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Companhia Siderurgica Nacional (NYSE:SID)

Q2 2012 Earnings Call

August 15, 2012 11:00 am ET

Executives

Luis Fernando Barbosa Martinez – Commercial Officer

David Moise Salama – Investor Relations Officer

Daniel dos Santos – Mining Director

Analysts

Ivano Westin – Credit Suisse (Brasil) SA CTVM

Thiago Lofiego – Merrill Lynch SA CVTM

Marcos Assumpção – Itaú Corretora de Valores SA

Operator

Good morning ladies and gentlemen. At this time we would like to welcome everyone to CSN’s Second Quarter 2012 Earnings Conference Call. Today, we have with us the Company's Executive Officer. 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. After the company's remarks are over there will be a question-and-answer session, at that time further instructions will be given. (Operator Instructions)

We have a simultaneous webcast that maybe accessed through CSN's Investor Relations website at www.csn.com.br/ir. The slide presentation maybe downloaded from this website. Please feel free to flip through the slides during the conference call. There will be a replay service for this call on the website.

We would like to inform you that due to the number of participants the Company will answer only up to two questions per participant, with no right to reply and therefore we kindly ask that all the questions are made at once as soon as the lines are opened by the operator.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of CSN’s management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of CSN and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I’ll turn the conference over to Mr. David Salama, CSN’s Executive Investor Relations Officer, who will present the Company’s operating and financial highlights for the period. You may begin the conference sir.

David Moise Salama

Good morning, everyone, and thank you for joining CSN’s second quarter results conference. Here, with me today are the CSN officers, so let’s begin with Slide 3 where we can see the consolidated results for the second quarter of 2012. Net revenue totaled R$4.1 billion in the second quarter, 6% up in the first quarter is due to higher sales abroad. In the first semester, net revenue reached R$8 billion. Gross profit reached R$1.2 billion in line with the first quarter of this year. EBITDA reached R$1.1 billion in line with the first quarter 2012, totaling R$2.2 billion in the first half. EBITDA margin was 27%.

The second quarter CapEx reached approximately R$800 million, first half investments totaled R$1.7 billion. CSN posted second quarter net loss of R$1 billion, basically due to an accounting reclassification with no cash effect, low adjustment investment is now recurring, based on the accounting rules as well on the Company's investment policy, management proceeds evidence of significant reduction in the Company’s investment in net sales by the end of June of 2012, and despite on the reclassification of accrued losses recorded under shareholders’ equity to the income statement.

It's worth mentioning that this reclassification has no cash impact, and that will affect the dividend payment due to existing profit results. Explaining the effect of these reclassification, net income would have totaled R$550 million in the second quarter and R$640 million in the first semester of this year.

Now, let's move to the Slide 4 where represent EBITDA evolution. The EBITDA totaled R$1.1 billion in the second quarter in line with the first quarter of 2012. It’s worth mentioning certain sectors that partially offset one another.

On the one hand, EBITDA was positively impacted by higher average mining prices and upturn in prices in Reais due to the appreciation of the dollar; and second, the increase to sales abroad. However, it is a fact we're partially offset by lower iron ore sales volume and higher SG&A expect.

Now let's go to the Slide No. 5. On this slide we can see net revenue and EBITDA for CSN operational segment. Mining accounted for 27% of net revenue and 6% of the EBITDA in the second quarter 2012, while Steel was responsible for 62% of net revenue and 39% of the EBITDA.

Let’s move now to the Slide No. 6, which shows the results from the few segments. We will begin with the graph on the top left, to sales totaled 1.4 million tons in the second quarter, 7% more than the first quarter, mainly due to the increases in steel sales abroad, thanks to the German subsidiary SWT, whose results were fully consolidated in the second quarter. 74% of the sales came from domestic market, 23% from our subsidiaries abroad, and 3% from exports.

As you can see in the graph at the top right, net revenue from two operations totaled R$2.7 billion, 11% more than in the first quarter in 2012. At the bottom, we have our EBITDA figures. Few segment EBITDA totaled at R$470 million in line with the first quarter 2012, and the EBITDA margin was of 18%.

