Companhia Siderúrgica Nacional (NYSE:SID) Q1 2024 Earnings Call Transcript

Companhia Siderúrgica Nacional (NYSE:SID) Q1 2024 Earnings Call Transcript May 10, 2024

Companhia Siderúrgica Nacional isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to CSN Conference Call to present Results for the First Quarter 2024. We have with, 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, we will go 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 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 event may differ materially from those expressed or implied by forward-looking statements as a result of several factors overall, and economic conditions in Brazil and other countries, interest rate and exchange rate levels, future rescheduling or prepayment of debt denominated in foreign currencies, protectionist measurements 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: Good morning, everybody. My name is Marco Rabello. It is a pleasure to share with you the results of CSN. We — 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 at beginning of the year was important to reinforce operating enhancements beginning with mining, where we had record sales for the first quarter. The company benefited from this period, prior period, and we sold more than 9 million tonnes.

In terms of steel, this is the fifth quarter — consecutive quarter of sales, showing the normalization of the operation and the asserted commercial strategy by 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 with advances in emissions control. ESG is a strategic fundamental topic for CSN. We go on to Slide number 4. We see the EBITDA evolution. You see an impact of the price of iron ore and the impact on our results this quarter besides seasonality of the period, 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 2022 and the fourth quarter 2023, leading us to an EBITDA margin of 19% for the period. In the next slide, we can see the CapEx and the working capital. On the part of investments, 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, a reduction in accounts receivable directly related to the weaker sales performed in the period, especially in mining because of a drop in the international prices.

We go 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 the hedging with iron or this should be reverted in the coming quarter with the change of prices we have observed in the last weeks. In Slide number 7, we show you the leverage evolution and net debt buildup after two consecutive quarters of drop of leverage, we had an increase in the level of indebtedness of BRL1.2 billion when compared with the first quarter last year. This performance was expected because of the drop in prices of commodities. We’re making the most of this moment to reinforce our commitment to continue to reduce leverage in the coming quarters and comply with the goals of the company.

We will have more robust results in the coming quarters with seasonality acting in our figure in terms of volume and with an increase in price. In iron ore and steel, we also have strategic projects remarked upon in previous calls. We have a partner in energy and work with strategic investors for a minority stake in mining. These are topics that are extremely important because we need to have a diversified company with relevant action in different areas, and they will enable us to recycle our internal capital and of course, we will have a variation of leverage in less stable periods. In Slide number 8, you see our debt amortization schedule. We show you the sound cash position CSN has had with several million reals at our disposal. Additionally, the company is very active in terms of rolling its debt with a focus on long-term operations and the local capital market.

This quarter, we had the reissuance of bonds of last year with a raising of $700 million maturing in 2030. Yesterday, we concluded our 15th simple debenture with a total value of BRL800 million, divided in two series with the objective of investing in infrastructure for long-term and 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 a 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 price readjustment that was significant because of competition with imported material and because of the 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. In Slide number 11, you see a growth of 5.7% in steel production, referring to the enhancement of the production process that we have observed over the last few quarters compared with the same period in 2023, where we had some bottlenecks in production. Now, we have a higher dilution of fixed costs, leading to a drop in slab in the first quarter 2024. As mentioned in the previous slide, this decrease was not sufficient to offset the drop of price. On the other hand, the expectation is that the costs will fall even further, but we will resume our performance in the coming quarter where seasonality will play in our favor. There is also a drop in raw material and a more comfortable position once we have quotas for imported products.

On Slide 13, we see the mining performance despite seasonality. The company maintained operational excellence in recent quarters to deliver yet another production record for the year, overcoming the critical period of rainfall. Now, the readjustment in the price of iron ore was intense, a change of $30 per ton in the price practice this quarter vis-à-vis the last quarter, offsetting all of the problems we saw and leading to a drop in EBITDA, reaching a margin of 40% this quarter. On Slide number 14, in greater detail, you will see the impact of this adjustment on our results, especially in price provisions. This effect added to the effect of seasonality per volume where we’re responsible for a difference of BRL1 billion between the last two quarters.

We look at the result of cements on Slide number 16, and we can see that despite the seasonality with increased rainfall, the company maintained an assertive commercial activity with minor impact on the volume between the two quarters differently from what we observed last year when we had more aggressive price strategies. This quarter, we see an enhancement in the competitive environment, allowing for a price adjustment in this quarter, which means we have a stable behavior of revenue despite the lower volume. The message of this slide is a sound capture of synergy and operational efficiency gains surpassing for the first time, the mark of 25%, mark of adjusted EBITDA margin since the integration of assets. So, we’re on the right path to capture benefits with a sound and efficient financial performance.

