Earnings Call Transcript - SID Q4 2021

Operator, Operator

Good afternoon, and thank you for holding. At this time we would like to welcome everyone to CSN's conference call to present results for the Fourth Quarter 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 presentation. Ensuing this, there will be a question-and-answer session at which time further instructions will be given. We have simultaneous webcast that may be accessed through CSN's Investor Relations website, ri.csn.com.br where the presentation is also available. The replay of this event will be available soon after closing for one week. You may flip over the slides at your own convenience. Please bear in mind that some of the forward-looking statements made herein are mere expectations or trends and are based on the current assumptions and opinions of the company's management. They may differ materially from those expressed herein, as they do not constitute projections. In fact, actual results, performance or events may differ materially from those expressed or implied by the forward-looking statements as a result of several factors, such as the general economic conditions in Brazil and other countries, interest rates and exchange rate levels, future rescheduling or prepayment 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. We will now turn the conference over to Mr. Marcelo Cunha Ribeiro, Investor Relations Executive Officer. He will present the operating and financial highlights for the periods. You may proceed, sir.

Marcelo Cunha Ribeiro, Investor Relations Executive Officer

A good day to all of you! Thank you very much for joining this earnings conference call for 2021. I have Luis Martinez, the Commercial Director and the Chairman, Benjamin Steinbruch who will make his considerations before the Q&A. I begin with a presentation, speaking about the period highlights. Of course, we have operational and financial records that are exceptional. We doubled the results, attaining BRL22 billion in EBITDA, almost BRL50 billion of net revenue and we are going to surpass this goal without a doubt in 2022, making the most of the excellent moment of international commodities, but also due to operational efficiency and stringency with costs. We managed to resolve a problem in our balance related to excessive leverage. We have now turned the page and are below our goal of 1x EBITDA; we are at 0.76x with a solid cash generation and a commitment to maintain this, transforming the ability of the company to be a large capital allocating enterprise. Now we have already begun this journey, and we have made the most of this favorable moment to make transformations, including the IPO of cement, which is important for the growth of the business. Through the acquisitions in cement, we will become the second largest cement player in Brazil. Moving on, I’d like to speak about the details of the quarter; we noticed a clear change between the first semester of the year and the second semester. We began to see a gradual readjustment in the price of commodities. In the third and fourth quarters, this trend continued and CSN executed a correct strategy of margin over volume, maintaining our percentage margins very high. In the fourth quarter, we faced an important impact due to lower mining volumes, driven by our commercial strategy and also by heavy rainfall and a readjustment in the steel prices. We achieved an EBITDA of BRL3.7 billion. The positive news is that this readjustment is turning around and allows us to foresee a 2022 that will be as good as or even better than 2021, very similar to the average of 2021. Moving to the next slide, we will talk about cash generation, starting with CapEx. We wrapped up the year with almost BRL1 billion in investments as has been anticipated, getting to an annual value very close to BRL3 billion. In line with the strategy of increasing investments in the Presidente Vargas plant, which is competitive with cohesive battery improvements, we have a project for productivity and quality gain, with magnetic concentrators and new fleets that will enable us to reduce costs. Our target is close to BRL4 billion in CapEx for 2022 as we accelerate our growth projects in mining as well as in cement. In terms of working capital, this semester demanded more working capital. Our stocks were pressured alongside the increase in raw material costs, relevant to our strategy of margin over volume. We kept a high inventory of finished products and we will explore this in 2022. We can expect a gradual reduction that will help us in sales and cash generation in that period. In the next slide, we focus on cash generation. We had a semester that was different from the previous one, reporting BRL575 million in cash generation influenced by EBITDA, lower commodity prices, the high volumes, and typical working capital that will undoubtedly be reverted. This cash flow should return to levels more aligned with those of the prior semester, as the fourth quarter was an atypical one. We will continue on with the evolution of net debt, and we underscore that we attained our main goal - reducing leverage to less than 1x. We are at 0.76x, which we consider very important to maintain as a ceiling. The only reason for the debt increase this semester, which went from BRL4.8 billion to BRL16.8 billion, was due to the series of actions including remuneration to shareholders, share buybacks, and exchange rate variation. Almost 80% of our debt is pegged to the dollar, which means that if it weren't for this, our net debt would have remained relatively stable, allowing us to maintain low net debt and leverage below 1x. We also showed you our debt amortization schedule and demonstrated how active we have been over the last few months regarding liability management. We have extended our liabilities, reduced costs and increased our cash coverage. We maintained cash at substantial levels. We are at BRL17 billion, which gives us coverage for six years regarding amortization. This is our policy to keep our cash above BRL15 million in the upcoming quarters, alongside all other actions undertaken to ensure that our indebtedness becomes more extended. Now, let’s delve into each different business. We begin with steel, which had an extraordinary year. We experienced an EBITDA growth of 300%, from more than BRL2.5 billion in 2020 to BRL10 billion in 2021. We enjoyed robust volumes, similar to 2020, which was a