As now in the next slide we are going to make the same analysis for Mining segment. We have used to once again, start with the top left graph. In the second quarter, CSN and NAMISA iron ore sales reached 6.4 million tons, 9% less than in the first quarter, considering some operational issues that we have in the second quarter and affected our operation. And we are going to give more detail during this call.

It’s worth mentioning that in addition to the sales supply CSN sales consumed 1.5 million tons of iron ore in the second quarter, a figure that is not shown in this graph.

Moving on to the top right graph, you can see that net revenue source of R$1.1 billion in the second quarter, impacted by lower sales volume, partially offset by the appreciation of the dollar and higher average prices, which reached $109 per ton in the second quarter, versus a $107 in the first quarter of this year.

Now let’s look at EBITDA for mining operation at the bottom-line. In the second quarter, mining EBITDA totaled R$600 million and EBITDA margin of 65%, 4% higher than in the first quarter of 2012.

Now let’s go to the Slide No. 8, where we show our net debt evolution. Net debt moved up by 9% in the second quarter totaling R$15.6 billion with gross debt of R$29.3 billion and the substantial cash position of R$13.7 billion. The main factors that impacted were the payment of R$1.2 billion in dividend, investments of R$700 million in fixed assets, R$600 million from disbursements related to debt targets, and other effects that together had R$100 million impact on the net debt, these effects were partially offset by the second quarter EBITDA of R$1.1 billion and the reduction of approximately R$200 million in the working capital allocated to the business.

I want to highlight that CSN has made an important progress in reducing its working capital. In the last 12 months alone it decreased by around R$900 million our working capital position, and the cash conversion cycle has shortened from 104 days to 67 days. The net debt to EBITDA ratio close in the second quarter has 2.9 times EBITDA of the last 12 months.

On June 63% of the gross debt was denominated in Reais and 37 in foreign currencies, especially U.S. dollars. Of total debt, 8% short term and 92% long term.

That brings us to the end of our presentation. We will now move to the Q&A session, thank you.

Question-and-Answer Session

Operator

Thank you, the floor is now open for questions. We would like to inform that due to the number of participants, the Company will answer only up to two questions per participant, and therefore, we kindly ask that all the questions are made at once as soon as the line is opened by the operator. (Operator Instructions) The first question comes from Ivano Westin of Credit Suisse.

Ivano Westin – Credit Suisse (Brasil) SA CTVM

Hello, good day. Thank you very much for the call and for the question. Just like to touch, basically again on the discussions ahead on the Portuguese Code. Just like to get a bit of color on the breakdown of the mining CapEx for the period in 2012, second semester this year, and 2013 through 2015, this is the first question.

And the second question refers to NAMISA pellet plant, which you mentioned that it was approved. I just wonder whether you expect to have a second pellet plant on your expansion project? Thank you very much.

David Moise Salama

Hi, Daniel Santos, our Mining Director is going to answer your question.

Daniel dos Santos

Evano, we can send the breakdown of the CapEx through the investor relations. I think it's better because we have a lot of details here and I think it will be more better if you receive it from investor relations. Relating to the second pelletizing plant that you asked, we are scheduling the start-up of this pelletizing plant for the first quarter of 2016, because we have do it to the license procedures, a gap of some months between the start-up of one plant and implementation license for the second one, but it’s something that is agreed with state government through the license agent and we have this schedule to start-up in the first quarter of 2016.

Operator

The next question comes from Marcos Assumpcao of Itau BBA.

Marcos Assumpção – Itaú Corretora de Valores SA

Hi, good afternoon, everyone. First question is regarding domestic prices of Steel in Brazil, if Martinez would help a little bit here. First is, do you think that increasing prices in September will be possible considering that probably imports will be lower from September onwards, given that imports that are going to be order, now we’re going to be arriving in Brazil only after 2013, so they will not benefit anymore from the ports tax legislation.