With this, I would like to end the presentation on the segments, and I invite Helena Guerra to speak about the highlights in ESG.

Helena Guerra: Good morning, everybody. Thank you for the opportunity of presenting our results for the quarter. I couldn’t begin the call without first referring to our for solidarity to the disaster in Rio Grande do Sul. It is an economic and humanitarian tragedy due to climate change, and it reinforces the need to focus on climate change and the need for the society to adapt to avoid the impacts of this new reality, our deep solidarity and help to our associates in the region. Even in extremely difficult working conditions, our employees have worked consistently in a very competent way to maintain our dam stable despite this new volume of rainfall and to ensure that our company could be properly mobilized through different actions to help the people in Rio Grande do Sul to face this disaster.

Although the call is for the first quarter of 2024, we highlight the publication of the fourth edition of CS10 report was published yesterday. Both have been reviewed by outside auditors and we’re complying with our obligations until 2026. We refer to this double matter reality. It considers the impacts caused by the company environmental frameworks, but risks and impact to the business, especially financial risk with double materiality as part of the European system that was approved in 2023 and will become a mandatory practice. And this has been incorporated into the 2023 report. In the quarter, we have some actions referring to advance in health and safety. We have a decrease in the margins of [Indiscernible]. We have a dam that was improved in December.

It had reached level one-off stability. This was stated through an external audit. So, all of the dams in the company have the highest level of safety. We also highlight the evolution in our safety and operations. In the first quarter of 2024, we surpassed the goal set forth regarding our accident frequency rate vehicle for 2030, we have reached in 2024. This is the best historical day, 1.62 accidents and we also have an expressive reduction in the seriousness of accidents, thanks to the program implemented in December called [Indiscernible] to act. And this has reduced the potential number of accidents in environmental management. More than 500 tons of cement produced according to the best rules in the world. In terms of emissions, very good results in Minas Gerais, almost 2,000 cubic meters an hour allowing for good availability of water at Casa de Pedra, something fundamental for the project.

In terms of diversity, we have increased women participation. We have reached 62% in the CSN group, 10% of women in leadership position compared to the same period last year. And of course, we participate with the evolution of CDP grade that has the largest data bank in the world, and we have become global leaders in environmental management, especially in terms of water, safety, and climate change. Thank you very much.

Antonio Marco Campos Rabello: Thank you, Helena. Before we go to the question-and-answer session, I would like to give the floor to our President, Benjamin Steinbruch for his remarks.

Benjamin Steinbruch: Well, good morning, everybody. Thank you for your participation in the CSN earnings call. I would like to simply review some points, and we will then open for questions and answers. I highlight what was said in the [Indiscernible] call and CSN. In mining, we had a record production. However, we had a timely negative impact on prices with a reduction of almost 20% and with a direct impact on EBITDA. This impact that we had in the first quarter will be eliminated as prices have increased 20% once again. We believe that the negative impact that we had in EBITDA in the first quarter will end up being positive in the second quarter. If we consider that the mine is doing well in terms of production, it is working with control costs, this is the effect of direct price on EBITDA.

And if we take into account the movement at the port enabling us to ship more ton through our ports. Regarding steel, we had an increase in the amount of steel, but we focus a great deal on mix and price. We had an impact of the imported products, and this issue has begun to be addressed by the government. Eventually, there will be a better projection of the domestic market, and we believe it will lead to better results in the second quarter. In cement, conditions are normal. We have been growing in terms of amount and margin. We have been able to raise the price and cement has shown the potential that it truly has. And gradually with the synergies that we have captured, we have a consolidated position with the integration of Lafarge Holcim and the production of our prior plan.

The EBITDA, despite the negative effect, as I mentioned, basically due to the drop of flat. Now, regarding our investments, we continue our normal pace. We have investment policy that is higher now for 2024. We’re advancing at a normal pace. And the main investment that we have for P15, has been fully contracted. All of the equipment has been contracted. The engineering side under a rapid development, and we believe that very briefly, we will have the P15 becoming operational. This is the main investment from the quantitative and qualities viewpoint for the entire group and for mining. And still, we have coking centering and high furnace also underway. The leverage, of course, which is an issue of great concern. We have made commitments to remain below 3 times.

