Companhia Siderúrgica Nacional S A : 2Q23 Transcription

Conference Call Transcript

2Q23 Results

CSN (CSNA3 BZ)

August 3, 2023

Operator:

Good morning, 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 2Q23. Today, we have with us the Company's executive officers.

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

We have simultaneous webcast that may be accessed through CSN's Investor Relations website at ri.csn.com.br, where the presentation is also available. The replay service will be available soon after closing. Now once again, you may flip through the slides at your own convenience.

Before proceeding, we would like to state that some of the forward-looking statements herein are mere expectations or trends and are based on the current assumptions of the Company management. And there could be differences materially from those expressed herein as they do not constitute projections. In fact, actual results, performances or events may differ materially from those expressed or implied by forward-looking statements as a result of several factors, such as general and economic conditions in Brazil and other countries; interest rates and exchange rate levels; future rescheduling or prepayment of debt denominated in foreign currencies; protectionist measures in the U.S., Brazil and other countries; changes in laws and regulations; and general competitive factors at a global, regional or domestic basis.

I will now turn the floor over to Mr. Marcelo Cunha Ribeiro, CFO and IRO Executive Officer, who will present the operating and financial highlights for the period. Mr. Ribeiro, you may proceed, sir.

Marcelo Cunha Ribeiro:

Good morning. Thank you, and thank you for attending one more results call for CSN. We will begin with the highlights of the period. We would like to underscore the strong commercial activity in all segments, highlighting the all-time records even in markets that are decelerating an all-time record and volumes sold in mining. And all of this despite the operational difficulties.

Secondly, we would like to highlight the strong cash flow, even with the result below our historical averages. Thanks to the excellent performance and the use of our working capital, we were able to sell our finished inventories with a boost to cash flow, and this will be sustainable. So we have a sound cash flow that will be reflected in coming quarters.

We would also like to highlight the Company effort in R$3.5 billion in prepayments for energy and mining, to soften the onetime increase in leverage because of the payment of payout. We get to a leverage of 2.57x, and starting now, we will see a gradual reduction closer to our guideline. We will speak more about this during the presentation.

We show you that we reached an EBITDA of R$2.2 billion in the quarter, a drop of approximately 29% sequential compared to the 1Q because of a lower price realization this quarter, along with a moment in the steel mill where the costs continue to be high

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Conference Call Transcript

2Q23 Results

CSN (CSNA3 BZ)

August 3, 2023

because of the operating situation, and in cement prices below those at the beginning of the year. Because of this, this quarter, we reached a level lower than we had attend in the last 4 quarters. This confluence of negative factors is a onetime event, and from now onwards, we will return to our average levels of previous quarters.

We continue to speak about cash generation. First of all, we will speak about CAPEX. We are very close to R$1 billion, very much in line with our annual guidance, which is somewhat above R$4 billion. It's natural to have this slowdown in the steel mill with the advance of the projects because of the repairs of coke batteries and advances in mining projects and because of the P15 project. In the coming quarters, we will see similar figures, higher than this R$1 billion to be able to comply with our guidance.

In terms of working capital, there was a significant reduction, especially in the line of inventories. This is positive commercially, of course. We are trying to be creative with slabs of difficult application and in the sale of finished products to offset the reduction of volume in the steel area. And because of this, we will hold lower levels of inventory that will also be supported with lower raw material prices.

This you should see again in the coming quarters, and this will help our cash flow, which is what we see on the next page, we generated almost R$750 million in cash, partially returning a significant use of cash in the 1Q, not different to what happened last year. At the beginning of the year, we have a higher application of working capital and in the rest of the quarters, we returned this cash. It is somewhat low, but it is a relevant cash flow. And in the 2H23 with an improvement in operating profitability, this should all accelerate.

In the next page, we see that this cash flow, although positive, was not enough to avoid an increase in debt because of the payment of dividend of R$2.7 billion. Now this leads us to a leverage for the 2Q of 2.78x. However, when we look at the transactions concluded after the close of the month of July, we already have gone down to a leverage of 2.57x.

As I mentioned before, we are thinking of 5 different operations, adding up to R$3.5 billion is our long-term operations with very good commercial conditions not only in mining, but also in energy, and they will bring about liquidity in different conditions, and they are aligned with the volumes that we had last year. Since 2018, we are seeking this deleveraging with very good results, and it has helped us to get to this level of 2.57x. Now we had a peak in the year and from now onwards, we will be closer to our guidance, which is 2x.

