Companhia Siderurgica Nacional S.A.

everyone to the CSN conference call to release results for the fourth quarter 2022. 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 there will be a question and answer section when further instructions will be given should any participant need assistance during this call please press star zero to reach the operator We have simultaneous webcasts that may be accessed through CSN's Investor Relations website at ri.csn.com.br, where the presentation is also available. The replay of this event will be available as soon as the call ends for one week. Once again, you can flip through the slides at your own convenience. Please bear in mind that some of these statements made herein are mere expectations or trends and are 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 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 rates and exchange rate levels, future rescheduling or prepayment of debt pegged 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 national basis. I would now like to turn the floor over to Mr. Marcelo Cunha Ribeiro, the CFO and the IR Executive Officer, who will present the financial and operational highlights for CSN. Mr. Ribeiro, you may proceed. A good morning to all of you, and thank you for attending our results call for the fourth quarter 2022 for CSN. Before beginning the presentation, I would like to thank all of you for your attendance and The CEO and Chairman of CSN is with us as well as other executive officers that will participate in the question and answer session. Let's begin with the highlights for the period, the acceleration in our financial results for the fourth quarter. We had important frameworks and some impacts, especially because of the rainfall in mining, but we were able to come up with a good response and we had a speed up in volumes, prices and costs in mining. And in terms of steel, we had the traditional good performance and which enabled us to increase our EBITDA by 15% at the end of the year, a growth that should increase its pace throughout 2023. Secondly, we highlight the conclusion of the acquisition process of CEEE, with the acquisition of 66% of the capital of the company and also a transaction at the end of the year when we acquired an additional 32% from Eletrobras. We're now owners of 99% of the capital of CEEE. an important player in the electrical sector. It enables us to be self-sufficient and we can also sell energy at present. The third important impact, a jump in our ESG indicators, work that has been done by putting in place policies and goals, but also enhancing the disclosure of our historical practices, we have attained two important indicators. The first, we have been called an industry mover, the company that most improved ESG throughout the year. And secondly, Sustainalytics has included us as the fourth best company in the segment throughout the world, thanks to the endeavors and efforts that CSN carries out on that front. We go on to page number four and show you our evolution of our EBITDA quarter on quarter. Of course, we had volatility throughout the year. We were impacted by the strong prices of iron ore and steel in the first half of the year. We then saw a normalization in the price of these commodities impacting our profitability. At the end of the year, at operational level, we were able to obtain better margins, 27%, and ended the year with 13.8 million reais in EBITDA, the second best year of CSN. although it represents a drop of 30% vis-a-vis 2021. With this, we had a growth of 15% in the quarter in this sequential comparison. At the right in the graph, you can see that the great difference lies in the mining sector, where we practically increased the results twofold in terms of prices and volumes as mentioned, still also operational but with a gradual reduction of prices causing that drop in the EBITDA. We go on to page number five where we will speak about our cash beginning with our investments. We accelerated our CAPEX in the fourth quarter going from 839 million to 1 billion 036. especially investing strongly in segments besides steel and mining. We had some factors that were not part of our initial forecast, the consolidation of Holstein and the rights of use. bringing us a new level of capex in the segment of 1 billion reais, raising our capex of 3.4 million reais for the year, still below what we expect to do in 2023. And of course, we will have a speed up in the mining sector with the evolution of the P15 sector in working capital. quarter, we had a very strong demand in our inventories. We had been reducing inventories of raw material because of the normalization of prices abroad, as you will see in the steel results. We had production. We ended our inventory, which was of course part of our strategy. We increased production and accounts receivables because of the possible evolution of the mining cost. And all of this was fully offset with the receivables from suppliers. But this led to an increase in our working capital with an impact on our cash flow. In the next page, you can see the volatility that we face in free cash flow, the operational cash flow that you can see to the left of the page. Ending the year with good operational results, but with a high level of inventories. That is why we have a negative cash flow. We enhanced cash generation and ended the quarter Well, we had an EBITDA of $3.4 billion used in these variations of working capital, a higher KBITS, higher interest rates as well, and taxes that seasonally were somewhat higher for 2023. we will stabilize this cash flow. We have a positive result in EBITDA, and this will offset the higher investments. So a positive cash flow will enable us to reduce our indebtedness that we see in the following page. In page number seven, we observe that this cash flow for the fourth quarter was insufficient to allow us to reduce our indebtedness. Subsequently, it went from 24 million to 30 million for very obvious