Companhia Siderurgica Nacional S.A.

Good morning, 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 second quarter 22. 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 presentation. Ensuing this, there will be a question and answer section at which time further instructions will be provided. Should any participant require assistance during the call, please press star zero to reach the operator. We have a simultaneous webcast that may be accessed through CSN's investor relation website at ri.csn.com.br slash English where the presentation is also available. The replay of this event will be available soon after the closing for a period of one week. Please feel free to flip through the slides at your own convenience. As a reminder, some of the forward-looking statements Made herein are mere expectations or trends and are based on current assumptions and opinions of the company management and there may differ materially from the results performance and events as they do not constitute forecasts in fact actual results performance and 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 rate 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 globally, regionally or nationally. I would now turn the conference over to Mr. Marcelo Cunha-Rivero, CFO and Investor Relations Executive Officer. He will present the operating and financial highlights for the periods. Mr. Cunha-Rivero, you may proceed, sir. Good day to all of you and thank you for participating in our conference call. Here we have the executive directors of the company as well as our chairman, Benjamin Steinbruch. who will participate in the Q&A. We begin with a presentation on page two. And this was a period marked by enormous uncertainty and volatility in the steel and mining market. The diversification of our businesses allowed us to have strong results, although mining was impacted by the drop of prices in the quarter A spotlight on the cement segment, which presented record results with a recovery of prices as a qualitative indicator. In the highlight of what we do, we announced investments in energy, a solar plant and Quebra Queixo, as well as with the company C3EG, which will allow us to become self-sufficient and become very competitive in terms of our businesses. We go on to page number three and the evolution of the EBITDA. It's very clear that the company has been through ups and downs within a scenario of very volatile prices, especially in mining. 2021 was marked with very high iron ore prices that continued during the second quarter, being a bit closer to the present day levels. In the first quarter, a rising iron ore price. We had a reversion of the provision for provisional prices, which helped us in the results. But in the second quarter, We were impacted with a dropping price in iron ore, a reversal of provisional prices, and we had a negative result for the period. EBITDA reached $3 billion with a variation of 1.5 negative in mining. Thank you very much. Operating and Financial Indicators, a growth in our CAPEX, 838 million reais, with a stronger growth in mining as was expected because of the growth of projects P15 and C3. and in steel, more relevant projects in centering and the reform of some ports. Now, these are levels that are in accordance with our initial expectation of a capex of 4 billion in 2022. But at present, we're carefully revising our projects. Thank you very much. Regarding networking capital, quite stable during this quarter vis-a-vis the first quarter, but still at very high inventory levels. We do have good news coming forward. We see a normalization in terms of inventory of finished products. We have prioritized price instead of volume and for two or three quarters we had finished products with high inventories. We have now made an adjustment with this and in terms of raw material, we went through the first and second quarters with a price of coal and coke that were record prices and are now more normalized prices. Thank you so much for joining us. Giving way to a correction at the end of the year because of the accumulation of working capital and in the first quarter of the year besides a high working capital, seasonality of payments, income tax because we had a very strong year in 21 with cash disbursements. We now go to more normal quarters, $830 million in adjusted free cash flow with an outlook for a clear increase. The results of EBITDA will be constant or under growth and a reduction of working capital, which should help our levels of cash flow quarter on quarter. What is very important, if we look at the next page, is the maintenance of our leverage levels. In this quarter, net debt had a growth, although we generated operating cash flow. This is explained partially by the exchange variation. We went from 4.7 to 5.2 for the dollar, an impact of 1.6% on net debt, Eneas Garcia Diniz, Luis Fernando Barbosa Martinez, Rogério Bautista da Nova Moreira, Harry Morgenstern Now, once again, this is a one-time effect. Now, we had an extraordinary semester of 8 billion in EBITDA replaced with a more normal quarter, the EBITDA dropping. And once again, this is a one-time calculation standing at 1.3 times higher. because of the recent events