We continue on with this commitment despite that slide into 1.3% due to the drop of EBITDA and also due to that drop of 20% in prices for iron ore, for plots that seems to have recovered that price loss. We believe that very speedily we will be able to once again have that commitment complied with the market. As we have been saying for almost two years, our goal is to always work between 2.5 and 3 times leverage and to attempt to be as close as possible as 2.5. We do have a significant investment program, notwithstanding that we believe in our operations, and we will quickly return to that level that we have set forth to comply with. I can say that mining very broadly is doing very well. It is under control. We have growing volumes. The price has returned.

The cost is dropping and the port is doing very well. So, all of the variables seem to be in place and working in harmony quarter-after-quarter as we were able to show this last quarter. Regarding mining, what we have to do is more of the same. We truly don’t need to make corrections or adopt major actions. With this resumption of price, we will once again go back to having the results that were forecast in our budget and we’re quite calm when it comes to mining. With cement, the same holds true. We’re doing well, capturing synergy. We are working very close to our nominal volumes. When we lose something because of gold silos, for example, we do lose a bit of the nominal capacity because of this, but the productivity and the yield that we have set forth for ourselves are quite strong, and we have had good receptivity on the part of the market.

Our costs are under control, allowing us to have growing margins as was a concrete fact in the first quarter of going beyond 25%. Now, when it comes to the steel plant, this is where we have our major problems there’s nothing different, nothing unknown. It’s simply an issue of management and ability to forecast. We had a serious problem with converters with coke and centering. Well, all of these problems are known at large, but as in any capital-intensive company, when you detect the problem, even though you know how to resolve it, even though you know how to return to normalcy, you do depend on spare parts that should be immediately available, and they’re not and the delay because of the articulated order for each type of equipment can be impactful despite knowing what we need, despite having a defined strategy to regress these variables.

Unfortunately, this will take some time and we are presently in that phase where we are losing production. Even though we know what needs to be done, we have to continue to live with that for an additional period. We are attempting to reduce that problem that we have with third-parties in the market. We have been successful. The purchases are lower than our cost of operation, but we’re getting ready to recover for our loss of the time of difficulty in production have gone beyond what we expected in the steel mills. Now, commercially, we have a highly competitive market because of the imported products. It is a pity that the Brazilian government proceeds so slowly with that reaction that we’re expecting regarding imported products. It’s not only in the steel segment, we have to be attentive to this and quickly react quickly in all segments that impact our economy.

This is not a timely issue with the general problem. China attack very strongly and fully impacts competition. Nobody can say let China come, we’re ready. We are not, not in the automotive sector, not in chemistry, not in the consumption sector, or in the spare part sector and the damage takes some time to recover from the Brazilian government is under the obligation of reacting rapidly to protect the industry as a whole. We have seen this in the past. There is a drop in the share of industry in Brazilian GDP and for each point that we dropped, it takes threefold the effort to go back to our original position. Although the Brazilian government is somewhat attentive, it has been slow in terms of its reduction and not very aware in terms of what should be done with imported products.

To give you an idea, the Brazilian government used the averages of the year’s 2022, 2023 to set up the average imported added 30% in amount. And based on that has come up with a new import levy. Now, if the government would have wanted to inhibit imports, they should have based themselves on the averages of the United States with a reduction of 30% to show that they’re truly combating imports. Unfortunately, we have done the contrary. What will happen in May and June is that imports will be extremely strong and to set up this higher quota. And only after that, there will be a new taxation levy. It continues to stimulate imports, which truly doesn’t make very much sense and which is effectively hampering the entire Brazilian economy. I repeat here, nobody can face up China.

Nobody. When China is ready to export any type of product, it simply goes over everybody in any country. We have to be attentive to that. And the faster and the stronger this action is, the better the production for industry as a whole and for Brazilian economy. And this will have a huge repercussion as it is already happening in the consumption area. It’s an issue that is pending, and we have to wake up to this and act quickly. Very well. We’re now going to open the floor for questions and answers, and we are at your entire disposal to answer your questions. Thank you very much for your attention and let us continue on.

See also 16 Best US Stocks To Invest In Under $10 and 13 Best Stocks That Will Always Grow.

Q&A Session

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

Daniel Sasson: Good afternoon. Thank you all for the — for taking my questions. My first question refers to that final testimony made by Benjamin on China competition, the competition of imports that the sector has been facing for a year and a half. For Martinez, if you could comment on this new scheme for recent quarter recently announced by the government. If this is something that could move the needle in terms of this competition due to imports because of aspects that are not exactly fair? Or is this just an initial step where they all should be done? If this could stabilize the margins in the sector or if it was still a very small step? My second question is to Benjamin. Benjamin, thank you for this opportunity. If you could comment on your mindset in terms of opportunities for growth, especially in organic opportunities, acquisitions appear and you have to be ready for them.