reasons. The acquisition in the electrical sector an increase of 3.3 million reais besides an important payment that we carried out. All of this adding up to the totality of our net debt that grew 25% to 30 million reais. With this, we ended the quarter with 2.2 times leverage pro forma for the prepayment of mining that we announced in the first days of January. And in truth, this leverage would have been two times, which is the range in which we would like to operate for 2023. We will see a sequential improvement of EBITDA and cash flow. And of course, we will tend to fall within that range with minor variations through the coming quarters. On the following slide, our liquidity and our debt amortization, which is quite lengthened. Liquidity remains comfortable at 12 billion reais. And because of the prepayment of the $500 million, this would be very close to our target liquidity, a good coverage in the short term. We highlight our activity in the capital market, especially the local capital markets. We took advantage of a very sound window. We debentured for more than 4 billion reais, helping us to lengthen out our indebtedness and making it more efficient. before we were working in a more volatile and more expensive capital market than in this quarter now we had debentures in each of the businesses we had a good year in 2022 Our volumes were very close to 2021, especially in the domestic market. We had a minor drop of 3%, smaller than the drop of the market that was close to 10%, showing our endeavors to... conquer the market, we grew in important sectors in construction and others more than leveraging what had happened in other sectors, the automotive line, the white line, and We had a quarter with prices that internationally were weakened. Therefore, we were very careful, privileging volumes and not prices. We had a slightly higher drop, but better than 2021. Regarding prices, they have a drop of approximately 8% in line with the international prices. The positive issue, as announced, is that the international market has given way for new price increases. And as we will see in questions and answers, we have the opportunity of holding new rounds. We still see very high prices. and this should allow us new incursions. We had an EBITDA with a marginal drop a drop of 13% despite a good operational performance and dropping prices. On page number 11, as you can see, we had a production of 7% below 2021. We took the most of some opportunities buying slabs in the international market. taking advantage of the drop in average prices. We also had a drop of 5% in slabs and we had a drop in the cost of the final product. This has enabled us to maintain average prices, the floor of our profitability that would be higher than our historical average, 819 reais, which is above $150, which is the average cost. what we saw in 2022, we intend to improve upon with that attempt of increasing prices and of course a better quality in mining on page 13, a very strong quarter from the viewpoint of results and operation. We were able to have an increase of sales of a quarter, which typically is a slower quarter because of seasonality. We produce somewhat less because of seasonality, but we were able to sell more. and impact working capital because of the improvement in prices. We began the quarter with low prices with a price improvement in December. We made the most of this price improvement, sold out our inventory during the period, and we had a slight increase. In volume vis-a-vis 2021, our forecast for 2023 is even better. We will buy from third parties and improvement in the market at higher prices. And we're quite enthusiastic about the margins. In 2023, all of this should speed up to what we saw in the fourth quarter above 50% and higher EBITDAs that we saw of 1.8 million reais for the fourth quarter. On page 14, this is an x-ray, a comparison among quarters. We had an improvement in all of the areas in volume, in the mix. of our own mix, vis-a-vis that of third parties and improvement in prices, great. And with this, we got to attain this growth also bolstered by the provision of what had been sold in previous quarters, leading us to 1.8 billion reais of EBITDA Now, to speak about cement on page 16, for the first time, we consolidated La Salle Holcine of Brazil, now called CSN Cements of Brazil. We got to 3 million tons this quarter and ended the year with 7.2 million tons. Of course, if we look at 2023, these are figures that will change quite drastically as happens every year, but we also expect a significant growth in certain environment. At the end of the year, we implemented some actions within our CSN plant in Brazil to reconnect capacity. And this led to a slight reduction in margin, the reconnection of some operations. And because of the cost of fuel that is higher, it led to a profitability that is a one time effect that was somewhat lower. We have prices of coke and oil dropping in 2023. We won't have these reconnection costs. And of course, we have an abundance of synergies to make the most of. A control of the LaFleur's Holcim plant that has proven to be better than we had imagined. We have, for example, the cost of our own energy, something we had forced in for July, we have anticipated to April. We're quite enthusiastic with the cement business in 2023. This ends our presentation of segments. We would now like to speak about ESG. Good morning, everybody. We are here again to present to you the results for the second, for that fourth quarter of ESG. And of course, this is something under constant evolution with the aim of offering you greater transparency in terms of what is done in the company. I'm just going to give you a bird's eye view in terms of governance, great strides. We concluded the impact and dependency matrix on ecosystem services. We're following the guidelines of TNFD, mapping of risks and opportunities, setting forth some parameters, especially that relate to nature. And in April, in our