strong year as we were recovering from the pandemic; notably due to strong prices worldwide, not just in Brazil but also in the United States, Europe, and China. The positive news is that we continued on this high trajectory in the fourth quarter despite market seasonality, even with a drop of over 20% during that quarter, we managed to grow 4%. We maintained competitive pricing in the domestic market and increased prices in the foreign markets. Our mix also improved with the U.S. We increased the average price this year and our foreign business continued at a record pace, contributing significantly to the EBITDA with a margin of 33%, totaling BRL2.5 billion, which aligns with what we anticipate throughout this year. From the viewpoint of production and cost, it was also a promising year. We boosted our slab production to almost 4.1 million tons, marking the second largest output in company history. This enabled us to maintain relatively stable costs during the fourth quarter. Despite the rising costs of raw materials, we avoided purchasing slab from third parties and managed to reduce costs, which contributed to our EBITDA per ton surpassing $400—three times our historic average. This is our objective for 2022. Moving on to the mining segment, we celebrate a year characterized by sales growth and a 30% rise in revenue. It was a year with two contrasting narratives: growth figures in the first semester and declining figures in the second semester, impacting price realization as we had sales from prior periods that were simply provisioned and therefore adjusted. However, we managed to achieve this growth through production growth, almost 20%, and higher sales in the fourth quarter, attributed to our margin over volume strategy. We decided not to sell iron ore shipments, preferring to wait for better price moments, and this was initially impacted by an unusual volume of rainfall. We expect these declines will be offset in the first quarter. In the upcoming slide, we present a fairer comparison of the quarterly results. To account for the effects of previous periods, the EBITDA for the fourth quarter does not fully reflect our recurring results for that specific quarter. We experienced nearly BRL500 million in impacts due to provisions and shipments from earlier periods. From the third to the fourth quarters, we faced a negative impact on volumes because of delays and a 30% drop at plants, partially mitigated by shipments of previous quotas sold at higher prices. This adjustment indicates that without the reversion of provisions, the EBITDA would be nearly BRL1.0 billion, which still doesn’t represent what we aspire to achieve in 2022—a substantial growth in volumes, and we will observe the opposite effect with plants increasing to $160, alongside a positive provision reversion that will significantly improve first-quarter results. Regarding the cement business, we had a quarter marked by growth, despite the seasonal slowdown. At the year's end, we faced several halts due to heavy rainfall that delayed construction, however, we were able to achieve a growth of 9%, not only from the southeast plants but also integrating the acquisition in Paraíba, the Elizabeth plant responsible for 20% of our growth and revenue. The cost of raw materials exerted pressure, particularly transportation, diesel, coke, and oil. Nevertheless, we are confident in our ability to transfer these costs to prices and maintain margins at the 2021 levels while continuing to grow our volumes. Data from 2022 shows that while growth may be less robust than in previous years, we will maintain good margins and continue to expand. This concludes my presentation on our business sectors. I would now like to provide an update regarding our strategic priorities. We aim for efficient and disciplined capital allocation, positioning CSN as a smart capital allocator responsive to shareholder interests. A recent example is our acquisition that complements our metal plant operations in Iguassu, a type of acquisition that we shall continue to pursue—reasonable in scale, non-impactful to our balance sheet, with strategic value added. This will bolster our control over our distribution channels for specific products. We will maintain this approach in capital allocation, continually seeking complementary avenues for strategic value. In innovation, we are making a further investment in CSN Inova. CSN Inova had already invested in an operative hydrogen production company and has identified another promising startup, H2Pro, an Israeli company working with renowned investors such as Bill Gates who are betting on hydrogen as an alternative fuel and production method for green hydrogen. This represents another pillar in our pursuit of technology to support CSN's future business. In conclusion, regarding ESG, although Helena Guerra is not with us today, she has entrusted me with communicating the good news: an evolution in our sustainability indicators, which are being recognized. We are witnessing this in the sustainability ratings for the company, assessed by globally renowned agencies such as MSCI, which have issued reports indicating significant improvements, positioning CSN as a benchmark in Brazil's sector. This progress is significant. On the last page of our presentation, you will find a clear and transparent demonstration of our achievements in terms of scores, stemming from more complex integrated reports, a reduction in CO2, our goals for decarbonization communicated on CSN Day, and our benchmarks in the sectors of cement and mining. We stand as the most efficient in our sector, with dam management ongoing—we are diligently decommissioning these structures while ensuring 100% stability. Furthermore, we have achieved a year of progress regarding security with improved indicators. In environmental management, our focus has been on better water utilization and waste management with positive impacts that our rating agencies have acknowledged. As for diversity, we have set ambitious goals that are being met quickly, and in social goals, we proudly mark the achievement of BRL100 million in the CSN Foundation for supporting social responsibility initiatives in the communities around our business. This is a source of immense pride for us. With this, I would like to conclude our presentation and transition to the question-and-answer session. I will now hand over the floor to the Chairman, Mr. Benjamin Steinbruch.

