best quarter for volume sales over the last five quarters. Benjamin’s strategy of diversifying our operations outside Brazil is yielding positive results. Recent trends in China show a recovery in industrial production, particularly in the automotive and industrial sectors. We see a broader context where, despite pressures due to high interest rates, there are emerging sector exceptions that shed positive light on recovery. Notably, the Chinese market shows improvements; they’ve uplifted prices by $20-$30. In terms of imports, Brazil has faced pressures, evidenced by the annualized import rates. Yet we anticipate stability through our key production strategies and management of exposure.

Rafael Barcellos, Analyst

Thank you very much. Very clear.

Ricardo Monegaglia, Analyst

Good afternoon. I have two questions. Firstly, could you share which are the most critical points for consolidating the cement industry in Brazil? Additionally, can you describe your investment analysis process including the return on cost of capital, minimum spread, and how this framework adjusts for international considerations? Secondly, regarding the steel mill, although there will be import pressures these next few months, could you elaborate on potential profit margins restoration prospects as we look ahead? Along with this, what are the key timelines for equipment refurbishment?

Edvaldo Rabelo, Executive Officer

Hello, Ricardo. This is Edvaldo. To address the cement industry’s consolidation, we've shown the evolution of our products, which reflects market dynamics. There’s a prediction of a 2% industry increase this year, and early indicators from April suggest a quicker rebound. We're executing strategies to fully integrate synergies from the Lafarge Holcim acquisition, aiming for continual cost reductions, targeting nearly a 20% reduction compared to the same time last year. Pricing will also be significant; currently priced at around $70 per ton domestically, compared to higher South American and U.S. prices. This discrepancy reflects the potential in our market for price elevation part of yielding strong profitability. Martinez may want to add to this, focusing specifically on operational excellence.

Luis Martinez, Director

Thanks, Edvaldo. In our industry, operational excellence is fundamental. We want to create a prepared company able to respond tactically when required. Achieving competitiveness means lower costs, which ensures longevity and efficiency in the face of market pressures. The margin recovery will entail lowering our costs while strategically increasing prices. We are optimistic about a greater margin recovery in the second half of the year, hinging on improved performance–supported by our operational strategies. They are ambitious targets we are aiming for and believe will be realized.

Ricardo Monegaglia, Analyst

Thank you very much.

Marcio Farid, Analyst

Good afternoon. Thank you for taking my question. I have two follow-ups. Given that both Benjamin and Martinez stated how the U.S. has approached the industry more effectively than Brazil, what is your appetite for investing greater exposure in the U.S. via steel mills? How might recent events change your perception? For my second question, regarding recent CapEx execution being comparatively lower this quarter, what do you foresee regarding P15 and timing for the ramp-up of steel plants? Are we experiencing more delay than expected, and what do you expect moving forward?

Luis Martinez, Director

Hello, Marcio, this is Martinez. Once again, we don’t preach for greater leverage. Pursuing opportunities conservatively is our focus. In the U.S., we have established operations with quotas that we are hoping to enhance, targeting more attractive options. We are focusing on finding lower-cost investments that can yield higher returns. We seek to optimize service resources and aim to establish ourselves as a local player with service centers offering lower-volume arrangements and value for customers.

Benjamin Steinbruch, President

Regarding the U.S., we are eager to pursue investments aimed at adapting to decarbonization and clean energy initiatives, which are notably absent in Brazil. Investments here can justify themselves based on varying capital costs, and we want to seize opportunities. Our objective is to engage, especially in activities that intersect with what we accomplish in Brazil.

Antonio Marco Campos Rabello, CFO

As for CapEx, thank you for your question. The data showcases that we historically ramp up investments through seasonality in CapEx, which significantly takes place during the fourth quarter, revealing that investing will be higher throughout 2024. The investments planned for P15 align with these operational efforts; we are achieving record investment levels, including higher than last year. Monitoring our cash management practices will allow us to support our investment strategies effectively. Regarding InterCement, we shared a material fact recently. We’re in discussions with sellers of InterCement, working closely with other stakeholders as discussions develop, which should conclude by July. At this moment, we do not have concrete updates to share but will ensure timely communication as the situation evolves. This acquisition is of considerable interest to us. Thank you all for your attendance at our results call for the first quarter of 2024. We conclude the presentation for the quarter, and I wish you all a very good weekend.

Operator, Operator

The CSN earnings result has just ended. We wish you a very good day.