Companhia Siderúrgica Nacional : 3Q20 Conference Call Transcription

Conference Call Transcript

3Q20 Results

CSN (CSNA3 BZ)

October 16, 2020

Operator:

Good afternoon, ladies and gentlemen, and thank you for holding. At this time, we would like to welcome you to CSN's Conference Call to present results for the 3Q20. Today, we have with us the Company's executive officers.

We would like to inform you that this event is being recorded, and participants will be in listen-only mode during the Company's presentation. Ensuing this, we will go on to the Q&A session, when further instructions will be given. Should any participant require assistance, please press *0 to reach the operator.

We have simultaneous webcast that may be accessed through CSN's Investor Relations website, where the presentation is also available. The replay of this event will be available for the period of one week. Once again, you can slip through the slides at your own convenience.

Before proceeding, we would like to state that some forward-looking statements made herein are mere expectations or trends based on the current assumptions and opinions of the Company management. Future results, performance and events may differ materially from those expressed herein, as they do not constitute projections. In fact, actual results, performance or the events may differ materially from those expressed or implied by forward-looking statements due to several factors, general and economic conditions in Brazil and other countries, interest rates and exchange rate levels, or prepayment of debt denominated in foreign currencies, protection is measures in the US, Brazil and other countries, changes in laws and regulations and general competitive factors at global, regional or national basis.

We would now like to turn the conference over to Mr. Marcelo Cunha Ribeiro, Investor Relations Executive Officer, who will present the Company's operating and financial highlights for the period. You may proceed Mr. Ribeiro.

Marcelo Cunha Ribeiro:

A good day to all of you. Once again, thank you for participating in our conference call for CSN. We are going to, first of all, go through the presentation, and upon the close of the presentation, we will hear from the Chairman and then go on to the Q&A session.

We begin the presentation on page two to speak about our results and it is important to celebrate, we were able to go through a quarter that is still being impacted by the pandemic, but with very little impact on our operations, as you can see from the results and from the viewpoint of the health of our employees. We have a favorable situation. We have had only six active cases at the plant, at Volta Redonda. And, of course, this points to the assertiveness of our precautionary measures that is still valid, and we intend, of course, to continue to obtain these excellent results.

On page number two, to speak about the highlights, we begin with our excellent results. We prepared for the worst, but we had something better. We had an accelerated growth in all of the markets, but we face the market much better with boldness in terms of cost and expenses working in all of the item lines of our balance, and we were able to achieve the best adjusted EBITDA of R$3.5 billion in our history. This gave way to a strong cash generation a lengthening of liabilities, new prepayment, reinforcing liquidity and an improved debt profile and what is very important.

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Conference Call Transcript

3Q20 Results

CSN (CSNA3 BZ)

October 16, 2020

Once again, although, our indebtedness is high, this quarter, we have reduced our debt to R$2.5 billion, with the best reduction in leverage and the last five years with a drop of 1.5x and we will refer to this during the presentation.

On page number four, we show you the EBITDA evolution, during the quarter, an improvement of 82% and compared to the previous year 124% taking us to a historical profitability with a margin of 39% achieved and 70% of margin in mining, showing you the strength of the business at CSN.

We had a growth at all units in steel 70%, in mining 90%, in cement impressive 264%, and we have good news in all of our business lines, a moment of record revenues because of cost of prices, and a good operational performance. And if you look at SG&A, you will see that we continue to cut down on this.

On page number five, we have our cash generation. First of all, we begin with CAPEX, very aligned with the R$1.5 billion for the year and this quarter continues to follow that direction. And the net working capital was significant and helped us in cash generation.

We had a significant reduction in inventory, especially in the steel business, where we had a high volume, because of the situation in the 2Q. We were able to reduce finished stock and inventory being produced, and we came down to the lowest level of inventory in slabs.

And in terms of net working capital, we generated almost R$1 million, with a very good receivables term, in line with our history. And our suppliers once again, working, according to the proposals made before the pandemic.

We have the double of the adjusted cash flow. And as you can see on the next page, this was essential to reduce our indebtedness. We obtained what has not been possible in previous quarters and despite a relative improvement of our indebtedness because of our net debt EBITDA ratio. We did have an absolute debt that was growing now.

This quarter, we were able to revert this trend, reducing the indebtedness by R$2.5 million and leading our leverage to R$3.5 million, if we consider the average USD rates, but there is still a great deal to do, this area needs to be strengthened and we continue with our goals of our net debt/EBITDA of 3x for the end of this year and a more aggressive goal for 2021, to reduces to 2.5x net debt/EBITDA ratio. And what is more important is to cut our debt by another R$7 billion. This will be possible through financial initiatives that will compliment the reduction of leverage.

We continue. It was not only cash generation that allowed us to accumulate this liquidity of R$6 billion. We also had other important efforts. We continue to lengthen our indebtedness with Banco do Brasil and Caixa, and now with private creditors. We had a payment extension of about R$600 million, prepayment about a R$150 million and we now work with rates that are higher than our short-term debt that represents R$4.5 billion. And, of course, we are going to continue to address our short-term debt. Our priority in the coming months will be to prolong this bank extensions up to 2023.