the imminent conclusion of the acquisition of Holcine and others we will go through a period with higher leverage we're still working with our projections because of the events that so far have not been concluded but potentially will have an adjustment in our leverage position for the end of the year, perhaps standing at 1.4 or 1.5 times in the case of Holcine. We have not consolidated the EBITDA for the operations and receivables from Holcim. This once again is a one-time effect and does not change our long-term outlook of having a leverage standing at one time. We continue on with terms of liquidity on page number seven, our cash that reflects our consistent policy of maintaining 15 billion reais in liquidity or perhaps somewhat less with sufficient activity in terms of our liability management. We issued $375 million with the SACI, the Italian agency, at very competitive prices. And recently, we obtained a funding for mining. And this is the path that we will follow. We're going to maintain our debt lengthened close to $4 million, but we're working with highly differentiated countries. We now will go through the details of each business in steel, a certain stability, Thank you very much. Thank you very much. Thank you very much. Eneas Garcia Diniz, Luis Fernando Barbosa Martinez We carried out readjustments to offset the other costs. The cost increased 5%, we were able to maintain EBITDA margins close to 25%, and EBITDA standing at 2 billion reais, very similar to what we had in the first quarter. When we speak about costs, we had stability in the production of slab, We had an inventory of finished products that was high. We decided to opt for prices. Therefore, we worked with planned maintenance. We maintained our production at values below those vis-a-vis last year. Despite this, we were able to avoid an even higher increase of prices. We had a growth of 4.5% below the true growth of prices, once again because of the pressure caused by coal and coke, a record pressure. We now see a gradual drop in this raw material, which will help us with costs in the second half of the year. The unit cost per margin had an increase of costs. And that is why the EBITDA per ton increased this quarter very close to the record levels of 2,000 reais and 4,000 dollars. Very interesting prices still. We go on to mining on page number 12. We had a second quarter of recovery when it comes to sales and production. Sales with a growth of 9.3%. Production had a growth of 29%. And when compared to comparable periods in 2021 below our potential growth, We had impacts at the operational level caused by the direct and indirect impact of rainfall that began very early this year. We still had a disruption at the port in April with iron ore because of humidity, low productivity, and in mining we had to hold up the dams. We had bottlenecks when it came to repairing the damage caused by the rainfall. So these were moments where we did not have maximum production. We have surpassed this stage. We have other projects coming into operation. and of course they're at a phase of commissioning, stopovers. Now the positive part is that we do have a second half of the year where we will be more aligned between the mine, shipment and port to be able to maximize our sales and production volumes. When it comes to price realization, we had the double impact of the drop in iron ore. Not only the price of the quarter suffered with indices that went from 140 to 120 and the open shipments because of a reversion, and the sea freight that was at 23 and went to $29, an impact on price and this was the main impact in our realization of EBITDA close to 900 million reais and a margin of 5%. Below we show you the comparison of results per quarter, the positive effect of this reversion of provisions in the first quarter, with a rising Platts Index. This helped us with 650 million reais in the first quarter, and we now had a negative impact of 360. To compare apples with apples, the volume helped us, but the mix, that additional percentage of opportunity, iron ore, the drop in iron ore, Well, these were indicators that led to this specific drop in the quarter. We go on to cement, a highlight for the quarter. We see not only a growth in volume, Because of better seasonality, the first quarter is always impacted with a lower number of working days. In the second quarter, an acceleration in the southeast, the northeast still impacted with rainfall, stronger figures, and the possibility of recovering prices because of the costs that had a significant increase earlier. The impact of thermal and electrical energy costs, oil, diesel, as well in freight. These compress the margins that we saw at the end of last year and in the first quarter. And we have now recovered excellent margin levels, standing at 34%. We're speeding up our engines for the integration with Holcine. We hope to have a decision from the antitrust agency this week. We're quite enthusiastic with the integration and the synergy that will arise from this. We'll now speak about energy for those who did not participate in our material fact last year. Now, the rationale of these last acquisitions. This was a very rapid movement. We had three