Companhia Siderúrgica Nacional (NYSE:SID) Q2 2024 Earnings Call Transcript

Companhia Siderúrgica Nacional (NYSE:SID) Q2 2024 Earnings Call Transcript August 13, 2024

Operator: Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to CSN’s conference call to present results for the Second Quarter 2024. We have the company 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’s presentation. Ensuing this, there will be the question-and-answer section, at which time further instructions will be given. Today’s event can be accessed at ri.csn.com.br, where the presentation is also available. The replay service will be available soon after the call. Before proceeding, we would like to declare that some of the 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.

In fact, actual results, performance, or events may differ materially from those expressed or implied by forward-looking statements as a result of several factors, such as overall and economic conditions in Brazil and other countries, interest rate and exchange rate levels, future scheduling or prepayment of debt denominated in foreign currencies, protectionist measures in the U.S., Brazil, and other countries, and competitive factors at a global, regional, or national basis. We will now turn over the floor to Mr. Antonio Marco Campos Rabello, the CFO and Investor Relations Executive Officer, who will begin the presentation. Mr. Rabello, you may proceed.

Antonio Marco Campos Rabello: Good morning, everybody. It’s a pleasure to be here with you to present the earnings results for CSN for the second quarter of 2024. On Slide number two, you see our highlights with great achievements for the company. We see better operations in all segments, highlighting the efficiency of operations, but the efforts to resume the profitability of our company, still looking at CSN consolidated. We see that the growth of commercial activity generated an EBITDA of R$2.6 billion in the second quarter, an increase of 35% versus the first quarter this year, and an EBITDA margin that goes from 19% to 23% this quarter. If we look at cash, we had a total amount of R$26.6 billion at the end of June, an amount that brings significant comfort for the company’s obligations.

Regarding mining, with pride, we say that this was the best performance of owned production since 2016, the highest in history. And this shows the efficiency we have been able to achieve, taking advantage of this drier period that is characteristic of the quarter. We also had a significant reduction in the cost of production that went from $25 per ton to $21.2 per ton, helping us reduce our fixed costs. If we look at the results of that segment, mining reached R$1.6 million and EBITDA with a 48% margin, representing a growth of 8.1 percentage points vis-à-vis the first quarter this year. If we look at steel, we can see a resumption of the initiatives and investments of the company and the recovery of the segment as a whole. Commercially, we had sales volume above 1.1 million tons, which is something we didn’t achieve since the second quarter 2022.

Additionally, we had an improvement of 1.4% in average domestic price with a better mix of products for the period. While we have better volumes and price increases, this is the result of a growth of almost 40% of EBITDA in the segment. The margin is still compressed, but we can see a significant recovery this quarter. In cement, the results could not have been better. We had records in production as well as in sales with 3.6 million tons sold during the period. Net revenue grew 15%. Additionally, we made strides in capturing synergy and efficiency, reaching an EBITDA margin of 28% in the half of the year, the highest level since we acquired LafargeHolcim. Finally, not less important, significant growth in the logistic segment. We don’t speak about this very much, but we had extraordinary results with stronger trends for the coming years.

Especially as we move along in the Transnordestina project, logistic had a sound growth of EBITDA plus 9.2% vis-à-vis the previous quarter, making the most of positive seasonality and diversification of products. We go on to the next slide, where we can observe the evolution of EBITDA for the quarter with a sound recovery of margin when compared to the first quarter ’24, and compared with the same period last year. As mentioned, we reached 23.2% margin for the period. To the right of the slide, we have a positive contribution of all segments for these results. With the exception of energy that did not have a favorable performance during the period because of the difficulties faced and extreme rainfall in Rio Grande do Sul. Once again, we offer our solidarity to all of those that were impacted, and we’re deploying all efforts not only to maintain energy levels at the best levels, but to also help in the reconstruction of the state.

In Slide number four, we show you the evolution of CapEx for the period with a significant evolution in the amounts invested, 69% higher than what we saw at the beginning of the year. This increase is the result of investments made in steel that had some planned stopovers during the period to increase efficiency in sintering and to bring efficiency to the Presidente Vargas plan to eliminate the bottlenecks that we face. We additionally had an increase in investment in mining to guarantee operating capacity and the maximum efficiency besides the resources made available for expansion projects, especially related to P15. On the following Slide, we see our working capital graph with a reduction in this quarter because of the drop in the line of suppliers and an increase in accounts receivable and inventory levels thanks to the good performance in the half of the year.

We now go on to Slide number six where you see the adjusted cash flow with a negative result of R$1.2 million impacted by working capital consumption and a higher level of investments made during the year and the impact of the exchange rate on financial results. This offset the stronger operating results for the half of the year and the hedge operations for mining. When we look at leverage and we go on to the next slide, we had a one-time increase in the period with leverage going from 3.3x to 3.36x mainly due to the impact of the exchange rate for debts in dollars which occurred in the last days of this quarter. Besides the payment of dividends, jointly they offset the operating enhancements recorded by the company. It’s important to reinforce that we’re determined in our commitment to reduce leverage and we will obtain better results in the second half of the year with results that will aid and abet our capital.