In the next page, we see our liquidity that ended up at R$2.5 billion at the end of July. Given the transactions, we will be much closer to our informal goal, which is R$15 billion. Looking forward in the 2H23, we will always be closer to that figure. It gives us comfort for the investments that we need to make. And with the short-term negotiations, we have a good coverage to support us in coming years. But we continue to work with our amortizations in July.

We concluded another issuance of debentures of a term of 15 years to lengthen terms and at very efficient costs. And regarding our debt with the banks, we have paid out some installments and we are holding discussions once again for the lengthening of this debt. We have this constant quest to have a very healthy indebtedness profile. It should drop, in accordance with the future loans and financing that we will have. With the sequential drop of leverage, this is what we should expect in coming quarters.

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Conference Call Transcript

2Q23 Results

CSN (CSNA3 BZ)

August 3, 2023

Now we will comment on each of the businesses, beginning with steel. First of all, we will speak about volume. This quarter was not particularly strong in terms of demand because of mix trends in the segment. Despite this, we had a growth of more than 10% in domestic sales, and they were not higher because we have a new strategy, which is to bring products from Germany to Brazil.

And of course, this increases the period in transit, and we have 50,000 tons eliminated here that will be sold in the 2H23. Had we sold them in Europe, we could have sold greater volumes. But in Brazil, the profitability will be higher.

So with average volumes and prices in the 2H23, it will be interesting to maintain these prices despite the pressure on imported products. And the results were better than the 1Q, but we had a negative impact of the increase of costs in production, and that is why we have a drop of the margin of 9% to 3%. This margin should return to historical levels.

In page 11, we show you these limitations in production in the last 2 quarters, buying a production of slabs, 30,000 tons, far from our average of 950,000 to 1, and this is because of the reduction of costs. Our unit margin dropped as well, 34% because of this. Despite this, if we look at our historical results at US$20, US$30 per ton, we are above our historical levels, and it should have been closer to 200,000 if the prices were in the right place. So there will be a normalization in the volumes in the coming quarters.

We continue to speak about mining. As mentioned, we had absolute records in production, in dispatchment shipment from our terminals and of course, a record in sales. Operationally and commercially, the quarter was very good. Unfortunately, the prices led to a drop in the quarter. But with our sales in quotational period, we had the impact of this variation. And because of this, the price realization had a drop of almost 30%. That is why we see a drop of EBITDA margin from 48% to 30% from R$2 billion to R$1.1 billion.

When we look at the following page, we try to separate these effects, and we see that if we remove these effects from previous periods, it's not a comparison of R$2 billion to R$1.1 billion, it would be R$1.7 billion to R$1.3 billion, and this gives us clarity that this considerable increase in volume had a positive effect, offset by the drop in iron ore. Our EBITDA levels would be more than R$1.5 billion, compared to the R$1.1 billion that we accounted for in this quarter.

Finally, when it comes to cement, there is a very interesting ramp-up of our own volumes in the annual comparison. We went from 1.3 million to 3.3 million. We almost increased this threefold. It's not the right comparison, of course, because we have to consider the values and volume of last year. We still have a growth of 12% annually, and a sequential growth of 9%, in a market that basically has walked sideways.

We are quite convinced that there will be an acceleration and all of this was possible as to the strategy of filling up the capacity of the plants available, enhancing distribution, and we did this quite successfully. But the revenues did not increase as much as volume. There was an increase of only 2%, with a negative impact on price. And this also refers to what is happening in the market. With an improvement of demand, the prices increased.

Margins are very similar to the previous quarter, 20% approximately, and we have very positive expectations with the materialization of synergies with this merger. We will go back to our historic levels of 30%, and we do think that there will be better synergies that

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Conference Call Transcript

2Q23 Results

CSN (CSNA3 BZ)

August 3, 2023

are already in place. They are simply not more visible because of what is happening with price.

With this, I would like to end the presentation on the business. And let's speak about the ESG highlights. I give the floor to Helena.

Helena Guerra:

Good morning, everybody. Here we are once again to speak about the highlights of the quarter.

As you can see in this 1Q, we are working independently in terms of ESG. We are showing you our qualitative and quantitative indicators and our performance in each of these areas.