different acquisitions to seek self-sufficiency. Solar plants, Queixo Quebrado, Quebra Queixo, and the privatization of C3E, all bringing about this self-sufficiency with excellent returns above 20%, low risks, We can use this energy in-house and bringing us competitiveness with a direct management and reduction of costs in mining, where we put the quebraccio plant in cement, the SPH, and in steel particularly, where most of the energy of C3E will be directed to mining. This will lead to a rapid reduction in cost. It will reduce our time to market as well, and this will be important for our investments. Having sustainable energy is an essential step in our decarbonizing policy. Now, 100% of the group will have renewable energy. Finally, when we look at each of the businesses, this is a capital allocation decision that brings us diversification and reduces our dependency on others. And finally, I would like to give the floor to Elena Gueja, our Sustainability Director, to update you on our strides in ESG. A good day to all of you. We're going to speak about ESG and I would like to highlight the publication of our 2021 integrated report. And we will include indicators, KPIs that are relevant and of importance to the company. And you will be able to follow up on these quarter on quarter. This enables us to be very transparent with our audience. We have reports that were published in the second quarter for mining, cement and steel. And as we had mentioned, we're presenting all of this according to the TCFD reporting format. We have had a continuous evolution in our ESG ratings And once we analyze the new cycle, we will have further enhancements. We have also launched the company's new ESG website where you can find more updated information. In this last quarter, we signed with Shell and Itoshu a memorandum of understanding to work jointly on decarbonization and operational efficiency initiatives for coal projects, fleet projects that are presently already being tested in the company. Now, when we speak about decarbonizing, We have had some highlights in the cement operation with the coprocessing operation kickoff at Cimentos Arcos with a quarterly reduction of 8% in CO2 emissions and Arcos will have electric trucks and these are the first trucks in Brazil and they're being tested at CSN Mining. We have also made great strides in terms of our dam management. The auxiliary Vigier Dam was definitely unregistered as a dam and we're following the schedule for the de-characterization of dams with a completion scheduled for the next quarter. In safety, we had the best performance in the historical record of the company And we feel that this is our best year when we compare this quarter with the same period last year. We had a reduction of 27% in the accident frequency rate and 26% in the number of total accidents. Once again, the very best figures we have ever had in terms of our safety background. And we continue to make strides in terms of making the company more social and diverse. We had an increase of 70% in the participation of women in the company. We have a higher representation when compared to the same period last year. Very well. With this, we can now go on to our question and answer session. We are now going to go on to the question and answer session for investors and analysts. Should you have a question, please press star 1. If your question at any point has been answered, you may withdraw from the queue by pressing star 2. Please pause. Pick up your handsets when posing the question so that we can provide optimum sound quality. Please hold while we pool for questions. Our first question comes from Isabella Vasconcelos from Bradesco BBI. Good morning and thank you for taking my question. I have two. The first Referring to your price dynamic, how you look upon this and if there are pressures to offer greater discounts. The second question refers to capital allocation. Recently, you have carried out three acquisitions in energy. I would better like to understand the mindset of the company at present. The amounts that you had mentioned of 3.29 billion, if those are now out, and what has changed in your scenario? Is it more challenging? And if you're going to make investments outside of Brazil, thank you very much. Good morning, Isabella. This is Marco speaking to you. An important point that I read in your report to Dave and the Goldman report as well is that in your report, you speak about a rebound in the second half of the year led by China. And in the report of Goldman, they say that we were better than China in August. What do we believe will happen in the international scenery and what will happen in Brazil as well? We have a positive overbooking in several sectors, air conditioning, automotive. What is interesting is that our steel, coal, cement and iron or inventories are low. This market dynamic and the possible rebound in China in the second half of the year will leverage the situation worldwide. I would like to remind you that if you think of premiums, we have a BK in China that reached a level that is impossible to continue with. We're referring to $596 per BK. Chan FOB, and three, four months ago, it reached $845 in the