We’re continuing our conversation in energy and the inclusion of strategic investors for mining among other areas. We now go on to the profile of our indebtedness on Slide eight. We have the amortization schedule and you can see our sound cash position in the last few years with more than R$16 billion available in our balance. Additionally, the company is very active in lengthening its debt focused on long-term operations and the local capital market. Among the main moves of the second quarter 2024, we paid debts that matured in the short-term. The principle of some debts and here you see the composition of our debt, 64% respect to the dollar and exposed to the sudden exchange variations we have observed in the last few months. We now go on to an analysis by segment on Slide number 10, you see the performance of steel.

This was the best quarter commercially since the second quarter of 2022. We had a sales volume above 1.1 million tons, representing a growth of 3% vis-à-vis the previous quarter and 7% vis-à-vis the same period in ’23, reinforcing the return to normalcy in the operation and the dynamism of the local market. We had sound performance in the automotive, general industry and civil construction segment. In the next Slide, you see the revenue and EBITDA for the segment. What draws attention is the better commercial activity with an increase of share in higher added value products and an improvement in the average price in the domestic market with an improvement of 1.4% in the period. These are the main levers for an increase of 40% of EBITDA in steel and 150 base points in the company’s profitability.

Although the margin is still compressed, the results of this quarter point to better future results with an outlook for a more positive environment in the second half of the year in terms of demand, consumption of steel as well as in price with readjustments that were applied at the turn of the month. If we look at production on Slide 12, we can perceive a slight reduction in the total number of slabs produced in the quarter because of scheduled maintenance to streamline and bring greater efficiency to the operation. The stop had an impact on cost, a lower dilution of fixed cost. With the effect of exchange devaluation, we had an increase in the cost of production of slab for the period. On the other hand, when you look at the performance per ton, there is a consistent growth of 35% in the segment because of the mixed effect that I remarked.

We now go on to the mining segment where we can observe that we were able to make the most of this dry period. Characteristics of the second quarter, we produced the higher volumes in the history of the company. When we compare this with the same period last year, that slight drop in the volumes of production are true to a lower purchase of iron ore for third parties. Half of the sales were carried out vis-à-vis the same quarter last year. In terms of sales, we had a growth of 18% reflecting the operating enhancements in the operation. In the next Slide, we speak about revenue and EBITDA for the segment. There is a sound increase of 19% in net revenue despite a reduction of 5% in the prices realized. This points to the efficiency of the operation and the number of fitments in the period.

Stronger sales with a strict cost control and dilution of fixed costs led EBITDA margin to 48% for the half of the year with an expansion of 8.1 percentage points when compared to the first quarter. Finally, we go to the Slide on EBITDA and here we have a breakdown of components that led to this better operating performance. Now, we had the growth of volume with an improvement in mix favoring our own production and a stringent cost control along with a positive effect of exchange devaluation. This offset the cost of iron ore and a slightly steeper freight cost. We now go on to analyzing the cement segment. We have to praise the result achieved in this quarter when we see a record in production and sales and we made strides in terms of efficiency and synergy in the operation.

Never before in the history of CSN had we sold so much cement, 3.6 million tons, 20% above the first quarter of this year. Now, this strong commercial activity offset the lower price that we verified in the segment and led to an expansion of 15% of revenues. In EBITDA, we reached 346 million with a margin of 28%, the highest level since we integrated LafargeHolcim. We’re very satisfied with this performance and we have high expectations for the second half of the year, especially because we will have higher prices for the coming months. Finally, the performance of logistics. And we think it is important to highlight this segment more as it offers us good results. It wasn’t different this quarter. We took advantage of the prior period to enhance the amount of cargos.

Now, we had cargos with higher diversification leading to an expansion of 11% in net revenue and the EBITDA for the period. With this, I would like to end the presentation of the segment and we will now go on to ESG to speak about the highlights of the last quarter. The highlight for the period was achieving the decarbonization goal for CSN. We have reduced our emissions in the cement segment. They represent 40% of the total emissions of CSN. And they’re now aligned with what is necessary to comply with the Paris Accord and to reach the temperature of 1.5 degrees. We were elected for the FTC, an index of sustainability. We’re speaking about a division of the London Exchange. This FTC is made out of listed companies and based on stringent selection criteria with more than 300 indicators.

We have advanced in health and safety. We ended the first half of the year with a 12% accident frequency rate reduction compared to the same period last year and a reduction of 7% when compared with 2023. We had a reduction of 76% in accident severity. In the environmental management aligned with the decarbonization goals, we continue to make strides in the intensity of emissions of CO2 with a reduction of 8% in steel and mining and 4% in cement production compared with the base year for these goals. Finally, we’re making our company ever more diverse. This quarter, we had an increase of 63% in women representation in the CSN group. We have 34% representation of women in leadership vis-à-vis 4% when we set the goal. With this, we end the presentation of the company results.

And before we move on to the question-and-answer session, I would like to turn the floor over to Mr. Benjamin Steinbruch, our Chairman, for his remarks.