report, we're going to approach all of these topics. We ended the year with CSN mining, with all of its dams renewed. The BG Adam has completed, of course, the works and recharacterization. And we continue to evolve in terms of our operational performance quarter on quarter. We ended the year of 2022 with a reduction of 25% in our accident frequency rate. And Compared to 2021, this is the best result in our historical series. A significant reduction, 19%, in the number of accidents as well, with employees in our third parties. Our cement plant began with the 14,001 certification. We're working on sewage projects for the reduction in the consumption of water and the emission of CO2. Of course, this has been done for each segment in steel minus 5% versus the baseline in 2018 and improvement of CO2 emissions in cement minus 7% versus the baseline in 2020. A slight increase in the emissions of mining. So you can see that all of these trends have been carefully forecast segment per segment and we have mapped out our initiatives through time. It's also important mentioned that we have identified all of the risks in the company and all of this will be part of the next integrated report of the company. When it comes to diversity in the social area, we have a growth of women in leadership growing year on year. We have had a 50% growth Of course, we would like to reach 2025 with 28% of women in leadership position in the social area. We concluded two projects in the last quarter, a partnership with the Getulio Vargas Foundation, and the conclusion of our theory of change, which will enable us a new instrument in terms of social investment. As has been mentioned, there has been a constant evolution in the company in terms of our main ratings, especially in sustainability, where we had the fourth best score in the segment among 155 companies. We are the only Brazilian company with steel and mining that was indicated into these categories. We are the steel company with the greatest evolution in terms of its ESG practices. Thank you very much. Ladies and gentlemen, 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 pick up your phones when posing your question to allow for optimal sound quality. Please hold while we pool for questions. Our first question is from Rafael Barcelos from Santander Bank. You may proceed. Good morning to everybody. Thank you for taking my question. My question refers to steel. We imagine what the purchase of slabs has been quarter on quarter and what you are doing in the first quarter, considering that we're already in March. If you could speak about your priorities at present in terms of your capital spending, what would be ideal for the company at present? Good morning, Rafael. This is Martinez speaking to you. In terms of cost, as mentioned by Marcelo, we had a significant reduction in the cost of slabs in the fourth quarter. Our efforts are strong to continue on with this cost reduction. The first half of the year, we're going to ensure that this cost reduction continues. It's fundamental to preserve our EBITDA margins. In the fourth quarter, we got to 3,900, but we're going to work to reduce this cost even further for SLAPs. We carried out a strategic acquisition of slabs, approximately 400,000. We have already used up 300,000 tons of slabs. We have 100,000 tons that we can still utilize. And we're also analyzing other possible acquisitions of slabs to balance out the price of slabs at the plants. We have additional efforts to reduce the cost of conversion and manufacture as well in the transition between hot and cold slabs. and for upstream products as well for efforts ahead to continue to reduce our costs. Now, regarding our capital spending, minimum cash was the question. We continue with that vision that because of the volatility in Brazil, it's important to increase cash. The ideal range would be 15 billion. This is important insurance, of course, in present days. And we're making all possible efforts to reduce this, making our fundraising and investments ever more efficient. And we're enhancing our facilities to receive that special check that it is called to work with lower cash levels. For the time being, here's our instruments only available for companies of our investment grade. We have got an investment grade and throughout 2023, we're going to take that minimum volume of 15 billion. I hope that has answered your question. Is anything missing? Do you think it's possible to have additional cost reductions here in the first half of the year simply to complete this? In the first quarter, the cost will become more stable. In the second quarter, we do foresee the possibility of having a greater cost reduction. I will speak about our price pillar in the first quarter. We do have the ability to improve this, But in terms of cost, we will reach stability in the first quarter with a possibility of a further reduction because of the lower cost of acquisition of raw material, which we have already acquired. This has allowed us to reduce our costs for raw materials that are in inventory. We'll have more sales in the second quarter. And with the use of slabs, this will offset some variations that we might have in the first quarter. Our acquisitions were quite interesting in terms of cost reduction. Thank you. That was very clarifying. Thank you. Our next question comes from Danielle Dassault from Itaú BBA. Good afternoon to all of you. Thank you for taking my questions. My first question is to Martinez. Now in Europe, everything is slower. Last year, they ended at 7.5 million of capacity in terms of steel. It's coming back slowly. The prices are recovering as a counterpart. The situation will be very positive in terms of the demand of rebar. We will need 4 million tons to build this coming from Turkey. And when we come to Brazil, And we look at the pillars that you are conversing about. Coal continues at 375. Iron ore, 129, 130. Exchange, 129, 130. With these price levels in Brazil, a BQ at 