USA. The lever of BQ is 280, 920 in Europe, 780, and they have both reached $1,600. So when it comes to premiums in BQ, the premium still is very relevant because Representing 20 to 24%. Perhaps what is more uncomfortable is the premium of 34% in rolled products, laminates. What will be the dynamic in the third quarter? We should have a more stable price situation. We're going to fight more in the markets of interest where we have zinc products and domestic products. These are the imported products and we have 8 to 10 percent sales more in the third quarter than in the first quarter. Therefore, the scenario is positive. We're observing what is happening in economy. The reality, the signs are very interesting. There's more money inflowing into the market. And we think that part of this money will go for consumption. A part will go to construction. And this should increase our dynamic in the second half of the year in terms of price and demand. Another important point for We have a cost position that is more aggressive. We want to get 3,700 per ton in slab, which is positive. The real dollar position is not that important and imports continue at a somewhat lower pace. Last year, the imports were 2,700,000 tons. This year, this has been cut in half. A penetration of 10 or 11%, which is very healthy for the domestic market as well. On our side, and as part of our strategy, we're going to work at full steam. We're acquiring slab. To work at a fuller production, we have an acquisition of 200,000 to 250,000 tons of slab. In the domestic market, as Benjamin says, focus on quality. We have few sales based on contract. 85% are based on spot from the viewpoint of other businesses. Although the margin in Germany is very poor, we expect to have a recovery of volume once the freights are normalized. And Portugal and U.S., we're also active there as local players. This is a very general view of what we have. Backed up by a resumption of the world economy led by China. Well, thank you. Thank you very much. That is very clear. The second question is, I will begin answering it, but Benjamin is here with us. Without a doubt, he will also complement it. From the financial viewpoint, we do have to be more cautious. There's greater volatility in the price of commodities, the scenario of China, inflation, the potential of recession, all of this. Given our strategy of maintaining our leverage low makes us become more cautious when it comes to new investments. We do want to grow during the period, doubtlessly, but we still haven't announced projects because we're not fully convinced about each of them. We're carefully surveying each product and we will only put them in place when we're truly convinced that they will maintain our conservative capital structure as it was planned. Our next question comes from Daniel Sasson from Itaú BBA. Good afternoon to all. Thank you for taking my questions. My first question still refers to capital allocation. Marcelo remarked on the Leverage ending the year at 1.4 vis-a-vis EBITDA, already considering the disbursements with Hussein Lafarge. My question refers to how this impacts your short-term capital allocation plans if you You have slowed down the pace in the last two months in June and July. Are you awaiting to see if there's more visibility in the second half of the year to resume your program? Or will you be more aggressive in your capital allocation program? Perhaps you think your assets have been under-evaluated and there's still a good source of cash for you. My second question refers to steel volumes in Brazil. A question for Martinez. In the first half of the year, your total volumes had a drop of 14% vis-à-vis the first semester, and the guidance is an increase of 11%. What do you expect for the third quarter Martinez had a more positive viewpoint, but is there room for a review of that growth guidance in terms of steel if it will have a drop? These are my questions and thank you very much. Well, let's begin with capital allocation. It's a follow-up of the answer I gave Isabella. The buyback of shares is part of this context. We continue to think that the shares are unpegged from the fundamentals of the company, and we do prioritize a sound capital structure because of the uncertainties we're proceeding at a different pace. But we will maintain our dividend policy as always. We have high profitability. This will mean high dividends for CSN and mining. And the acquisitions will take place when we have a better visibility of capital allocation. And this, of course, includes M&A opportunities or greenfield acquisitions in the USA. One priority may replace another. This is how we have made decision in terms of the buyback. In mining, we're very careful with liquidity and we have to think carefully in terms of this. We're quite concentrated on having low leverage and maintaining our dividend policy, the same policy we have had in the last few years. I would like to compliment the answer both for Isabella and yourself regarding capital allocation. It mirrors what we're thinking in terms of the business. We had a second quarter That was a completely different, disorganized in terms of the chain of prices, the chain of logistics