Benjamin Steinbruch: Good morning to all of you. Thank you for your attendance at the CSN earnings result call. I would like to share with you, as has already been mentioned in the presentation of cement, how satisfied we are with the data presented by mining. And they crown all of the effort that we are deploying in a continuous way to deliver more in quarters that have already been overlaid until we got to this quarter that was a true record, especially for mining. We are very satisfied to know that we have reached full production. We obtained more than the nominal production of the equipment. And this means, of course, that we’re working very positively with a good outlook for the future. We have reduced the cost. We’re working with a full production.

And selling our production, purchasing less from third parties, and producing our own iron ore. Therefore, this is a growing curve, and we hope to continue this way. Quarter-on-quarter, we show these enhancements, obtaining better figures. Regarding the steel mill, the end of 2022, we identified several investments that would necessarily need to be made. Regarding the lifespan of our main equipment, we know exactly what needs to be done. We know how it needs to be done. And, of course, it’s not a technological ignorance. There’s no lack of knowledge. We know this is a long cycle. Some of the equipment, some of the spare parts of the equipment have been requested. [Technical Difficulty] high furnace so that we can produce evermore with lower costs and a better level of engagement with the environment.

Of course, although these are not complex issues, they do require time, they are being put in place and this quarter was the first one after many where we showed a very strong reaction. We are optimistic. We are highly aware of the difficulties that we need to live with during a short period going forward. But we are convinced that as we saw in mining quarter-on-quarter, we will be presenting better results. We’re focusing strongly on margins, which means what we have in terms of idle equipment will not produce more. We’re going to carry out that production in a smart way, so that we can have a more competitive cost and maximal added value when it comes to our products. And ahead of us, we have at least two or three quarters of enhancements, constant improvements, so that we can comply with our final objective.

We’re very convinced of this work, and we’re also confident that we will be able to work at full steam with very positive results. We have the knowledge, and above and beyond that, we have the product diversification and verticalization of production. I’m reiterating more of the same. We’re on a good path, and I’m convinced that the next quarter, as this one was better than the previous ones, the next one will continue to present enhanced results. Now, for the case of cement, we achieved a spectacular performance. We’re very close to nominal production. We produced 3.4 million tons of cement this quarter. We believe that we can push this line even further. We will do so. Our challenge is to have a full production. We have been able to control costs well, and we are in an area that is quite diversified.

And more and more, the value of productions of aggregate products will increase. And it is our understanding that in cement, we are definitely on the right path, and we will be able to achieve the results that we have set forth for ourselves. I would like to praise the cement team, as I did with the mining team, because of their truly positive performance, helping us enter this market segment with better margins than the competition, displaying the capacity that we have in terms of distribution and adding value to products. When it comes to logistics, as was mentioned by Antonio Marco, we had a very good result. We’re also on the right path. The trend is that we will evermore obtain better results. We are convinced that logistics and infrastructure will become very valuable in Brazil in the short term.

We need that infrastructure and logistics to allow ourselves to grow. And we know how important having an adequate structure will be. And for this, we have the energy segment that was hampered by what happened in Rio Grande do Sul. And our purchase of the 3EEE now, everything is being redressed. And I am convinced that once this critical moment is over, we will once again go back to having exceptional business, as we showed you in the first month of our acquisition. I would like to speak about the new CSN that has proven to be a very versatile, expeditious vehicle for the new technologies we will be using in industry, as well as for third parties. They’re doing excellent work, seeking out new markets, new technologies. We have a footprint in the United States, and we’re participating in the more compact nuclear plants, working on new, less aggressive projects when it comes to the environment, and competing with the larger projects that are being offered in the market, where we do have a footprint.

Now, we’re also working strongly in terms of ESG. As you can see, our results are very strong, and we’re ever more committed to that. And I would like to speak about our greatest challenge, which is that of acquiring assets outside of Brazil. We’re working strongly on that front with our main goal, which is internationalizing our assets. And to conclude, I go back to leverage, which is a constant concern. We are aware that this period of strong investments has paused. We have had a drop of margins in the imported products, in the steel. This is penalizing for the short term. But I reiterate once again the full commitment of CSN to enhance it. Having said this, I would like to thank all of you, and I would like to acknowledge the effort being made at the steel plant.

I’m convinced that this is the first quarter we were able to resume our work, and this will continue on in future quarters. And so we can have an equivalent segment, equivalent to all of our others. Thank you very much, and I will now return the floor to Antonio Marco to continue with the question-and-answer session.

Antonio Marco Campos Rabello: Thank you, Benjamin. Let us go on to our Q&A session.

Q&A Session

Operator: Well, thank you, and we will now begin the Q&A session for investors and analysts. [Operator Instructions]. Our first question comes from Daniel Sasson from Itau BBA. Your microphone is unmuted.

Daniel Sasson: Well, thank you, and a good afternoon to all of you. Congratulations for your results. My first question about that final part by Benjamin about the engagement with financial deleveraging. My question for Marco, if you could put in context all of the moving parts. You’re still negotiating to acquire more cement assets, and after the judicial decision, that legal battle that you had in the last few years with Ternium, perhaps you have that possibility of selling a part of the stake of mining to a strategic partner to bring in a partner for the energy business. If you could remark on your steps and these drivers to reduce leverage. My second question, perhaps to Martinez. We have seen a recovery in the results of the steel plant with the volumes of CSN growing above and beyond those of the market, especially when we see the results for flat steel.

