Companhia Siderurgica Nacional S.A.

Good afternoon, ladies and gentlemen, and thank you for holding. At this time, we would like to welcome everyone to CSN's conference call to present results for the first quarter 2020. Today, we have with us three companies' executive offices. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company presentation. Ensuing this, there will be a question and answer session at which time further instructions will be given. Should any participant require assistance during this call, please press star zero to reach the operator. We have a simultaneous webcast that may be accessed through CSN's Investor Relations website at csn.com.br slash ri, where the presentation is also available. The replay of this event will be available soon after the closing for a one-week period. Once again, you can watch the presentation at your own convenience. Before proceeding, we would like to state that forward-looking statements herein are near expectations or trends and are based on the current assumptions and opinions of the company's management. These future results, performance, and events may differ materially from those expressed herein. They do not constitute protections. In fact, actual results, performance, or events may differ materially from those expressed or implied by the forward-looking statements as a result of several factors such as 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 USA, Brazil, and other countries, change in laws and regulations, and general competitive factors globally, regionally, or nationally. We would now like to turn the conference over to Mr. Marcelo Cunha Ribeiro, the IRO. who will present the company's operating and financial highlights for the period. You have the floor, Mr. DeVito. Good afternoon to all of you and thank you for participating in our results conference call for the first quarter 20. We're going to have a brief presentation followed by the comments of our chairman CEO, Benjamin Steinbruch. We begin with an update to the market on the efforts that the company has adopted in the effort against COVID-19. Of course, this is inevitable, as it affects all of us as part of this activity. CSN has businesses that are deemed to be essential, such as mining and steel production. And because of this, we have maintained our activities without interruption. Thank you for joining us today. The use of masks, once again, distancing at the workstation, changes in shifts and transportation. And all of these measures have been quite successful in containing the advance of infection in our workplace. Up to present, we have very few cases to report. Luckily enough, none of these cases is serious, and most of the employees have already recovered. Now, besides this internal focus on our employees' health, the company has carried out activities to support the communities where we operate, especially in Rio de Janeiro and Volta Redonda. One of the most important is the donation of 500,000 fabric masks to the Health Secretariat of that municipality, the donation of 50,000 food baskets for the community, for needy people that have been impacted by the pandemic, and for employees themselves. And finally, an important measure, the City Hall of Volta Redonda saw contributions for the campaign hospital. We then go on to the highlights of the first quarter on page number three to comment on our three strategic pillars. The improvement of operational results, Maintaining liquidity and acceleration of sea leveraging. This was a different quarter, of course. In the steel production, we had a quarter of only two months, and in mining, the severe impact of rainfall. But despite this, we obtained good results in terms of etica and a strong operational task generation. When it comes to liquidity, we were able to take advantage of the capital markets window, issuing $1 billion to extend our debt. and to increase our liquidity so as to comply with our short-term debt. Finally, when it comes to leveraging, of course, at this point in time, we have had a one-off increase in indebtedness. Net debt will be recovered with an increase in revenues from exports. We, of course, are net exporters. These are the highlights for the period. We go on to page number five to speak about our consolidated EBITDA. It was $1.3 billion, about 15% below the fourth quarter 19 EBITDA, with a different performance for each of the sectors. First, we have the steel segment with a positive performance and a growth in volume. Even in this event, and we cover our cause productivity episodes we're almost 70 percent the great impact comes from mining because of volumes and we will speak about the causes in detail and how these impacts will be mitigated going forward the third segment is cement with a good performance a growth of four million highs in episodes with better volume Eneas Garcia Diniz, Luis Fernando Barbosa Martinez Focuses on mining impacted by the rainfall in January and February and in March a delay in some new sources and there was a delay in the licensing that had already been obtained in terms of the exchange rate, very big lift up because this happened at the end of the quarter. and the increase of cost of the steel mills were offset with the revenues in mining. Besides this, we had good impact on prices in the steel prices, cement and iron ore as well. The price index had a good performance as well as our price realization. We had a good cost evolution, especially in steel, but also in cement, and expenses helped us with a significant reduction. This allows us to get to the EBITDA of $1.3 billion. On page number six, we will speak about impact on cash generation. We begin with the KPEX, where we already show you a figure of $250. A year