And my second question would be, if you’re seeing an increasing risk from competition in the plastic market coming from Gerdau in 2013. And also, if you could just comment on what are the volumes that you are considering for long steel in the domestic market from the new client in 2013 as well as you’re going to be starting up in your line? Thank you.

Luis Fernando Barbosa Martinez

Hello Marcos, good morning. This is Luiz Martinez speaking. As I mentioned during the morning call I would like to emphasize that first of all we are completely focused in the local markets, we are just selling something like 95% to 98% to the local market and we are going to continue to pursue this type of objective hearing inside the CSN.

Regarding to recover, we can recover margins in the market, we need to take into account that we're working very, very strong and trying to reduce our costs and we have been doing successfully according to my understanding not only for the raw materials, but also for the plan that we had already implemented involved in other plans, so we are going to benefit in margin in terms of cost analysis.

I’m little bit concerned about imports not only for the best situation but the queuing situation. We are perceiving that in China, for example they are starting trying to export hot-rolled coils in a price range of US$530 per metric ton, and probably they are going to do the same with coated materials. In the case of coated materials, CSN has been suffering a lot during the last four years, especially in 2010 and 2011.

So far as I mentioned in the first semester of the year comparing with the same period last year imports increased 5%, and we start to experience a slowdown in imports just for two or three months. We would like to confirm that’s going to happen, no matter what’s going to happen with the ports. We are also considering that we are going to have some benefits of regarding to the season, regarding the taxes mainly in Santa Catarina and northeast of the country.

So in terms of pricing, according to – we are perceived in the market our competitors just start to increase pricing of the distribution markets. And as I mentioned during this money distribution is not a markets just a channel.

We need to understand what’s going on with all the productive channels like also industry white line, home appliance and so on and so forth. We are expecting to have a better mark for the second half, we wouldn’t like to lose any opportunity to recover our margin and we are going to keep marking the markets exactly what we are doing so far. So basically, this is the situation of our given price and future demand in terms of the industry.

Regarding to long products, as David mentioned during this morning, we are forecasting to have the start-up of the plants, the second half next year, obviously we have a ramp up, but we are considering that – in six or eight months, we’re going to run in something like 500,000 metric tons a year, 100% local market, we are not forecasting to import just supplying to the local market, and take advantage of some growth in the building products and the infrastructures in Brazil.

Operator

The next question comes from [Hinato Antoni].

Unidentified Analyst

Good afternoon, everyone. Thank you for taking the follow-up from the Portuguese call. First question is related to the recently implemented mining tax in Minas Gerais, if I’m not mistaken you too had $0.17 cents per ton, we have been seeing some companies already provisioning the spending, and I just wanted to hear how is CSN positioning on the mine, and what are your views on the thing, you understand that this is being contested in judicial court. That’s the first question, and the second question is related to the iron ore business unit from a strategic point of view. I just wanted to hear views about the consolidation thing among miners in the Minas Gerais region. Is this something that CSN could be looking at or would be interested to look at – you mentioned that M&A would be opportunistic, of course, but I mean from a more broad point of view, is this something that you're looking at? Thank you.

David Moise Salama

Daniel is going to answer your question.

Daniel dos Santos

Related to this last question, where you mentioned possibles, M&As in Minas Gerais state, our focus is to finish the pipeline of projects represented so far in Casa de Pedra and Namisa. We have a strong portfolio of projects that needs to be finished and that the prior results of the company at the movement. Of course if there is and you put anything to region we used it carefully and see if it makes sense to and it is in accordance with the strategy of the company.

Reclamation the movement that some companies are doing in the area called Suzhou. We are – in different location when you compare with the assets of other players in Suzhou area, we are in the southern portion of (inaudible) and I recall the, outside (inaudible). And in this area we are already the dominant company, and we have the most of the good assets in the region.

If you compare the quality of the assets of CSN in the region with the other players in the area, you'll see that most of them depleted the amortized resource, and we still have a significant amount of amortized in Casa de Pedra mine, that is preserved and it is our – it would create more competitiveness for us.