If you could speak further about prices, you mentioned very shortly that you will have increases at the turn of the half of the year. And speak about the new quota system and import levies, if perhaps in the third quarter we may have a more important impact from these measures of the government, or if they still continue to be somewhat innocuous in terms of allowing the price of steel to increase in the local market. Thank you.

Antonio Marco Campos Rabello: Daniel, this is Marco. Thank you for your questions and thank you for joining us in our results call. Beginning in the second quarter, we saw the quarter impacted by the increase in the exchange rate in the last 10 days of the half of the year, and of course some benefit from that exchange rate increase as part of the drivers to deliver. The most important is the company operation. We have a production that is very representative in iron ore and cement, as I mentioned, where we will remain at these high levels during the second half of the year, and of course we will enjoy the good results in these two segments in terms of cash generation and results. In steel, we go on to a second half of the year where we will be able to harvest the results of the investments made this year and the previous year.

We still have a great deal to do going forward, but when we look at the steel mill now, we have an enormous part of the EBITDA that normally takes place in the second half. Without giving you percentages, it is a considerable percentage of EBITDA. Cash generation and EBITDA are important drivers for deleveraging as strategic actions. We do have the goal of concluding both transactions still within this year. The goal is not to do this in 2025, but in 2024. It is difficult to mention the month. The M&A dynamic is very volatile, and both had an impact that led to problems in the negotiations. The flooding, of course, in Rio Grande do Sul, the parties interested wanted to better understand the impact. There was no relevant impact on materials, and in mining, the volatility of the mining crisis led to additional negotiations with a partner.

We continue on with these two businesses to materialize them within 2024. Finally, to comment on cement, you are right. Many of the points in the acquisition of that company is the capital structure so that it will not impact the consolidated leverage of the group. That is why it is taking more time than is usual because of our commitment with the leverage of the group as a whole, and because of the size of that acquisition, we are being quite cautious in absorbing this company and the leverage that will come from it. The capital structure is an important discussion topic. That is all, Daniel.

Daniel Sasson: Thank you very much, Marco.

Luis Martinez: Daniel, to give you a broader overview for your question, the issue of prices, we have to look at this from several different angles. As I have always said, we have to look at the cost, the dollar-reais ratio that sometimes increases, decreases, the premium, the competitiveness of the value chain, imports and supply and demand. When we speak about demand and what Benjamin has just said, we had a very interesting result. The demand grew, apparent consumption in Brazil grew 9% in Brazil. It has been a while since that happened. Domestic sales grew 7% and CSN luckily had a growth of 9%. We showed interesting recovery, helping us to recover some of the EBITDA, always within that cautious view we have on margins. If we look at the sectors, I can mention three sectors that have very positive outlooks.

If you look at the assembly plant segment, we had a growth of 11% in the second quarter vis-à-vis the first quarter of this year, with sales growing even more. And this, of course, is very positive. Distribution itself, which is not a market but represents the sector as well, had a growth of 4% vis-à-vis the first quarter. And other sectors that Marco mentioned, the white line, some industrial sectors like trucks and buses, with a growth of 20% to 25%, and civil construction that still has a significant multiplying effect on the economy from the viewpoint of employment, revenue, and the quality of labor. We estimate a growth of 3% to 4%. Now, regarding demand, if you compare what is happening worldwide, Brazil perhaps is in a very good condition vis-à-vis what is happening in China, USA, and Europe.

In terms of the market, we are the shining star, and I hope this shining star will continue on in terms of its marketing. When it comes to cost, you have observed that our cost remains stable during the second quarter. It’s important to mention that this stable cost was impacted by maintenance. The cost outlook for Slab is that we reach values of 3,200, 3,000 BRLs. Now, we have to pursue those values. It’s not simple, but that’s what we want to do. And it’s an important piece of information. In a simple account, if you imagine the price of BQ at 4,200, we’re speaking about returning to a profitability of 20%, quite representative. In terms of premiums linked to import, premiums, if we think about BQ, it’s not the BQ that is contaminated by the prices from Europe.

China is reluctant in terms of its effort of supplying to Europe and other regions. So, in CRI, the price is 480. The FOB price is 540, 550. And if we compare this with hot roll products of 4,200 to 4,300, this premium varies from 6% to 8%, a reasonable premium. What we did as of July 1st was to work more with a reduction of discounts. We’re not working on price. We’re focusing on discounts. And I believe we can continue to depend on a strong pillar, which is demand. Now, the issue of imports, although many are speaking about this, now what the government has done is in the right direction, but the intensity is innocuous. Imports in the second quarter grew. They went to 22% import penetration. And my diagnosis is that this should improve in some products for the second half of the year, not all products.

We still have the forecast of having imported material. Brazil did the opposite than the rest of the world. We’re legitimating quotas and the high imports made last year, this year. So, basically, this is the price dynamic that we’re working with. And throughout the year, depending on what happens with the exchange rate, it’s at 5.7, 5.50 presently. And depending on the measures put in place by the government and others we have for anti-dumping in tin foil and others, perhaps we will have the opportunity to continue with the realignment of prices or reduction of discounts. So, basically, this is it, an encompassing vision of what is happening.

