Earnings Call Transcript - SID Q2 2021

Operator, Operator

Good morning and thank you for waiting. Welcome to CSN's Conference Call to present the Results for the Second Quarter of 2021. 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's presentation. After the company's remarks are over, there will be a question-and-answer session. At that time, further instructions will be given.

Marcelo Cunha Ribeiro, Executive Director

Good morning everyone. Thank you for participating in this conference call. This is yet another call in a quarter of very good numbers, very good news. We will start this presentation on page number two with the highlights for the period mentioning a record EBITDA. And practically all the financial metrics of the company reached record numbers except for the net income where the number of the quarter one was even higher. But at the time it was impacted by the IPO of CSN Mineração. At this time, it was BRL5 billion of net income and with excellent operational results. It's a historical number. However, it's a short history because with such positive trends in terms of prices and costs, we are expecting that the next coming quarters are even better. This has allowed us to reach some leverage targets that were expected only for the end of the year but we were able to bring our leverage to very low levels. We even reduced the net debt to less than BRL50 billion and we inaugurated a new phase in the company's journey. We are now focusing more on capital reallocation. So, the highlights of this quarter mark the start of this phase with the purchase of main plant inaugurating the investment strategy of CSN in this industry.

Helena Guerra, Executive Officer

Good morning, everyone. First of all, we would like to announce the publication of our integrated report for 2020, with a little bit of CSN's history. CSN just celebrated its 80th anniversary. So this was our first integrated annual report. It brings the largest number of indicators ever reported by CSN, and the main events and results of the past year in terms of financial management, economic aspects, and environmental aspects of our five segments: mining, logistics, energy, cement. This was outsourced to an independent company. According to CVM's construction 14 of 2020, so I invite you all to read the report, which is already available on our platforms on CSN's site. And in this quarter, we also concluded our TCFD and this is all available in the global emission record, prepared according to the GHG methodology. For the seventh consecutive year, we got the Golden stamp. Additionally, we concluded our disclosure inside action about our environmental and climate-related performance, water capture supply chain. All this information is also available to investors through the very important platform CDP. In this quarter, we had the start of the training of our executive officers and other members of the staff. The construction of our risk metrics and climate opportunities metrics allows us to incorporate the impact of our climate-related initiatives in our financial reports. We also have Grupo CLIMA, a forum with many executives in different areas that allows us to discuss and supervise implementation of initiatives related to our decarbonization road map. We are also using an AI tool that creates an imaginary curve showing the results of all projects projected. This allows us to calculate the impact of the emissions that will be avoided. By the end of this year, we will have even more ambitious and aggressive targets than those presented in our initial plan.

Marcelo Cunha Ribeiro, Executive Director

Thank you, Helena. And before we open for questions, I'd like to hand the conference over to our Chairman and President, Benjamin Steinbruch for his considerations. Benjamin? I think we're having connection problems. I apologize. So I suggest that we open for questions, and Benjamin can join us for the final remarks. Thank you all.

Operator, Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. We will take questions from investors and analysts. The first question is from Daniel Sasson, Itaú. Mr. Daniel, you may proceed.

Daniel Sasson, Analyst

Hello. Good morning. Thank you for the opportunity. My first question is perhaps to Martinez about your steel business. Can you talk about your expected margin looking forward based on the 33% this quarter? So how far can you reach considering that you still have some price carryover from the second to the third quarter? And also there's the evolution of the cost of raw materials. And the second question maybe is for Marcelo. With the low leverage levels and very strong perspectives in terms of results, there's a natural question that arises about capital allocation. Do you see more opportunities after the perpetuals that you're going to rest in September, so in which business lines of the company today except for the projects that we already know and have already been approved in mining and cement. What are the business areas today where you see your major opportunities? And if you allow me, I'd like to ask about cement. We saw a price increase of 6% in the quarter. So can you also talk about what you expect for the second half of the year? Do you think that these price increases will continue in the second half of the year and will continue to help the results of this business unit? Thank you.