We continue, and we will now speak about the results of each business beginning with steel. From the viewpoint of volume, the volumes grew very strongly, 27% in the year compared to the 2Q. (AUDIO FAILURE)

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Conference Call Transcript

3Q20 Results

CSN (CSNA3 BZ)

October 16, 2020

We are back and we do apologize for this. We began to speak about steel. We had a growth of volumes of 27% in the quarter and as part of this growth most of this was sold to the domestic market 50% higher, and this shows how the strategic planning of CSN has worked well.

We are working with clients and industries in that sector and with a mix of products that allow us to work with added value. This allowed us to grow more than the market. We also had a strong foreign market with a few problems of seasonality and with a significant increase vis-à-vis last year.

So in the year 2020, we have accrued volumes equivalent to those of 2019, something that was unthinkable a few months ago when we thought we would have a drop of 20%. We now observe stability and growth for the year 2020. In revenues, a growth of 33% also aided and abetted by a price readjustment and the exchange rate of course, and with this the EBITDA grew 70%. An EBITDA margin of 12%, already a good evolution vis-à-vis the previous quarter.

In the following slide, you can observe, perhaps, what is the most relevant element in this performance, which is our operational performance. Even by disconnecting blast furnace 2, we had significant activity from blast furnace 3. Last year, we went through our worst moment, a productivity of 6,000 tons. We now produce 50% more, about 9,500 tons, which guarantees an improvement in fixed cost and we have come to a very efficient costs structure something we did not have for years. And this, of course, gives us a unit profitability that is different to what we observed and quite sustainable EBITDA per ton of more than R$400.

Now to speak about mining performance, we were able to attain the volumes of last year, and this was the recovery that we expected despite the rainfalls and delays, but in the 3Q, we have volumes equivalent to the 3Q19. 2 million sales very good production and, of course, taking advantage of this excellent moment of sales, USD rise sales, and a much more competitive cost. As you can observe, fixed costs, and we depend less on the iron ore accounts of third-parties and this has increased our EBITDA margin by around 60%, and 90% in terms of nominal EBITDA.

Lastly, not less important we speak about the cement performance that has gained relevance that it did not have in the past, thanks to the market. We show you the inflection point of the market that is impactful because of the pandemic and the growth that we were able to obtain up to September.

The market could get to a growth of 9% and if we annualize the growth we see in the 3Q, we go back to the peaks that we had in 2014, but of course, supply has limitations and this has taken us to a balance supply demand situation that is favorable for us. Our volume grew by 16%. We had a growth of 51% in net revenue and EBITDA increased fourfold to R$100 million and an EBITDA margin of 39%. Once again, highly sustainable figures in this 3Q.

With this, we would like to end the presentation, and I give the floor to Benjamin Steinbruch, our CEO and Board Chairman to begin the Q&A session.

Benjamin Steinbruch:

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Conference Call Transcript

3Q20 Results

CSN (CSNA3 BZ)

October 16, 2020

A good day to all of you, and thank you for participating in the call. I would like to highlight a few elements that have already been mentioned previously, but we would like to always underscore them.

The team has attained this favorable result and a favorable outlook going forward. We have the reduction of costs. We began the year with a very strong program to reduce expenses, encompassing all of our businesses and all the possibilities that existed to, in practice, cut down our costs and become ever more competitive for a year that seems to be very challenging.

We prepared the Company as a whole for a very bad, poor market. In truth, we prepared CSN for a war. And what we wanted to do was to obtain the greatest competitiveness and resistance and resilience to go through a year that we imagined would be very difficult.

Our forecast and that of everybody, of course, beginning in the 2Q things began to improve and especially beginning in the 3Q things did not comply with our expectation of a market, but we had deemed to be lacking began to depend on the production of all of our products. Now this work as I mentioned was carried out in all of the business segments of the Company, all of the areas of the Company were still lagging behind in terms of the steel and cement results.

In the steel business, we are making investments in the coke and centering area and with the return of blast furnace 2. We once again will begin working full steam in this second fortnight of November and we will be able to have a greater decrease in fixed cost. And cement had some timely problems in production leading to a cost increase, but we do believe that this will return to normalcy because of cost and production.

In mining, we were able to continue on with the work we were doing gaining in production and presently, we are working very close to what we can truly produce. Therefore, the most important results obtained was thanks to the preparation of the Company to face a very difficult year.

As you know, at present the Company as all large companies are working through their production to ensure that we are able to replace our stocks and we are already for this.

In-house as well as externally simply to give you an idea, we have used all of the intermediary inventories of the Company. This includes our emergency stocks that we hold for eventual problems in production. All of this inventory has been consumed. Our inventory level is very low. We are producing full steam and we believe that as of the 4Q that issue of supply and demand will balance out.

We are convinced that with a full steam production in all of our segments, and as we have the need for regulatory stocks in the supply chain, this lack of products will be adjusted in the 1Q, and the market should return to normalcy beginning in the 2Q21.

This favorable condition for the domestic market vis-à-vis the foreign market and with a reduction of cost and an increase in price because of the positive market is a very good result and this is what we are presenting to you.

We think that this year is a given. We have all of our products in all of our lines and we are running after a good production and I think that next year we will have a better

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