Operator: Our next question comes from Caio Greiner from BTG Pactual. Your microphone has been unmuted. You may proceed.

Caio Greiner: Good morning or good afternoon to everybody. We have two questions. First, about the position of CSN in the position with Usiminas. There’s a comment that CSN will be obliged to sell its shares. Which is your stance in this? Are you in accordance with this stance? Will you continue on with the sale of the shares or does the company not agree with this and will you issue an appeal? The second question is to Martinez. Very quickly, Martinez, you spoke about cost and the reduction going forward. Now, how would you work with cost and margin looking upon the coming quarters? In the third quarter, will there be an exchange rate depreciation that will negatively impact the cost? We also have a reduction in coal, a reduction in the cost of slab. You will no longer have the maintenance. So, how do we put together this puzzle to better understand the margin dynamic for steel in the third and fourth quarters? Thank you.

Luis Martinez: Well, thank you for the questions. Now, regarding the issue of Usiminas, we had a material fact about this recently. The position of CSN is that we’re still within the period set forth by justice to sell these shares. We’re observing the ideal moment to monetize the shares and obviously, we have internal discussions and discussions with the authorities in terms of when this will happen. Basically, we’re reinforcing the message we conveyed in the material fact. We’re not in a situation of noncompliance of periods up to present. This is the main message.

Luis Martinez: Caio. this is Martinez once again. what we have done internally and Benjamin mentioned this, this was the first positive quarter for CSN in terms of cost compared to previous quarters. We have deployed enormous efforts towards operational efficiency, which is our mantra. It’s always in the first quartile of cost and this is something we have to seek assiduously and this is happening. I see that the results are appearing and are occurring. There’s a great deal that we are doing in the day-to-day of the plant in terms of maintenance, upgrades, prioritizing products, prioritizing routes, so that at the end of the day, we can have a margin that will resume its historical levels. The cherry on the cake, of course, has to be a plane in the market for the purchase of slabs because this will also favor our cost and will take it to lower levels.

What I foresee is that in the second half of the year, those costs will continue to drop. I don’t doubt this. We are at $300,000, $400,000 presently. We should be working with figures closer to what we’re seeking. In terms of prices, there is a recovery. The BQ price clearly has recovered. If you have observed, we’re back to our best mix, which is the mix with added value that I always mention. Zinc, pre-painted products, and something remarked by Benjamin, we’re going to focus on margin, quality, added value, selling more to less, position ourselves in several segments. The full production is not simply a helper. It’s important, but we’re going to work with that trade-off of working with a more expensive slab. This is an analysis we carry out daily.

I truly believe in the work that we’re doing with the commercial area and production in terms of operating efficiency to recover the historical levels of CSN. In 2002, we were in the first cost quartile, and we should pursue this goal. That’s what I wanted to remark. I don’t know if it was clear, Caio.

Operator: Our next question comes from Marcio Farid from Goldman Sachs. You may proceed. Your microphone has been unmuted.

Marcio Farid: Good afternoon. Thank you for taking our questions. We have some follow-ups. The topic of leverage, for example, you spoke about the possibility of selling the stake at Usiminas, 3EEE, mining eventually. So there are some possibilities to help you with the leveraging and enhancing results, especially in steel. Now, 38 billion EBITDA for the last 12 months. It seems to be somewhat far from seeing the figures mentioned by Benjamin, 1x 2x EBITDA. I would like to know if you still have that expectation of eventually getting there, which would be the horizon for that. And if you could reach those levels faster, there’s volatility in iron ore. It’s not the best time to sell the Usiminas sales. In the meantime, the leverage is still high in a scenario of even higher interest rates.

That’s the first point. Secondly, Martinez and Benjamin referred to the present-day market conditions in Brazil. In the first quarter call, you were more emphatic about the need to have measures, adopting measures in Brazil to bring back the competitiveness of industry. This hasn’t been very discussed here. Martinez mentioned that Brazil went in the opposite direction vis-à-vis other countries. What are you doing alongside the government and other entities to help the industry? Or if you think that everything that could be done has been done and there will be few measures coming from regulators to bring about the competitiveness and to aid and abet you in terms of profitability?

Luis Martinez: Marcio, I tried to be somewhat softer with my words to tell you the truth. Nothing has changed vis-à-vis the last call. We still receive a stock of material of very poor quality in Brazil without a control of performance, several materials entering the industry without any reason. They’re not following the standards of the Brazilian market. This is very serious, only to speak about performance. The other points I mentioned continue to be valid. They’re even more valid. If you see what happened in Europe, they had set forth measures for commercial defense. They have measures against Egypt, Taiwan, Japan, and Vietnam now. Europe, in a short while, will only operate within Europe. This is my feeling. In the USA, it’s not necessary to mention what they did correctly.

They value the employment industry and they’re working with these import quotas. We don’t know what will happen when there is a new government, but their assessment is correct. And do remember that in the USA, despite that hiccup they had in the last month of BQ, reaching a peak of $1,000, going to $760, $780, they have the infrastructure law, they have the employment law, everything positive so that the economy can remain calm. And there’s a slight mismatch because the automotive industry is an exception. It continues to grow. When you look at this scenario, we are simply an outlet for China, the only place where China can send its material. We look at the lineups, and that is why I look forward, and I don’t see positive things happening with these measures.