Once again, these grants are performance in ESG, with greater transparency. In this 1Q, of course, we have a stability in mining. We continue to evolve in our operational performance. In 2022, we had the lowest rate of accidents in our history, and we ended the year 2023 with results that are even better than in 2022, and a reduction in the seriousness of accidents when compared to 2022.

The greenhouse effects are only 40% at present, and we have already incorporated everything that refers to CSN cement with a reduction of 8% compared to 2022. We have also had a reduction of lower consumption compared to the 6 months of 2022 greater operational efficiency when it comes to water consumption and advance in terms of social and diversity. Especially, when it comes to women representation, we have reached 47% of women in CSN Group compared to 2020.

And finally, the evolution of the Company and the main ESG ratings in the world. This quarter, we also have an evolution in MSCI rating from B to BB. We were listed on the FTSE4Good Index going from 2.5 to 3.4 in 2023, because of our sustainability. We are a listed company, and this is very important. And all of this was based on stringent criteria of almost 300 indicators. And this is used as a reference for the indication of the most important companies.

Thank you very much, and that is it.

Marcelo Cunha Ribeiro:

Thank you, Helena. Now, we will now go on to the questions. And before this, I would like to give the floor to Benjamin Steinbruch for his remarks.

Benjamin Steinbruch:

Good morning, everybody, and thank you for participating in the presentation of results for CSN. I would quickly like to summarize my assessment of where we stand at present basically looking at the efforts that were deployed in the past going through the steel area as part of what we had already presented regarding the difficulties of production.

We began the year with a bit of difficulties during the 1H23, we addressed and balanced out production. And we are beginning the 2H23 with a more balanced production and with the vision that there will be recovery, thanks to all of the measures that have been

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Conference Call Transcript

2Q23 Results

CSN (CSNA3 BZ)

August 3, 2023

adopted. What is more important was to stabilize the process. And now that it has been stabilized.

We will go on to recovery and the growth in production. As a result, this will lead to a reduction in cost, not only because of the improvements in production, productivity as a whole and also because of what is happening with raw material, there has been a drop in the cost of raw material. And beginning in the 2H23, this, of course, will benefit us in all of the segments in which we work. This drop will achieve a very interesting combination. It will enhance production and reduce costs.

Sales have never been a problem for us. We had a surplus and excess of orders. We had a certain delay because of this break in production. We were able to offset this by purchasing outside products such as the hot slabs. And in the 2H, we are seeking normalcy with a better production, a drop in costs, an increase in productivity, and consequently, an enhancement in our margins.

In terms of mining, the situation is quite different. We had a very good production. Quantitatively, the results were very good. Even with our purchases, we did enhance our performance at the port. We shipped more products than what had been foreseen, thanks to that possibility of selling lower-grade iron products.

We were successful in what we tried to do, to have more purchases, more shipments, increase in sales, and we now have the hope that China will renew its efforts towards making its economy grow. The entire world is depending on this. And I believe that this will happen soon, perhaps not in a spectacular way, but they will adopt measures to resume the Chinese economy.

What we continue to do, what we can do working on the cost, on productivity gains, and we have done this successfully since the 1Q, and we count upon an improvement in prices, stability. We were penalized because of the open prices as everybody else was, but we do believe that going forward, the prices will become more aligned, and we will be able to make the most of all of the efforts we devoted quantitatively speaking, mining is doing very well. And in terms of cost, also thanks to the efforts that were set forth. And the margins will return to a more normal level.

When it comes to cement, as you have been following up, we deployed great efforts. Our proposals since the acquisition of Lafarge Holcim was to work at full steam, looking for a full production capacity. We are very close to achieving this. On 1 month, we achieved nominal capacity. We had during the semester, 3.4 million tons. Our goal is to reach 3.6 million tons. And I believe that our purpose will be complied with. We also had a cost reduction that was very efficient. We eliminated our main cost in the production of cement, and this was already underway and will continue on because of the drop of prices in raw materials.

And I do believe that we will have a very appropriate performance as part of what we set forth to do at the beginning of the year. And thanks to everything that we have done, we should have a very good 2H23, confirming the guidance that we mentioned at the beginning of the year.

In cash generation, we are working strongly. We have a positive cash generation in the 2Q. Historically, we tend to do this for the 2H23. I do believe we will achieve this, and this will lead to a greater deleveraging, greater than what we had set forth to do this year, which would be net debt/EBITDA at 1.95x, which, of course, is our goal.

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