Our portfolio is based on these advantage that is the amount of amortize that we have there, then we will be one of the few producers of Sinter Feed when most of the players in the region, we’ll be producing only Pellet Feed. So our capability is to buy low grade oil from the others to mix with this high grade material and transform and send the products for the market. We’ve this capability now, and we’ll take advantage of this in the future.

David Moise Salama

Okay and also answering your first question related with this local tax, we’ve really started to see an increase in taxes in Brazil. Not only in taxes but in fact orders discussion related to royalties and all the mining industry, not only in Brazil is suffering a lot. And we’ve here specifically this new charge of Reis 2.6 per pound started by the end of May.

We are discussing this point using the national confederation of the industry here in Brazil and we are making all these deposits of this new tax. But in our accounting we are making all the provisions and so on. And we wanted to work going to be the final decision on that, considering that we pay a lot of taxes in over and all the other charges in the mining industry.

Operator

(Operator Instructions) The next question comes from Thiago Lofiego of Merrill Lynch Brazil.

Thiago Lofiego – Merrill Lynch SA CVTM

Hi, I’ve two questions. First one to Martinez, Martinez up into what kind of premiums to import are you comfortable on having domestic prices? And also if you could tell us that where the June premium or discounts to import the local prices are, that’s the first question? The second question is, just to clarify from the Portuguese Coal on your volume expectations for iron ore for the remaining of the year and also 2013. You mentioned that, you expect the quarterly run rate to return to close to 8 million tons or of course your previous guidance, which would mean 28 million tons to 29 million tons for the year. Is that reasonable and also, if you could tell us what’s your guidance for 2013 is? Thank you.

Luis Fernando Barbosa Martinez

Hello, Thiago, this is Luiz Martinez again. Just to give you some other colors regarding imports in the market. Let’s talk about Galvalume for example. This is alumina and zinc steel. If you take into account just this example, year-to-date we have something like 128,000 metric tons of total imports of Galvalume in Brazil this year.

It means something like 18,000 metric tons a month, 18,000 a month is our queuing production in CSN Paraná just to give you. So we are receiving every month from Galvalume, one month of production of one of our coating line is in Paraná. So this is just to illustrate to give some other colors regarding tool import. And I’m a little bit concerned about the situation, because the queuing prices in the international market are giving some signs not in U.S., not in Europe, but what makes me more concerned regarding to the China for example.

If they are facing some very bearish situation in China, they could reverse, they could divert production to Brazil, I am a little bit concerned about the situation. If you consider the important material landed in Brazil with import tax and another taxes, in the case of coated products we have a premium, something like 2% to 3% in galvanized products.

In terms of cold-rolled products, something like 3% and in the case of hot rollers we are almost in the break-even, so this is the queuing situation, we are going to analyze all the value chain to be sure that we are going to have the right decision in terms of price increase.

David Moise Salama

Now Daniel is going to answer your second question related to how iron ore sales for this and for next year.

Daniel dos Santos

After this first quarter into the year, where we were affected by a typical rain from January mainly, where you experience the catastrophe scenario in the areas around mine operations, and the southern portion of iron ore quadrangle, we implemented all the repairs needed to recover the infrastructure around, because it involves a lot of earth movement into the corner, slopes, rolls access in the area.

And since July, we are in line with our budget, then the second half of this year, we’ll be at full capacity in terms of production, and we expect to achieve a number similar to last year as you mentioned, something between 28 to 29 million tons. We believe we can achieve this 29 million tons a little bit higher when compared to last year.

And at the same time we are finalizing the work in duplication of the production in Casa de Pedra, to the end of this year we will have some line in operation and you have the capacity to produce 40 million tons installed in Casa de Pedra next year. So all the resources are there, and we will have this capacity area and we start to ramp up the production to achieve the maximum capacity of 40 million tons next year.

Operator

The Q&A session has now concluded. I'll turn conference back over to Mr. David Salama, CSN’s Executive Investor Relations Officer for the closing remarks.

David Moise Salama

Thank you all for participating in our conference call. The IR team is available to answer any question you may have. Good afternoon.

Operator

Thank you. This concludes today's CSN conference call. You may disconnect your lines at this time.

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