Luis Martinez, Steel Executive

Hello, Daniel. Good morning. Let's start with your question about the expected margin for quarter three. I don't know if you remember, but when we started the profitability recovery plan of the company, Marcelo used to say that 1.5 years ago that was in dollar per ton of EBITDA. Fortunately, with all the work that was done and with other factors that helped supply-demand and cost factors, we closed the first quarter with a margin of $400 per ton of EBITDA. The forecast for quarter three is to reach a margin of about $500 to $530 per ton. Of course, we expect that in this quarter costs will behave a little better. Although people didn't really pay attention to this in the market. But today, for example, for one ton of coal, we are already paying about $200 per ton. If you look at what is happening regarding costs, for example, the cost of coal today was $140, $150 now it's $210 FOB Australia. Coke remains the same, the same price FOB China and for iron ore $203 to $215. So part of this has already been priced in. Another important thing is that we should have a price carryover to quarter three between 13% and 17%. There are some peculiar reasons for that which are related to CSN's work and strategy.

Marcelo Cunha Ribeiro, Executive Director

Well now as for your question about capital allocation, we have our priorities very well defined by segment. For example, in the case of steel, we are very much focused on productivity gains considering the current volumes. These are projects under UPV in particular, which will lead to improved efficiencies, centralization of our coke shops and removing bottlenecks. This will increase the production volume by about 10% to 15% and reduce production costs. In mining, we have a very ambitious plan of tripling our production rates using the IPO funds. In the case of cement, there's a mix of inorganic growth via sector consolidation and we have the appetite to do that if we have adequate price conditions. There are also organic projects that are exceptional. They count on long-lasting sources, with excellent technology and equipment, and a very privileged location. These will reinforce our presence in the Southeast. In the case of mining, we're talking about BRL 30 billion of CapEx over seven to eight years. Mixing equity and debt, we already announced the financing of $350 million in a 12-year term. Very favorable conditions. We will also be issuing an infrastructure debenture with a maturity of 10 to 15 years with subsidies of 2,431. The company's debt from now on will be very much based on this type of project financing, long-term and low cost. The liability management will follow the strategy of improving the conditions of the current liabilities. We are retiring the perpetual debt which has a high cost of 7%. Just for comparison purposes, we have our 10-year bond negotiating at 4.2%. We will possibly be prolonging our debt but always seeking to reduce the average cost, trying to reach the investment levels of our credit ratings.

Luis Martinez, Steel Executive

This is Martinez addressing Daniel's question. Your question about cement, just to give you an overview of what we are going through right now. The Brazilian market is growing at about 15.8%. Of course, this is impacted by last quarter, which was very bad. But the expected growth of CSN is at 16.2%, considering that in the Southeast the market has grown 12%. So we're gaining share in the market that we chose. Another important point is that the market will probably close the year with a growth rate of about 6% to 8%, which we always talk about when we prepared for the IPO. The price in Brazil is still very low. Cement in Brazil is the cheapest in the world. To give you an idea, coke, which we use as fuel for cement production, has doubled in price. Today it accounts for about 30% to 40% of our cost. So the price increase in cement isn’t just about recovering profitability, it's about recovering costs. So we did indeed increase by 6% quarter-over-quarter. We already see some increases. The cement has different dynamics. We have some focal increases and monthly increases. So the expectation is to reach a FOB net price of BRL 295, which should be the industry price to allow us to have good profitability in this segment. Thank you, Daniel, for your questions.

Marcelo Cunha Ribeiro, Executive Director

Thank you.

Daniel Sasson, Analyst

Thank you, Martinez and Marcelo.

Operator, Operator

The next question is from Leonardo Correa of BTG Pactual. Leonardo, you may proceed.

Leonardo Correa, Analyst

Good afternoon, everyone. My first question is also about capital allocation. I'd like to further explore the avenues that you're implementing. For example, in cement your strategy is very clear with M&As. You're already delivering on that strategy and you have other opportunities inside. You also have the growth in mining, which is well-defined and already being implemented. So I'd like to explore if you've been looking at new business opportunities. And maybe consider a more aggressive capital allocation, or will you keep focusing on the core services of CSN, where you already have a presence and still have room to grow? What is the strategy that you have planned for capital allocation? And also, still about capital allocation, the theme of the buyback. We saw CSNA3 negotiating with your consensus accounts, a paper that is very deep low versus historical levels of valuation. How do you see the possibility of a buyback, potential buyback? And the second question to Martinez. You already talked about the market and the price carryover. But at the same time, we realized that we are at a crossroad in Brazil regarding price. Of course, the scenario is still very positive. The recent increases were strong. But when we look at the recent news flow of distributors and some small adjustments and discounts, when we look at the pressure of the government for a potential small reduction in import rates and all the noise that we hear about this informal price agreement, which was denied. Looking at the premiums, we see that the premiums are getting fuller between 15% and 20%. So it seems that it is somehow losing momentum and customers are having some difficulty in some isolated cases. So I'd like to hear more about price in Brazil and how you see this current moment and the new elements that were brought into the discussion.