Benjamin Steinbruch, Chairman, Chief Executive Officer

Thank you, Marcelo. Good day to all of you. I would like to thank you for participating in this call and express my satisfaction in witnessing this moment where CSN has delivered its best results in its 80 years. CSN celebrates 80 years this year, and as you all know, it’s challenging to maintain a company in Brazil active and thriving for 80 years. To be celebrating these 80 years at such a high point is uplifting. For those of you who have followed our journey over the years, you understand our commitment—our pledge to deleverage the company while fostering growth and maintaining margins. This has consistently been our tactic, and it is this differentiation in our EBITDA levels that has allowed us to become a benchmark. Therefore, my presence here today, announcing the results for the last quarter and the full year of 2021, fills me with immense pride and motivation. Pride, because we accomplished what many deemed impossible, they doubted whether we could achieve this—as we sustained the assets and company operations, moving from almost nothing to where we are now. We enhanced indicators of margin and cash generation, growing the company remarkably—not only in net revenue but also in EBITDA, while effectively deleveraging. We reduced our net debt EBITDA ratio from 3.2 in 2020 to 0.76—0.78 by the end of 2021, fulfilling the commitment we made to the market. Our primary priority remains the demand from our shareholders, which is to maintain a leverage lower than 1x net debt EBITDA. While many may gloat at the fourth quarter results, they often overlook the extraordinary results across the entire year—a fact that gives me great satisfaction and motivation. The fourth quarter was marked by significant distinctiveness due to a drop in prices in the plant index, heavy rainfall, and exacerbation in the market as a whole. Our strategic decision to protect margins led us to be less aggressive in the market; we stocked up products and are prepared to capitalize on this in 2022. While we celebrate the excellent results of 2021, we are additionally motivated by our outlook for 2022. I want to frame this not just as a singular event; I aim to have a holistic perspective on the company's results as we enter 2022. Everything that hindered us in the fourth quarter will positively benefit us in the first quarter. When speaking about prices, margins, market recovery, or inventory sales, we are poised to reap benefits that were absent in the fourth quarter. We've already established our commercial policy for the domestic market, for all of our products, which will be to add even more value and quality to everything we produce, whether in iron ore, steel, or cement. We seek to perpetually increase value and quality, implementing a more direct relationship with the end consumer by diversifying our product distribution approaches. Our commitment is to sell steel, cement, and iron ore, not just by ton but by kilo, ensure a consolidated brand presence at all levels, and strategizing to grow both domestically and internationally. We aim for our production capabilities in the USA, Germany, and Portugal to double our activities and carry out the growth aims set forth in past periods; we maintain a goal of doubling the company’s size within three years while upholding stringent adherence to the market's commitments regarding leverage, margins, and growth. Our ambition is not just about expanding our assets outside Brazil; we seek to have 20% to 30% of our assets in foreign markets, contributing to greater geographical diversity which will support our market verticalization and horizontal distribution strategy. It fills me with joy to stand here, presenting to you the fruition of everything we have promised over the last three years, especially when others doubted that I would tackle debt reduction or sell-offs, yet we have done just that—delivering an exceptional growth performance. Very few companies, both in Brazil and abroad, possess the growth trajectory that we have demonstrated. Additionally, the margins and results show a net revenue of BRL14 billion and EBITDA of BRL23 billion. A lot of skepticism existed about our viability, and while I can empathize with those doubts, we have shown it is feasible to execute a radical transformation in 2021, and for 2022, the outlook is significantly more promising than in 2021. The company is capital-structured effectively, with debt maturities extended and BRL16 billion in cash available, enabling us to accomplish far more than we did last year, supported by a clearly defined business strategy now communicated to all managers to ensure we can persist in realizing this growth while enhancing margins. I extend my gratitude to the company’s entire team, the Board of Management, the Directors, and all employees who believed in this vision and made sacrifices during the challenging years of 2020 and 2021. We hope to share this extraordinarily gratifying moment of success with everyone, our employees, shareholders, and stockholders. This victory is immensely gratifying for everyone involved, especially for me. I reaffirm my commitment and optimism for the future of this wonderful company, which, though may be lesser-known in portions of the market, surely holds significant potential to be recognized in the coming three years. I take immense pride in my long-term association with CSN since 1993, having marketed it from a struggling entity to this aggressive company, persistently seeking challenging goals. Now, as we deliver these results, past difficulties and hard work have borne fruit, and we are committed to striving for even greater achievements.