It’s not something that you can predict beforehand. So, how can you balance all of this out with that commitment with your capital structure and the leverage below 3 times? Simply so that we can understand at which moment you will be taking this additional step to deleverage in the future and generate value that way that would help us to understand some transactions that could take place in the short-term? Thank you. Answer

Luis Martinez: Hello Daniel. Thank you for the question. Now, to speak about the commercial defense. I’m going to try to complement what Benjamin has said so that you fully understand not only what is happening globally with this situation regarding other players in the sector, but specifically, what happens with CSN. CSN presently has a portfolio where 50%, 51% comes from reverted material-linked pre-painted and tin foil. Now, we have this as a matter and the issue of commercial defense throughout the world is dealt with as a matter of survival in the United States that deals with this more friendly. They implemented 323 as a matter of national security. So, this became a very important issue in the worldwide scenario. It has to be dealt with, with a great deal of seriousness.

To add to what Benjamin said about China, nowadays to give you an idea what we have in terms of flat steel coming into Brazil, what arrives every month. I’m referring to 70%, 80% that comes in directly here. This is a unique, very peculiar situation and very typical for CSN. Besides everything that is happening is that we have become the trash can of the world. We’re receiving material outside of specific — coating that the market has to put up with, with generalized corrosion, compromising everything we have built in Brazil. This is an additional issue of extreme emergency, we cannot compete technically. Commercially, there is no competition. But technically, we have not been able to act correctly so as to block the entry of these products into the country.

Another important point, if we look at the worldwide scenario, Brazil is the only country in the world with this its mouth open to China. And this is what is happening in Brazil at present, the most serious countries nowadays, what do they do? They privilege their industry, maintain employment, competitiveness. And beyond that, in real time, they see what is happening with competition. CSN has never needed protectionism. It is an obsolete concept. I have been at CSN for 23 years. We have always been in the first quartile of prices. We never needed protection to compete. We have operational excellence and commercial strategy in place. Another problem is our myopic vision. We’re confusing a strictly technical topic with a political issue. We represent to China, something negligent in terms of the imports.

Brazil would not have any retaliation if we had applied the rules that other countries have applied. Nobody would stop buying corn, grains from Brazil because of a steel import that is destroying the Brazilian market. From the political viewpoint, we have been greatly weakened. That’s the truth, as Benjamin mentioned, everything that the United States did. They base themselves on an average and took away 70%. We leveraged this at 1.3%. When I speak about technical measures. And in the last call, I praised the government. I imagine that this issue would be dealt with in a stringently technical way according to the World Trade Organization. Now, the three cases of CSN have been postponed. We have a case of pre-painted and two cases of tinfoil.

They have been postponed. Well, this is a political issue. People are simply looking upon this two weeks ago, we had two people from the government carrying out an in local verification, which is part of the regulations of the World Trade Organization to see about prices and costs. What should the government have done to enforce temporary measures while this investigation process was being carried out. This was not done and it could have been done in three or four months. It’s very possible that we will have to wait another year for this antidumping to be resolved. Now, as other plants, we focused on the technical part. And the three products of CSN were postponed. Now, the entire world has set up safeguards sanctions of 25%. And I don’t think that we are better than the world.

Something wrong is going on here. To give you an idea of what was done, let’s look at the idea of zinc to material, the average that the government considered was 162,000 tons a year. The average imports for 2023 were 483,000 tons. If you look at 362,000 and multiply this by 1.3, you have 470,000. So the government is legitimizing the import of the zinc products an [Indiscernible] and efficient measure, an offensive measure completely to combat unloyal competition as we have in Brazil. So, this shows us very clearly an event that extends to all other products. The only thing that is somewhat different is the hot rolled coil. Perhaps they can help us somewhat, but the amount is very small compared to what is imported into Brazil. So in this situation, as Benjamin mentioned, we see several industrial change in Brazil that are suffering due to this problem.

Steel is just beginning. Very soon, we will wake up with the Chinese manufacturing finished products in Brazil. They are now coming in through indirect imports. I do apologize for extending myself on this issue, but this should be looked upon in the correct fashion. Now, regarding the CSN portfolio, it’s very specific. It’s very different. It’s important to understand how relevant this is for CSN to such a point that the Brazilian steel market in the first quarter, this was not only CSN. We had a loss in mix. There was so much imported zinc that what was left to sell was BQ. And the entire market is dropping and we suffer more than other local competitors. Daniel, do forgive me for extending my comment, but I attempted to give you more color on this issue.