Marcelo Cunha Ribeiro, Executive Director

Now about capital allocation, we have five segments. It's not just mining, steel, and cement. We also have energy and infrastructure. This gives us broader opportunities. We're reinforcing our staff and training our senior executives with very good results. We have a very interesting pipeline but within the segments that I mentioned. We don’t see any possibility of diversifying beyond these five segments. What we have is an interesting discussion that has always been present in CSN, which is geographical diversification. Considering the recent global crisis and national crises, it's interesting to be present in disconnected economies for risk mitigation and exposure in different markets. So, CSN already has a presence abroad, but that could be improved in the future. This is certainly something that is included in Benjamin's concerns. He will address this in his final considerations. Regarding the buyback, we do think it's a very interesting use of our cash. We already have a short-term buyback program that we have started. In the next weeks and months, we will see part of our cash being used for that purpose. Regarding price, I think Martinez is the best person to answer your question.

Luis Martinez, Steel Executive

Leo, one important thing, first we need to consider what is happening in the world. We already heard about this in the first call this morning. But this is all somehow permeating and being transferred to Brazil regarding the import spiller which has grown greatly. China today has decided that they will have strong production control in the second half of the year. We have heard from different plans that will be working at much lower levels. In steel production, this is positive because this certainly means that prices will increase in China, compared with the current prices of about $930, $940. Other data like industrial production, retail, automotive, and a reduction of the rebates they have for export products. So this is what's happening in China. In Russia, for example, which is a country that we didn't mention a lot, but on August 1st, they're going to have temporary tariffs for imports of iron and non-iron products. This will certainly impact us. Another important subject, which is very interesting and important for Brazil is that we're going back to consumption levels of 2013. In 2013, we had BRL14.5 million then we reached BRL11 million or BRL10 million. Now in 2021, we expect to close at BRL14.5 million or BRL15 million. Why do I think this price can be sustained over time? One important thing is that today in Brazil, because of supply and demand, and also because of the service level that we have been providing, particularly in CSN, I think we're allowed to maintain higher premiums. Premiums of about 15% are not unfair today, given the instability of the market, the fluctuation of the dollar exchange rate, and market dynamics. As I said, we have a good relationship today, and costs are also controlled although they're not fully controlled. Coke has skyrocketed to $210, iron ore is still at high levels, prices around the world are elevated. We're also seeing price effects in Brazil that are comparable to those in Europe. The peak for imports has passed, but of course, there will be carryover for the next few months.

Operator, Operator

The next question is from Caio Ribeiro, Credit Suisse. Caio, please you may proceed.

Caio Ribeiro, Analyst

My first question is about your dividend payout policy. Today your policy is 25% of your net income. But with this low leverage and the potential tax reform with the taxation of dividends, is there any chance you'll be announcing extraordinary dividends this year or even expanding your policy to a higher payout linked to cash generation maybe? And also my second question is about steel. Could you talk more about how you see the evolution of the delivery terms of your products? How this has evolved in the last few months? How do these terms compare with the terms that you had in the first and second quarters of last year? Also, how are you seeing the steel inventory levels and the sales mix in internal and external markets? I know you're focusing on the domestic market, but do you see any changes planned for that?

Marcelo Cunha Ribeiro, Executive Director

Thank you for your question. Regarding dividends, we're very attentive to the repercussions of any eventual reforms that may happen, which will guide our strategy. Based on the reform that we had, we don't see any intra-group losses of course. From the standpoint of shareholders, the possibility of taxes on dividends would decrease efficiency. This could trigger new decisions taken this year. But looking from a structural standpoint, this new phase of liquidity and capital allocation is very recent. So we have our radar attentive to potential opportunities arising. This is a time of desynchronized recoveries, we have some industries doing really well and others not so much. It’s too early to talk about increasing dividends when we can have new opportunities arising. We have a limit to reach in terms of investment from the standpoint of our credit rating and the low leverage. This will be our priority before increasing the dividend payout. However, shareholders do have a different level of distribution. Last year, we distributed BRL 900 million, and now in the first half of the year we have distributed twice as much. The dividends will come with improved results. We will study the impact of this recent reform. But for now, CSN's and CSN mining policies will be maintained.