marked by strong investments in steel because of the blast furnace tree and going forward what we expect is to have investments as a priority in operational safety and maintenance. In this environment of uncertainty, we're reducing our expectations for investments. We had expected to invest 1.8. This has been reduced to 1.1. And we're postponing some great projects and only working with sustaining projects. In a financial cycle, we have to work hard to generate good inventory levels that begin to grow because of an uncertain demand, support to clients. and management along with suppliers that were supporting case by case. Thus, we were able to significantly mitigate variations and we get to 1.3 EBITDA and 500 million in operational cash. We go on to page number seven and we see that this cash flow is still not sufficient to ensure a reduction of embeddedness We have a strong evolution in debt, which is very natural as 70% of our debt is in dollars and we're net exporters. Additionally, to this, the exchange rate change happened at the end of the quarter and the net debt ratio on EBITDA that reflects an average exchange rate is distorted. If we look at the net debt ethics, based on the average exchange rate, it was 2.8 and 4.1, and now 4.8, as we have said, would be for the period. Now, this indicator that has risen as a one-time effect over the significant growth of revenues will come back to normalcy. We benefit from greater revenues in reais, and we have a positive dollar sensitivity. Every 20 cents of U.S. decreases the net debt at the rate of 0.15%, and so we maintain our goal of getting to three times net debt at the end of next year. We begin with 32, 33 million of net debt, to get to the new target of relative indebtedness of $23 billion. And for this, we have to generate cash from our operations, but continue with our divestment program, maintaining the initiatives that are underway. And this will enable us to reduce the debt by $10 billion at the end of 2021. On page number eight, We speak about our liquidity and our amortization schedule, highlighting the most relevant action, which was the issuance of a billion dollars in new bonds with maturity in 2028. And we have gone from 35 months to 45 months in terms of lengthening of the debt. This was essential for our liquidity at the end of the The first quarter tax was at $2.2 billion and these are the amortization of 2020 at $5.7 billion. We're at a very advanced stage at present of rolling, rollover of the debt, especially the banking debt. We see that only $1.8 billion will be amortized in 2020. which means we have sufficient liquidity to honor all of our short-term commitments and we continue to work on new initiatives to increase this liquidity. Very soon we will announce the prepayment of iron ore to reinforce our cash position. We will now speak about the details of our individual businesses as of page 10 and indicators of steel, where we see an increase in volume, a sequential increase of 2% in total volume, and showing you the advantages of a geographical diversification and impact on sales domestically that had a nominal drop, but we had a good performance in Europe, showing that we have resilience in Portugal and especially in Germany. Now, this also had a price increase, especially in the domestic market, because of the depreciation of exchange rates. And we had price transfers in January, March, and we now are faced with a situation that with the increase of the foreign exchange, we have margins for future increases in price. So this leads to an evolution of profitability. We reached $3 billion in equities that were not where we would like to be, but this is an important step when we compare this to the high cost we had in 2019. In the next page, to speak of this productivity, we show you that the production volume has We had low volumes due to the blast furnace. Now, this is normal. We had 874,000 tons, the best volume in a year and a half. And this has led to a sequence of cost reductions in AI, even with the appreciation of the dollars. And although we saved some In the second quarter, everything will be in line with what is expected after On page number 12, we go to the mining performance with an atypical quarter in terms of the volume due to the range. And we weren't the only ones, of course. All of the mining companies in the southeast of Brazil had a relevant impact in mining and shipment at the port. And because of this, there were jobs The good news is that these licenses finally have been obtained. The volume is on its path to becoming more normal. But if we observe the year 2020, we decided to carry out a marginal revision of our expectations for production for this year, an expectation that will be a drop of a maximum of 10% compared to 2019 and 2020. We would love to reduce this impact, but this is the best estimate that we have at present. Now, these effects of a drop in volume are being offset with an excellent environment in the other areas of price, the exchange rates, and, of course, the freight. Because of our initiatives, they are at a low historical level, which means that the figures of revenues and EBITDA were less impacted. And we got to 921 million now, the margin of 56%. And what we see is a good price realization because of this. The flat is at $89, practically stable. But our price realization went beyond this. It increased by 2%. because we had a good performance of our quotational basket and there was a lockdown of crisis and very interesting moments with this we would like to end our presentation and I give the floor to Benjamin Steinbruch for his remarks before we go on to questions and answers. A good afternoon to all of you and thank you very much for Your