and with symptoms that are completely different in terms of raw material and the end product We were working at full prices for raw materials and we now observe a significant retraction in terms of prices in Asia. This still has not had a reflection in the USA and Europe, the drop of prices, aggressive drop of prices. We have a logistics lack of organization, delays in deliveries, Thank you very much. Organizing the infrastructure, the logistics. That is to say, to put the house in order, we did have an enormous impact in terms of prices in mining with the dropping prices. We had a double impact in the site price and the future prices that we had already sold out. So we We have had the impact of the increase in prices, the increase in raw material, fuel, transportation, and much more. We had a full production. We decided to slow down production to do it with an excellent cost. That is to say to produce what would be more favorable in terms of cost. And we're getting organized to sell more. You can observe that in steel as well as in cement we have had very good figures despite having an inventory and still having raw material with a full price. I believe that at present we will have a third quarter that will be The mining part is in order when it comes to prices. We have already absorbed the impact. We now have a situation of stability, albeit with a lower price. If the price increases, we should have better results. In terms of cement and steel, We have an adequate production. We're seeking a cost reduction. We haven't had a drop, at least not as we had expected in prices, and we're now going to work arduously to show who we are. So all the conditions have been set forth to have an excellent third quarter. We have inventories, we have the right products, we have a big share in the domestic market, we're working well in the foreign market. And differently from iron ore that depends on international prices, we have as a target the domestic market, of course, There may be an impact caused by the foreign markets but we do believe we will have a good third quarter because of all of these conditions. We have three four billion in inventory and of course they need to be sold out and we're going to work very hard in mining as well as in steel in cement we do not have significant inventories we have very little and we believe that the third quarter will be very good in sales We're including Lafarge Holcine, and we believe that this week there will be a decision we will take on the company at the end of the month. So, cement has given us a surprisingly good and positive contribution to the business at a very important moment, which is when we absorb Lafarge Holcine, and still we're being quite aggressive. It used to be a market of intelligence. Management, Decisions. Now it is something more manual and something of strength. We're going to see who is who here. We believe in our power in terms of distributing products. We're conversing with clients. We're really going to the market but not reducing our prices. We're going to propose something different, differentiated, With that outlook of a market improvement that we believe will happen through all of these measures that are being adopted in our economy, we do believe we will have a better market at the end of the year. There should be a significant improvement in terms of cash, helping us in the deleveraging and there is the possibility of structuring the energy and cement businesses to well for the participation of third parties in cement we had the idea of an IPO with an IPO of course We would have capital coming in and this would deleverage. We add what we're doing with inventory and in energy. Eventually, we could have a strategic investor or something similar as we're going to transfer energy into a significant business for the group. Regarding capital, these are our answers. And having capital, we make decisions on how to allocate capital. We're prioritizing the external part. We're certain that To make our company larger, better and more permanent, we need to have assets abroad. When we analyze the good Brazilian companies, there are those that have assets abroad and those that do not. Why? Thank you very much. Thank you very much. You're right. This is not something we did in the last quarter. We believe that the financial market is somewhat fearful. The prices are Returning to reality, the shares are attractive. We didn't do this only because of discipline in capital allocation, but instead because of the lack of organization in the second quarter. Beginning with the third quarter, we will have some buyback. We know the business very well, and it does not make sense to... Not do this because of these one-time effects. We do believe that the second quarter was a kind of retrocession. The market has not fully normalized. It will become more normal from the viewpoint of raw material, logistic and the financial part and that will be another option for capital allocation. I would like to underscore nevertheless that our priority is to keep leverage in mind. We can reaffirm this. We want to work with low leverage. It's easier, safer, more easy to forecast to work this way, and we fully respect