Luis Martinez, Steel Executive

And delivery terms of products are fully under control. There may be some very short delays, but also anticipation which compensates for the delays. Another important point is that our pipeline of orders is about 900 tons. We will have a full third quarter. With the price carryover of 13% to 17%, you can expect that our results in the third quarter will be even better than in the second quarter. In terms of inventory levels, this is also important. Distribution, which used to need 3 or 3.5 months of inventory has seen it go from 2.3 to 2.6 months. We didn't have much recovery. The other businesses in the sector are more conservative now about increasing stocks. With improved performance, we expect growth in the auto industry. Still, the stocks are not increasing significantly, which is positive. We are also looking at export quotas to the U.S. at full price levels. We will close the year at 250,000 to 300,000 tons of products to the U.S. with a better margin than we have in Brazil. Further, we are sending our full supply to Portugal, which consumes 400,000 to 450,000 tons per year. We will accelerate exports of metallic sheet. We are confident about the third quarter because we have volumes sold and prices realized. Our expected EBITDA will reach about $500 to $530 per ton.

Caio Ribeiro, Analyst

Thank you. Very clear. Thank you, Marcelo and Martinez.

Operator, Operator

The next question in English is from Carlos De Alba, Morgan Stanley. Mr. Carlos, you may proceed.

Carlos De Alba, Analyst

Great. Thank you very much. A couple of questions. First one is obviously extraordinary results expected for the third quarter in terms of EBITDA per ton in the steel business. But looking here at my historical numbers going back to 2003, the highest annual EBITDA per ton was in 2008 at $151. This is a cyclical industry. How do you see the sustainability of the current or the expected third quarter EBITDA per ton margin? What do you expect would be a more recurring sustainable long-term margin? If I may ask about capital allocation, now that the IPO of the cement business is postponed or canceled, would the company still pursue an acquisition in that sector and maybe finance it differently with debt and cash on hand?

Luis Martinez, Steel Executive

Hi Carlos. Well, from the standpoint of sustainability, I'm happy to have gone through that situation in 2003, 2004. I understand the major differences. The world is very different now. From operational excellence, CSN is launching now at full speed. We have all our maintenance regularly anticipated, some in quarter two to prepare for quarter three and four. We are being careful with coal, as the price increased significantly, which has an impact on costs while ore prices are also high. Supply and demand is favorable. Looking at all possible scenarios in Brazil, all the markets such as agribusiness, railway, or roads, civil construction. All the markets are in a privileged situation in Brazil. Imports, contrary to what people think, are on a decreasing trend. We truly believe that this margin of $500 to $520 per ton of steel will extend beyond the third quarter, likely for fourth quarter. We don't see anything indicating a negative scenario over the next six months at least.

Marcelo Cunha Ribeiro, Executive Director

And Carlos, just to add, we believe in a stronger for longer. From the global demand standpoint, no half-turn in the stimuli for future consumption is expected over the next two to three years. This will be a lesson learned after the crisis of 2008, 2009. Both developed and developing countries will care for their societies post-pandemic. Demand will be really strong while supply has disappointed in terms of volumes. We are optimistic about our company's future. Regarding cement, the IPO is not canceled. We are still updating our numbers for quarter two. We are excited about the mid and long term of this business. We are looking for opportunities to finance this growth. We committed to the IPO, and we moved on. We think some extra time to update our numbers for quarter two will be useful for training investors who don’t know much about this segment yet. We will continue with our plans for an IPO and our strategy for M&A and consolidation in the sector. The timing may differ, but these events will occur without the IPO, always respecting our capital structure.

Thiago Lofiego, Analyst

Good morning, everyone. I have two questions. Martinez, going back to price and focusing on car mix and the automotive industry. Will you revise the frequency of your contracts with car companies? You talked about that, but I'd like to understand more what is the current situation? Is there any chance of having quarterly contracts with the automotive industry? What about the rest of the industry other industrial customers that you may have? The second question is about cement. Martinez, what is the risk that you see for the second half of the year or even for 2022 of seeing some deceleration in retail demand with all the reforms? Any changes in the current pace of cement demand in Brazil in the second half of the year or for 2022?