Operator, Operator

Thank you. Our first question is from Thiago Lofiego from Bradesco BBI. You may proceed, Thiago.

Thiago Lofiego, Analyst

Thank you, and good afternoon to all of you. Congratulations, Benjamin, on the company's journey trajectory. I have two questions for Martinez if you could speak about still here. First, the cost of iron ore, all that are increasing for the plans, the slab increasing as well. What is your outlook for the price of steel in the global context? Do you think that at the end of the day, at the end of all this confusion that we observed in the market, still will maintain its margin or lose its margin? The second question, also in the steel context. In Brazil, what is demand now at the beginning of the year? If you could speak about your plan for long steel, that would be excellent to understand the market dynamic in these two statements. Thank you.

Benjamin Steinbruch, Chairman, Chief Executive Officer

It seems that Martinez may have a problem in returning to the call. Luis Fernando Martinez, you may proceed sir. It truly seems that Martinez's connection has dropped. He will be back soon. I suggest Thiago, if it's not too uncomfortable, we’ll hold onto your questions and for Martinez to answer them, and then we can go on to the next question.

Thiago Lofiego, Analyst

Of course, no problem. Let's go on to the next question.

Benjamin Steinbruch, Chairman, Chief Executive Officer

Next question, and as soon as Martinez is back, we will continue again. We do apologize for this inconvenience. Operator, next question please.

Operator, Operator

Our next question is from Daniel Sasson for Itau BBA. You may proceed.

Daniel Sasson, Analyst

Good afternoon to all of you. Thank you for taking my questions. I reinforce the congratulations offered by Thiago to Benjamin. My question already referred to what you said at the end, reflections on the coming years of CSN. You spoke about doubling the size of the company in the coming years. If you could discuss your plans for not only mining but for international expansion, and where we could see better upsides when analyzing investment opportunities to expand outside of Brazil. I have another question for Martinez as well, but we'll leave it for later. Also along the lines of the question asked formerly, I wanted to understand the competitive environment in Brazil and how successful the latest announcements of price increases have been.

Benjamin Steinbruch, Chairman, Chief Executive Officer

Regarding the first question, I want to express clearly that we plan to grow the company while adhering to the principles we've mentioned: deleveraging—maintaining leverage at 1x as a priority. Our efforts will focus on enhancing product quality; we will move forward with a more engaged and direct approach to our consumer base. We aim to add value and more services to our products, and derive growth from the expansion opportunities we see across sectors. I don’t expect there to be major new products, we will persistently focus on steel, mining, infrastructure, logistics, and energy. Notably, we will invest significantly in energy, aiming for not only self-sustainability in generation but to make it a prominent business segment for CSN. Overall, our commitment is the company's goal to double in size over the upcoming three years based on leveraging, technology, and a commitment to ESG—not just in speech but in measurable actions. We will preserve large areas that the company will maintain and this commitment not only to decarbonize but also to conserve is projected to benefit us.