low leverages. Everything that we do will have as a basic assumption and priority respect towards a low leverage approach. Of course, every once in a while, we do have some slips here and there. Neither Lafarge Holcine or C3E were part of our plants. Quite the contrary, I thought that we would lose C3E. Why? If it was good for us, it would have been much better for our competitors. But we did win the bid and we were extremely satisfied with that. And from the viewpoint of Lafarge Holcim, our priority was to look abroad. It appeared there was no Brazilian group that wanted to acquire it. So we thought it was the right time to Thank you for watching. I base myself on your question to explain my stance regarding all of these points and of course I base myself on capital allocation which is the result of our strategy the buyback capital allocation This is what we wanted to say about these two themes. Danielle, to complement the answer given by Benjamin regarding the guidance, we went through a moment in steel between 2010, 2013 of a large amount of tons. We went through a terrible period between 2015 and 2019 with the steel at 10.4 to 12. In 2020, we began the ramp up. In 2021, we got to 15.8. And in 2022, the market is given. It will not be lower than 15.4. This is something that we should celebrate, although we suffered these variations in the market and transformation. The market remains at 15.4 and the import penetration is lower at 4 million tons. If we look at the markets, what is happening? Benjamin just mentioned the cement and long steel. That's what we're focused on. Civil construction has an excellent carryover of work that is happening. Infrastructure gives the signs of being more avid for new work. The segment linked to agribusiness, highway, machinery, implements, they're doing very well with growth of 12 to 18% in the case of buses and in packaging, we're doing well. What is perhaps somewhat negative is the lack of components for the automotive sector and a slowdown in the household items. Now, there's a channel that is suffering because of these drops in economy and the erratic signals that we see day after day. Our guidance will remain the same. We're referring to 5 million tons for the domestic market, 3 million to 3,200. And local cider, Germany, 850. In Brazil, 250,000 tons. I think this guidance scenario is consolidated as we already have sales that are 10% greater in the third quarter vis-a-vis the second quarter. We're working on our strategy. In the second quarter, we preferred prices over volume. In the third quarter, we're going to recover the international market, a drop in imports, and we'll be more aggressive in the markets where we are in, especially in the galvanized market. Excellent. Thank you very much, Marcelo, Benjamin, and Martinez. That was very clear. Thank you, Danielle. Our next question comes from Carlos de Alba from Morgan Stanley.

Yeah, good morning, everyone. Thank you very much. Maybe this is repetitive, but just to make sure that I understood all the explanation, if we can summarize it. So for the third quarter, you guys expect higher revenues on the back of higher volumes, as you will, this stock, iron ore and steel. Prices for iron ore probably will be lower in the third quarter. What about prices for steel? You had a very good realized price in steel in the second quarter, but we have seen, at least for HRC, the benchmark has been coming down in recent weeks slash months. So what do you see in terms of prices for the third quarter in steel? And given that you'll be selling more volumes with the higher cost that you incurred in the past quarters, does this mean that EBITDA will probably increase on a quarter-over-quarter basis because of the higher volumes, but your EBITDA margin will probably drop? I just want to make sure that I understand in a succinct way the message. Thank you.

Carlos, good morning. I'm going to repeat what I said about prices in the second quarter. We preferred prices over volume in the third quarter. We have a somewhat higher inventory. We have to destock inventory. and part of this destocking has to be in the domestic market. We're counting upon a market improvement. The scenario is quite positive and in the third quarter we will have more stable prices. with a significant drop of imports in the third quarter. In the case of CSN, we cannot forget that we have 120,000 tons of imported material coming into the country. 75% is part of the material that we manufacture with a premium of 30%. You can act. You have to operate based on those volumes. In the third quarter, we have a higher sales volume already sold out in several sectors. We don't put all of our eggs in the same basket, an increase of 8% to 10%. And in the fourth quarter, we're counting on a recovery of prices at international level. All the Chinese steel plants without exception are working with a negative EBITDA. Europe and the United States are also having a profitability that is not very desirable in this sector. I think there will be a recovery and in the fourth quarter, Perhaps we can see a recovery beyond volumes, a recovery for prices, but we will recover our volumes and maintain the prices very stable.