They’re in the right direction, but they have the wrong intensity. It’s even worse in the case of CSN. We decided not to deal with this politically, but technically, other countries set forth 25%. Now, where CSN is a market leader in metal sheets and others, we have an anti-dumping measure that was in deferred. It should have been approved in June. It was postponed, so there’s still a great deal to be done. And that demand in the second quarter was very helpful, but it could help the industry further, not only in steel, but in other areas of the industry. We also have indirect imports coming in by hordes into Brazil, 5 million indirect, 10 million as a whole. So, to speak very clearly, the measure goes in the right direction. There’s a slight cooling in the third quarter, but in the fourth quarter, the year is over.

This is a difficult year, and we have to work with an import penetration of 19% to 20%, unacceptable for Brazil as a whole. I’m not speaking of protectionism. I’m speaking of competitive isonomy. 10%, 12%, as it was in previous years, would be acceptable. And, of course, this is a scenario, and we can give you more color through details.

Marcio Farid: That’s very clear. Thank you, Martinez.

Antonio Marco Campos Rabello: This is Marcos to answer your question about leverage. Yes, the company is still very focused on the issue of the leverage, one to two times as we had in the past. This is the company intention. Now, we have in the guidance 2.5x at the end of the year. In the long term, it’s difficult to say when we will go back to the leverage among factors for deleveraging. We need to understand some better the steel scenario, which we discussed here. We seem to have a turning point, a beginning of enhancements. This has to become a reality, and the iron ore price that has been at $100 in the last few days linked to the dubious decisions of China on whether there will be new incentives or not, and lead to a higher demand of iron ore.

So, we don’t know if there will be new incentives coming from China. It makes it difficult to speak about precise periods. If we look at other actions, the ICM0 for the short term, during our discussions, the results of international benchmarks that are very relevant in our results, fixed cost synergies, they’re all aligned under control. We’re all obtaining better results in the short, medium, and long term in all of the companies, basically. The issue of Usiminas, as you mentioned, it will be a source of liquidity for the company, but we’re undergoing that debate. These shares don’t have that liquidity in the market, so you need an adequate structure and period to monetize these shares. And, of course, the CapEx capital recycling in the company to seek our own peer leverage through the coming periods.

Operator: Our next question comes from Caio Ribeiro from Bank of America. Your microphone has been unmuted.

Caio Ribeiro: Good afternoon to everybody. First of all, to speak about the structure of CSN that encompasses several different divisions, deals, demand, mining. [Technical Difficulty] and mining, which is a potential of an IPO for these specific divisions in terms of timing and to help you on the company deleveraging. Secondly, to go back to the steel business, to speak about your sales mix in the domestic and foreign markets. Are there opportunities, given the depreciation of the exchange rate, to export more? And which is the profitability of this exported volume compared to what you sell in the domestic market? Thank you.

Antonio Marco Campos Rabello: Caio, this is Marco. Thank you for the question. Yes, the company does have the intention of listing other companies in the stock exchange besides the [indiscernible] and CSN. The next one in line would be the cement area. Now, we have two scenarios here. The M&A process in cement could help us adjust the M&A period. You can’t have an IPO in the middle of the transaction, but there is no market for the IPO transaction. We continue to work with the M&A, which doesn’t mean we won’t seek an IPO in the first appropriate window that we find. The goal continues to be these companies, cement in the first place, logistics is the possibility, and perhaps the energy assets. But this is further along in time, depending on the acquisitions and evolutions in each of these.

Caio, the mission of an executive in export is one of the most difficult in Brazil. If you imagine what is happening, and I broaden the analysis not only to steel, my export horizon, which has always been very generous throughout the steel industry, is practically closed. It’s what we’re saying, a deglobalization, decarbonization, and depopulation, the three Ds. What is happening, the United States, I have a high added value product that I could export tenfold. The quota is 10,000 tons a year and enormous capacity in Brazil. Obviously, we’re also working in the USA to hamper that quota for tenfold as the USA market by 50% of imports. And we could contribute more from CSN. We’re the only producer. When you go to Latin America, Latin America is taken over by the Chinese everywhere.

You have no competitiveness vis-à-vis the freight, the cost, the country cost, and risk, the risk in some countries of Latin America. Now, what is left over that is positive for CSN? First, when it comes to margins, and Benjamin mentioned this, what are we doing? We’re sending BQ to Portugal, as we used to do, or supply Portugal would be healthy if we didn’t have to pay €53 per ton. And this isn’t subject to anti-dumping or a sanction as of 25%. So to export BQ to Europe is not feasible. We are discontinuing this. We have decided to buy BQ in Europe if they supply, which is another problem we’re discussing at the European Community. If we look at the Louisville, Cedar plant, we bought it because it was a remedy from Arcelor. Nowadays, we cannot buy hot bobbins in the European market.