participation in our conference call. I would like to make some remarks very briefly and say that we are fully respecting the pandemic that has arisen in Brazil and the entire world. We acknowledge the difficulties in economy and politics. Notwithstanding this, we do have to go through this in the best way possible. I believe that CSN has been working arduously, at least in-house, to do whatever we can to reduce costs, making investments in productivity enhancements and productivity, and we're following up very closely on the market. Now, to speak about each segment, My market perception is that from the viewpoint of cement, we're going through a very good moment. The market is stable practically, and we believe that we will have an increase of sales for the second quarter. We're working with production at 80% in the first quarter. We're going to attain 90% for the second quarter. Now prices are being corrected favorably and in truth what has made a great difference is the availability of logistics. We have been more aggressive in the market and that is why we had a good performance in the first quarter and expected to increase in the second quarter. In terms of long-steal, because of our limited revenue and the market was selling full, we haven't had any problems in placing our product. And we also had a price improvement. We believe that for the second quarter, this should be maintained or improved vis-a-vis the first quarter. In terms of mining, we have an opposite problem, which means that all of the conditions are favorable when you think of price, of the dollar rate, of freight. We had one of the problems with rainfall in the first quarter and this will not be recurrent in the second quarter. We were able to obtain the environmental licenses which were very important from us because we're opening up two new mining fronts and with this We will not only obtain iron ore, but also good quality iron ore, which will enhance our performance in terms of quality in the second quarter. And of course, the amount represents a challenge. Everything that will be produced will be sold. So in the case of mining, our problem is the opposite to have More production tools make the most of the other variables. And I think that after having obtained these environmental licenses and the opening of these new mining fronts, we are on the right path to reestablish our quantities, return to normalcy without the problem of the rainfall in slag fields. The market did have a greater drop. I think you have followed up on what is happening in the automobile industry and the industry as a whole. The civil construction was somewhat less of an impact. And distribution. Eneas Garcia Diniz, The adult firm is two. Because the working capital invested is quite steep and presently A good manager has the obligation of preserving liquidity, so we have an eye on production and the market, and we're also looking towards liquidity and our financial commitments. But as a whole, I would like to transmit the most realistic viewpoint possible. and I acknowledge all of the difficulties but I would say that there are several positive factors because of the efforts that were deployed previously by CSN. We should be having a significant reduction in the production cost of flat steel because of the Renovation of Blast Burners 3, Productivity Gains, as well as Gains in Quality, 60,000 tons that we should have as a result of this renovation. And perhaps this topic of Blast Burners 2 is being considered because of the But we do see a gradual and progressive recovery of the domestic market, along with the potential of a reduction in foreign sales because of the exchange rate and because of the products that we produce. When I say, therefore, that the only concern is black steel, and we are working with 60% of the second quarter as part of all of the variables of the exchange rate, the quality and the transportation of iron ore that contributes strongly to the results of CSN as well as the fact that the 60% will have a much lower cost We're considering all of the social issues. And because of this, we still have not come to a decision. When we do, we want to make sure that we have contemplated all of the possibilities to minimize the social issues that would be caused by this stoppage, as well as policies that are important in the region where we work. We're attempting to support our employees and communities where we work ever more during this coronavirus period. We're deploying all of our efforts, our best efforts, and in joint work with the city halls and with our internal audience. What we want to do is minimize problems referring to coronavirus. Now, if there is a shortage of black furnace too, we want to have this convergence of effort. Therefore, despite all of these difficulties, my message is that we are somewhat optimistic in terms of the second quarter. We believe that the second quarter will bring about the peak of and of course this will depend on the management capacity at each company. We will do whatever is possible without a doubt. We are mobilized for this. We continue with our commitment towards greater e-leveraging and as soon as the market opens up again that will make possible Thank you. Thank you very much. At the end of the year 2020, the ratio would be three times. And we must make the best of all of the operational efforts and the good results that we continue to have. An EBITDA of 36 margin in mining and an EBITDA going towards 15% of the steel segments for the second quarter. to me that despite everything we have said ourselves outside, these are our competitors in the market in general. These are my remarks. I would like to thank you and we can now go on to the question and answer session.