Luis Martinez, Steel Executive

Hello, Thiago. Good morning. As for your first question, CSN has always intended to eliminate the gap between distribution and civil construction products and contract-based products even for white line appliances or car mix. The price situation allowed us to define a new sales policy. As I said at the beginning of this call, we defined a new policy in CSN. These annual contracts aren’t beneficial for either the customer or CSN. We need to close a volume and deliver this volume. We discuss this on a half-yearly basis or quarterly at most, with a very small number of customers. Today, our production and market breakdown shows many customers operating under spot prices. CSN will not adapt to what’s wrong in the market, instead, we will focus on what’s right for profitability. Regarding cement, we only see positives. We don’t anticipate problems in the market, as the market is showing a 16% accumulated growth rate. The forecast for the year considering the second half is 6% to 8%. The number of new projects and foundations has increased, and traditionally, the second half of the year is always stronger. I’m confident in the outlook for our cement sector.

Edvaldo Rabelo, Executive Officer

Thank you. Elizabeth represents a fast entry in the Northeast market and a growth of 30% in our production capacity. It's a competitive plant. We have high expectations in terms of synergies and upsides with Elizabeth. We are looking to replicate what we have done in the past 10 years with our commercial strategy focusing on results and cost optimization.

Unidentified Analyst, Analyst

Hi. Thank you for the opportunity to ask questions. There was this article in Bloomberg saying that the finance minister mentioned that Brazil has a deal with steel companies not to raise prices in 2021. I see higher realized prices in your reports and you just mentioned you might consider increased prices in the future. Can you help me understand what the segment was? Can you remind me of your leverage target? Has it changed? I think last quarter it was four to five times net debt to EBITDA. Thank you.

Marcelo Cunha Ribeiro, Executive Director

Regarding the price control that the government is supposedly implementing, I must say Brazil currently has a full steel supply condition. There are no customers or production changes today, either for flats or longs, that aren't fully replenished. Another important point is that the steel plants in Brazil and CSN, due to asset integration, are very competitive. I do not have control and we are at risk of not controlling Brazil’s costs. We are not searching for protection but rather a competitive isonomy regarding other products. Brazil is open for imports, and the first half of the year saw imports equivalent to last year, so there won't be stock-outs of steel. As for your leverage target, the ceiling is one time the net debt to EBITDA ratio. Currently, we are at 1.6 times, but by the end of the year, we will be below one.

Benjamin Steinbruch, Chairman & President

Can you hear me, Marcelo? I apologize for the technical problems. Good afternoon, everyone. Thank you for attending this conference call. I would just like to say that we are very happy to have delivered these very good results. By midyear, we have reached what we had proposed for the full year. Our first intensive priority will be investment grade by the end of the year. We will do whatever we can to be considered an investment-grade company, and we will maintain our leverage level close to zero or below one. Do not be surprised if we have zero debt by the end of the year. Our greatest priority is to have zero leverage. Investments will be made with long-term financing compensated by our cash. We will maintain high cash levels. I heard many questions about how we would manage cyclical industry highs and lows. We will do that through low debt and high cash levels. Investments will rely on organic growth and also any potential M&A opportunities. We will be very conservative in everything we do, preserving this investment grade that we seek to achieve. We're striving for quality across all sectors, and our major project for the second half is cost control. We will work to lower our costs, ensuring the best competitiveness. I'm confident and expect an exceptional second half of the year, especially regarding quarter three. Unless unexpected disasters occur, nothing will change this favorable trajectory. We are proud of our company and the targets we've reached. Today, we have a very different company with good assets and a changed trajectory for the future. We will focus on managing excesses surgically with maximum dedication while maintaining our investment-grade, zero debt, high liquidity targets, and low debt targets. Thank you all for attending. I'm very proud of the work done by our team. Congratulations to everyone involved. Thank you, Marcelo.

Marcelo Cunha Ribeiro, Executive Director

Thank you, Benjamin. I think everything was very clear. I'd like to thank all the investors and analysts who attended this call and we are at your service should you have any further questions. Thank you very much.

Operator, Operator

This conference call is now finished. You may disconnect your lines now. Have a great day.