In the USA, we’re occupying the quota of galvanized material, coated, pre-painted. So we won’t leave this aside, and we have comfortable margins. Despite the drop in BQ in the niches where we act in the USA, we can sell this product with a higher added value, perhaps adding or cutting something in the US. So we will continue. Aside all of this, Caio, there is no competitiveness. It’s not about Brazil. It’s about what is happening worldwide. And we have to root and work to strengthen the domestic market, to strengthen domestic industry, give more strength to steel. And it’s not only steel in that basket. There are other products, and the government has to be somewhat more aggressive to make sure that all of this will work. We cannot remain on this one-off situation.

There is no competitive industry in the domestic market. If we’re working with a minimum level of 80% of capacity, now for CSN to be practical, our margin will increase. All of the material that it was exporting will have better margins than the domestic market. And this is a pillar to increase our margins, as Benjamin mentioned.

Operator: Our next question comes from Ricardo Monegaglia from Safra. Your microphone has been unmuted.

Ricardo Monegaglia: Few questions, and I’ll try to be brief. Now, cement going back to 30%, this was your performance of volumes. It’s a good opportunity to have more details on the successful commercial operation. And to get to that 30% margin, do you depend on price or with the maturity of steel and usage? I would, for the second question, something we have discussed with the market, internationalization of cement and steel. Does the company want to enhance its footprint in other regions of the Americas? Are there new countries, or do they continue to be the same? Thank you.

Antonio Marco Campos Rabello: Thank you for the question. Let’s begin with the last one, the intention to internationalize. While Benjamin referred to this, we are still focused on seeking greater expansion internationally. We have considered some opportunities, nothing at an advanced stage. We’re thinking of steel in Europe as well as in the USA. Yes, this is an activity that we continue to work on as part of the discussion for deleveraging. At which moment and how, this is something we will debate thoroughly. Without impacting the company leverage, it continues to be a strategic goal for CSN. Ricardo, thank you for the question. I’m going to answer part of it, and then we will speak about the production. Regarding the commercial strategy, it’s what Benjamin said.

It’s about joy. We’re radiant in the cement market. It’s a challenge. It was an enormous challenge for CSN. We began in 2009, the operation in Volta Redonda. And when we carry out a horizontal comparison in the market, I’m not looking at the largest players, but the more profitable ones that are smaller. I’m very happy because besides being as profitable as the small ones, we’re growing as we had projected. And we also have a frowning commercial strategy that I learned at CSN with Benjamin. To sell less to more, to look for customers, not to depend on channels. We depend much less on distributors. We go straight to the end consumers. We have 23,000 customers registered and 11,000 that buy regularly. This is our greatest asset, the customer base.

Our distribution strategically was placed in places that maximize net FOB. This is logistics. And from the viewpoint of another pillar, the operational pillar, I think Ed can speak more about what we did internally in production and in the operational part. Thank you, Martinez. Good afternoon, Ricardo. We’re very happy with the evolution of the indiscernible] margin. And our goal is to operate with margins above 30%. This is what we had before the acquisition of LafargeHolcim. It’s good to see that quarter on quarter since last year, we have been enhancing that margin thanks to capturing synergies, as Martinez mentioned, and synergies that we found in the acquisition of LafargeHolcim. We captured more than 100% of the synergies. We have implemented them.

And with these gains, we begin to see ever better margins. And everything goes through our strategy, the commercial strategy mentioned by Martinez, of implementing a policy and the managerial control of CSN, logistic optimization, a significant gain of scale in terms of supplies, and also the operating management, where we’re practically and pragmatically seeking to reduce the costs to become more sustainable with our assets. We’re very satisfied with that evolution, but we will have to continue to do our homework, continue to seek a cost reduction, while Martinez will continue to work on fragmentation of customers and the control of prices. In Brazil, if you carry out a comparison, the prices are lower, $50, $60 per ton compared to several other countries, including in Latin America, South America, operating at $120, $140.

So this is necessary to remunerate the industry. We have an old industry that dates back to the 1960s, 1970s. We have one of the best margins in the sector among large companies in Brazil, but with these reduced margins, it’s very difficult to renew the industry that is necessary to contribute with decarbonizing. We’re quite satisfied. The margins will continue to increase, and we’re going to continue to seek a return to our former margins.

Operator: Our next question comes from Camilla Bardem from Bradesco, BBI. Your microphone has been unmuted.

Camilla Bardem: My first question is a follow-up of the imports. If we look at the last date of the [indiscernible], the import quota for some products, zinc sheets, for example, are complete now. Can you remember the quotas that you have, the products that have quotas? And if you foresee a reduction of imports for the short term? My second question, the cost of lab, you have a target to reach 3,000, 3,200. Would this be possible for this year, or is it something for 2024? Thank you.

Luis Martinez: This is Martinez. Well, in truth, the issue of imports, and we follow up on how these quotas are being fulfilled, and they’re misleading because these quotas are renewed every quarter, basically. What happened there? And there’s a different speed. It’s difficult to analyze the dynamic of the business. Several people anticipated the imports. They did not bring this inside because of the peak of the dollar, and they gave the impression that there will be a drop, which is not the case. If we look at the shift with a drop of the dollar to $5.50, some importers are beginning to sell more products in the market, and of the 11 NCMs that were placed, some do have a quota that has been fulfilled, which conspires in our favor, especially for BQ.