4,700 and a Chinese BQ at 680, the premium Danielle will be slightly negative. The scenario, if we take into account a slightly stronger demand, which I do believe will materialize, In March and January and February, the sector was quite well behaved. We saw an improvement in March. We could increase between 7.5% to 10% beginning in April, which is possible because of the market dynamic. In the long-steal scenario, the premiums are negative. Nowadays, if you look at a Turkish rebar that was the cheapest and no longer exists, the premiums are minus 14%. So summarizing, if the demand begins to increase somewhat with growth as of March, stabilizing and if the market becomes stronger in the automotive sector in civil construction in the white line where we observe an improvement i think that as of april we could have that increase of 7.5 to 10 percent In long steel, the situation is somewhat more difficult because supply and demand is somewhat more complicated. In flat steel, the equation is different. There's the maintenance of some plants, especially our own Uzi Minas. This is not a secret. We're remodeling the blast furnaces. We also had some problems in special steel that are being retraced and everything will have been done as of March. Perhaps the prices will drop a bit more than the market as well as the volume beginning in the fourth quarter. So, I see that the scenario is very positive. And if we look at the world situation, Brazil cannot lag behind. Everything is increasing. And I believe Brazil will accompany the world trends. And Brazil has to give itself a chance. The government has to help us help Brazil so that it can go back to growing. Now, they're saying that the growth will be 1.5 to 2%. Last year, Brazil had a drop of 10% in flat steel. If we're able to grow 1.5 to 2%, we can recover prices and return to historical margins of over 20%. Very approximately, this is the scenario. And the cost of slab produced and purchased in Brazil the people were exploiting the world market yesterday I was looking at some reports and there was a Slabs sold to the U.S. and Mexico in an isolated way at $750, $780. Now, the Brazilian slab producers in a more orderly market were selling at prices below $650, our normalized slab cost. with the cost initiative will be below $700 for sure. And we have to calculate to see if it's worthwhile buying. We're going to look at this surgically to see if it's the right moment to buy. We're privileging our operational moments and trying to make the best of what we have in the company. We will only make use of opportunities if they're positive for us. I hope to have responded your question. Yes, yes, absolutely. That was very good. Thank you, Martinez. Our next question comes from the English room from Mr. Carlos de Alba, Morgan Stanley.

Thank you very much. Just wanted to discuss a couple of things on the cash regeneration, the CAPEX and working capital for 2023. I just want to see, Marcelo, if the CAPEX guidance still remains intact for mining and steel and for the overall company this year. And working capital, you alluded to the fact that you want to reduce it, obviously, the fourth quarter. wasn't exactly what the market was expecting, but if you can potentially tell us if this is something that the company believes can be achieved already in the first quarter, or if it's going to take a little bit longer to bring the working capital and to what levels to something that is more comfortable. And then, if I may ask, on the cement profitability, EBITDA per ton came down in the quarter. I don't know if this is a result of the consolidation of the Lafarge business or if it is just the market being a little bit more difficult, more challenging right now. But if you can talk about how do you see the profitability of that business in Q1 and maybe in 2023, that would be really useful. Thank you very much.

Well, thank you, Carlos, for the question. We're addressing your question on the CAPEX. In the guidance, it is 4.4 million with the main use in mining because of the acceleration of the P15 project. So the answer is yes. this guidance will not undergo revision, not in mining or in other businesses. It was simply impacted in the fourth quarter because of some issues referring to the segment, our RTGs, our cranes, the right of use. and the acquisition of products in our cement business. But these were a one-time effect that ended at the end of the fourth quarter. What we will see in 2023 is an increase in mining, increasing this figure during the year to 4.4, as stated in the guidance. Regarding our working capital, we ended up with our stocks above 11 billion. We hope for a normalization of the inventories. removing 600 million from that line item and also in the line item of raw material costs we still have coal and coke that are quite expensive we have inventories of this so we're hoping to reduce these lines by two million reais throughout the coming quarters of course This won't have a direct impact on cash generation. We have a proportional impact on suppliers, but the cash flow line item, the variation of working capital should be well-behaved throughout 2023. We're not expecting the volatility we had in 2022 regarding the EBITDA per ton of cement and the consolidation of the cement Brazil plants. This will tend to reduce the EBITDA percentage per ton. Yes, because we're speaking of a capacity integrated plants, what perhaps caused the instability in the fourth quarter was not that consolidation. It was what was mentioned in the presentation, the cost of oil that was higher, the higher cost of fuel, somewhat lower volumes. because of the heavy rainfall with lower volumes and because of reconnection of some of our capacity in the plant in Sorocaba and Bajoso. These are one-time costs that increased our fixed costs, reducing the percentage. Now going forward with the integrated company, we think we will be able to navigate above 30%. Go back to the results we had in the past.