Thank you.

We will now go on to the question and answer session. For investors and analysts, should you have a question, please press star 1. If your question has been responded, you can withdraw from the queue by pressing star 2. We request that you please take your hook out when posing your question so that we can have optimal sound quality. Please wait while we pull our questions. Our first question comes from Danielle Sasson from ETA-OBDA. A good afternoon to all of you and thank you for taking my question. My first question refers to the potential stoppage of Black Fern of 2. Is there any period in which you Thank you very much. Thank you very much. perhaps to Marcelo refers to the target of $23 billion in net debt and three times net debt episode ratio at the end of 2021. Now, how much of this depends on cash generation and other investment programs? Could you speak about the potential sale of some assets? Thank you very much. Well, regarding your first question, the salvage of glass furnace, too, from the technical viewpoint, we have already carried out this comparison very rationally. Because of the cost reduction, you can calculate And of course, the trend is that this spread will increase ever more, but you can consider 10% difference and Black Burners too. Now, when it comes to production, I think it makes sense to do the stoppage. Why? It will allow us to sell more iron ore. We're going to use less pellets. We will have a better pet coke. And additionally, if we consider the inventory levels that we have, without a doubt, we will consider that we can place in the market this entire inventory that we have. From the rational viewpoint, therefore, if we take into account results, This is what would happen. From these strategic viewpoints, this is where we have a doubt. And we're working with different possibilities of allocating a large part of our production from blast furnace to for exports. Now, if we are successful in this attempt, it would make sense to continue to work with all of our equipment lines We are servicing both the domestic and foreign markets awaiting a recovery for the second quarter and the end of the year and coming to 2020 in a good position. Now, what is holding us back in terms of our decision is the social issue. to make sure that at this point in time, we do not contribute with a crisis or by exacerbating the social situation, especially in the municipalities where we are active. This is a technical, strategic decision if we want to think about it that way. And the coming week, we're going to enter into discussions And in one or two weeks at the most, we will be able to make this decision. So this technical part has been scheduled fully. And if we truly do work with this stoppage, we're going to do it with a great deal of calmness and with a great deal of technical security as we have stopped it in Blas Fernandez two twice. It will be the third time we will do it without risk and in a very natural fashion. Now, between this week and the next, we will come to a decision. The second question, Daniel, before I respond to it, I don't know if the answer given by nature. I mean, fully respond to your question, yes. Regarding the second question, we have made an adjustment of our balance from 20 billion to 33 billion because of the exchange rate, but we maintain the figure of three times that at this job. And informally, we always have and a target of $1 billion for divestment, for divestment potential. Last year's $1 billion was 4 billion reais. We're now getting close to 6 billion reais. This is also helpful. So we're considering having a reduction of 10 billion reais between now and 2021. The difference will be the cash generated by the operation. And in terms of F-17, do you have anything to tell us? Nothing different from what we said two months ago. In those two months, Europe was in a situation of total abnormality. But there is a positive side to this. The negotiations have continued, and the potential buyers I'll be involved with their own problems because of the pandemic are still engaged and interested. The possibility continues to exist. Thank you. Thank you, Marcelo. Our next question comes from Tiago from Goldman Sachs. Good afternoon. Thank you for taking my question. My first question refers to mining that had a much lower volume this quarter. You mentioned the impact of rainfall and the lack of your environmental licenses. If you could break this down and tell us what was caused by the rainfall and what was and David Cesar Ferreira Lara. Thank you very much. What is happening with your debt? 200 million less. Thank you very much. Thank you. Now, regarding that ratio, it is always very imprecise. Well, the mining was to come into operation in March, and the impact was more in March and April. Thank you. Thank you. and this is what happened last year in 2019 with the reform at Las Fernas Tree where some equipment