The Zinc mark will depend on the volumes, but this is something we have to analyze every quarter. Otherwise, we’re not able to understand the dynamic. What I understand is that we need to be more stringent in these measures until we stabilize imports to levels of 10% to 13%, which will not happen this year still if we are able to approve the anti-dumping policies we have. In all products, we’re working with anti-dumping because anti-dumping lasts. It’s the cure. It lasts for five years. Any sanction is September, I will say it will last six months, one year. We want to fight in the technical field, and this is what we’re seeking in the World Trade Organization. We have people focused at the ministry to work on our segment. This is a segment that Brazil did not have so many problems in terms of imports, but now it is the segment for the Ministry of Industry and Development of Trade.

We need to contribute positively so that the industry will become a main player again in Brazil. Industrialization in Brazil is not good. It’s not compatible with the size that a country like Brazil should have, 20%. At present, we have 11%. So this is a challenge of the government so that the industry can evolve. So too many doubts in terms of imports so far. The other point I think refers to cost. I don’t think we can count upon victory here. We have to seek for the right path in this case, and I have said this in other calls. We have to find a path to receive R$3,000 per ton within the cost parameters. This year we are on a positive path, but I don’t believe that this year we can attain those levels. But the path will be easier and it will be leveraged by this drive that we are using with prices through reducing discounts.

Operator: Our next question comes from [indiscernible]. Your microphone has been released. You can proceed.

Unidentified Analyst: Congratulations for your results in mining and cement. I have simply one question to refer back to what was said on cement. Do you think that there is anything else that you could extract from Lafarge, something that has not happened so far? And if you could speak more about the rate of utilization of the Lafarge assets specifically.

Edvaldo Rabelo: This is Edvaldo. As I said, we have obtained more than 100% of the synergies we had thought about originally, and we have been able to incorporate additional synergies. Now, the process is dynamic. The assets acquired from Lafarge, we had to make good investments in some cases to recover the assets, eliminate bottlenecks, make them more efficient, and we’re annualizing the synergies we have already captured. That is why I mentioned that we’re going to continue to reduce our costs, and we hope to continue to grow in the percentages of EBITDA margin.

Luis Martinez: Igor, to complement what Edvaldo said, and in terms of operations, well, he said we reached 100% here. There are some points that can be improved in Brazil and at CSN in terms of logistics, so we do still have some upsides that we’re working on to maximize the plant part, the distribution center, net FOP, the cost of freight, and we should attempt to have the lowest logistic cost possible in the field of cement. This is what we’re pursuing now. The operating excellence pillar has been complied with, but logistics is still at a primary stage in Brazil when it comes to using all of the models. We have used railroads considerably to be able to distribute cement through the valley of Paraíba. It is an alternative.

The cement leaves the plant goes directly, [Technical Difficulty] and for the customers at the end, these costs are important to allow them to compete in the sellout. So, it’s something we should take into account, and we’re thinking of all models where it’s best to outsource, where it’s best to work with your primary assets. This is what we’re working on as well.

Operator: Our next question comes from [Eliseo Félix] [ph]. Your microphone has been unmuted. You may proceed.

Unidentified Analyst: I would like to ask you if you are still under an exclusivity agreement with [Technical Difficulty], and of not, are you still negotiating, even not with exclusivity, with InterCement?

Antonio Marco Campos Rabello: Eliseo, I think the connection was not very good, but I believe we understood the question. Exclusivity in your discussion. Well, CSN no longer has exclusivity with the sellers of InterCement as of today. To complement your answer, this does not mean that we’re not continuing our dialogue and discussion with the selling party. It’s normal to continue the discussions, even though we don’t have this exclusivity for the time being.

Operator: Our next question is in writing from [Tina Gauda from VDF] [ph]. She thanks you for the call and she asks, with the lower price of iron ore and the mining division representing two-thirds of your EBITDA, can you explain the path to reach that target of 2.5x? The steel segment will have to compensate for part of that difference. Do your prices support that at present? Which are your plans regarding InterCement as your exclusivity is no longer being extended?

Antonio Marco Campos Rabello: Thank you for the question. Well, part of this we already remarked upon in previous questions. Yes, in iron ore, this is linked to incentives and the decisions of China and the Chinese government. It’s at the level of $100. To continue the leveraging, we have not only the steel price, which has reached a tipping point, but also the operations of the Presidente Vargas plant that has enhanced the production of slab and steel very generally. We spoke about other leverages, the 3EEE, and all of these actions jointly will support us in our search for deleveraging. This is not an attempt, it’s a goal for the company. We’re going to reach this deleverage in the periods ahead of us. And even without exclusivity, we continue to have interaction and negotiations with the selling party of InterCement.

Operator: I would like to remind you that if you wish to pose a question, please click on the raised hand icon or send your question in writing through the Q&A icon. Please hold while we pull for more questions. As we have no further questions, I would like to return the floor to Antonio Marco Campos Rabello, CFO and IRO for his closing remarks.

Antonio Marco Campos Rabello: Thank you all for attending our results call. I would like to thank all of the members of the CSN Group that have contributed for delivering excellent results this period. We thus end the earnings call for the second quarter 2024. We wish you a very good day. Have a good day.