Luis Martinez, Commercial Director

I will first of all answer the question made by Thiago, and the second, if you would be kind enough to repeat it. I do apologize. Once again a technological glitch, but everything is working. Can you hear me?

Benjamin Steinbruch, Chairman, Chief Executive Officer

Yes, we do. Please continue.

Luis Martinez, Commercial Director

Thiago, returning to your question regarding the global steel situation in terms of costs for slabs and our outlook. We see a clear scenario of decarbonization and de-globalization impacting economies, which are now producing steel locally. The U.S. is seeing a phase of onshoring, emphasizing domestic production. Due to the ongoing crisis from Russia's aggression towards Ukraine, costs for certain commodities are being influenced. Currently, slab prices in the spot market are around $900, and our outlook remains optimistic for the steel industry's margins. In Brazil, apparent consumption was at 12 million tons last year, and we ended with 15 million, showing a growth of 25%. For 2022, we anticipate 2.2% growth; additionally, we expect to grow our domestic market share by a minimum of 10%. Our export penetration has been significant, with an anticipated increase in local production, minimizing reliance on imports. When discussing market projections for CSN, the entire industry is projected to grow by 5%, civil construction by 4.5%, agricultural trucks and railway implements by 10%, and distribution by 5%. Demand looks promising overall; while we experienced some seasonal transitions at the close of 2021 and the beginning of 2022, we are in a strong position going forward, primed to capitalize on higher prices. We aim to elevate capacity by further integrating operations, which reinforces our strategy to boost local supply. To further bolster our steel production, we are exploring opportunities for long-term partnerships that align with our vision of acquiring a more vertically integrated supply chain for continued growth. All our plans during this transition are anchored in optimizing our models for a more robust positioning in the market.

Benjamin Steinbruch, Chairman, Chief Executive Officer

We are setting the framework to ensure that we align with burgeoning market opportunities and continue growing our capacities. We are making it our priority to work with innovative partners while remaining flexible regarding how we adapt our strategies to market dynamics. Our objective to maintain a disciplined control of our pricing complementarily reinforces this intent and positions our brands effectively within the sector. This is how we will achieve sustained growth, both domestically and internationally.

Carlos de Alba, Analyst

Thank you very much. Good morning or afternoon, everyone. Congratulations on the 80 years of CSN. Just a couple of questions. First, perhaps for Martinez. With the acquisition of the Real that we have seen, what makes you believe that we are going to see a drop in imports into the domestic market that will be absorbable produced by local producers? Perhaps I'm missing something, but if you could elaborate on that given the strong currency, that would be great, Martinez. And then maybe Mr. Steinbruch, clearly very few companies in the world—let alone in our coverage—would be able to double their size or revenue in the coming three years. But when can we expect more concrete details about CapEx and the pace of this expansion and maybe more specific plans regarding the projects that would take you there?

Luis Martinez, Commercial Director

Carlos, thank you once again for your question. I would like to restate why we believe domestic prices will rebound. In terms of domestic consumption, following a seasonal downturn, we expect assertive growth signs in both infrastructure and civil construction over the upcoming months. Considering supply constraints and the strategic decisions we have made in terms of inventory, we are well positioned to leverage margins amidst the growing domestic demand. The cost pressure we are experiencing is challenging, yet we are committed to adjusting our pricing to align with market realities. Our domestic pricing strategy remains focused on capturing the increasing demand while simultaneously positioning ourselves disadvantageously against imported products. This allows for a positive outlook on margins.

Benjamin Steinbruch, Chairman, Chief Executive Officer

To elaborate on Martinez’s response, we will increasingly pursue strategies that add value to our products and diversify our distribution channels. This signifies considerable growth potential beyond traditional growth metrics—a key element of our market strategy. Although we are poised to explore M&A opportunities both domestically and internationally, we maintain a commitment to ensure that any capital expenditure aligns with our financial goals and adheres to our leverage standards, ensuring our growth trajectory is sustainable and manageable.

Marcelo Cunha Ribeiro, Investor Relations Executive Officer

With that, we find ourselves at the conclusion of our session. I want to express our enthusiasm for the year ahead. 2022 will exceed our impressive record year of 2021. We appreciate your engagement and wish you a great day—look forward to our next earnings call. Thank you very much.

Operator, Operator

The earnings results call for CSN ends here. You can now disconnect and have a good day!