was not used and the cost associated to that equipment was not the cost of goods sold but in another line item with a criteria that CSN always uses. Now for the first time we have this steep drop in volume And this is a one-off event. The shipment, transportation, and equipment at the mine were not used. And what happened was the same practice separating those costs for products that have not been sold. Are there any more questions? Your dead service. This was benefited Next, the rest of our speakers in this quarter will have an impact and an appreciation in chaos. Thank you. The next question is from Gabrielle Galvan from . Good afternoon and thank you, Benjamin, Marcelo, for taking my question. and congratulations on the rollover of your debt. My question refers to your commercial strategy when there is a resumption of demand. What are you going to do initially? Increase prices or increase your market share? What has the rest of the industry done regarding this? The second question along the same line, if you could speak about your export mix. You sold more to the international market in this first quarter. What is your strategy going forward during this year? Of course, it will depend on the sales. Hello, Gabriel. This is Martinez. The strategy has changed somewhat compared to the end of last year, but basically it is the same. Benjamin has mentioned that we're going to work with a Blackburn S3 that is producing full steam. This is the lower cost equipment, and the more economical production will be in Blackburn S3. using the minimum amount of outside pit coats and pellets. Another point that does not change that I always mention, and I always repeat this, we have maintained this during the years, 50 to 53% of our output is linked to the COVID products. The third point, which I have reiterated often and it has become Very clear in our strategy. Thanks to our strategy at present, we don't depend exclusively on the automobile market. CSN has 12% of the automotive market and markets that have had less, the trucks such as civil construction, there we have 16% in industry in general, 16%. In fact, again, 11%. There wasn't a drop, quite the contrary. 9% in house appliances and 15% in distribution. Our strategy of not having all the eggs in the same basket continues and in exports besides other strategies that we are seeking linked to maintaining the protection of the blood furnace too. We're competing this amount in the United States. We're selling fully to the U.S.A. We're selling 300,000, and we're going to produce a large amount of galvanized products that have been contracted until the end of the year. Presently, we have been able to close some deals in Canada, Mexico, and something in Latin America. Of course, this would be Nirvana. But the fact is that these markets are also suffering, but we have become more competitive because of the exchange rate. Now, the recovery of margins is mandatory. 70% of the cost of a slab at present, and this refers to any plant in the world, is iron ore, fondant, and coal, and petcoke. With the dollar prices, you have to increase the prices. It's a matter of survival. So recovering margins through a reduction of price has to be done. It is part of our strategy. As part of our strategy, what is happening in the first quarter? A parent's field consumption was a very reasonable consumption, 3 million cents. In the second quarter, as Benjamin mentioned, and this is going to materialize, it has been contracted for TSN. It will be below that of competitors. The crop will be 37 to 40 percent. So the market will have 1,800,000 tons for the second quarter. What I am drawing up, although this is negative, and T.S.N. will work with a reduction that is lower than our competitors thanks to our distribution, perhaps of 20%. Our strategy will be focused on added value, on working with very economical products and recovering prices as well as margins When we speak about a price recovery, if we consider the premium that we have in nationalized imported goods, imagine, Gabriel, a new BQ in China at 400 and some dollars and the dollar at 585 reais. The premium is 12 to 15 percent negative at present, We cannot imagine not having a price correction, and TSN is going to increase prices in June. We're looking for the best date. We're going to look at the supply-demand curve, the competitiveness of the value chain, the premium. The market needs to improve, but we have to make corrections in the price to continue to survive in the market. I think an increase of 10% to 12% in June, and we cannot flee from this. Now, this is the CSN strategy for this year to return to the market in the second semester, as mentioned. Our next question is coming from Mr. Carlos de Alba with Morgan Stanley. You may proceed. Thank you very much, everyone. Good afternoon. I hope everyone is doing fine. I just wanted to check, how much do you expect or do you think