Cia Estadual De Geracao De Energia Eletrica - Ceee-G (CSNA3) Earnings Call Transcript & Summary

Good afternoon, and thank you for holding. Welcome to the CSN conference call to discuss the company's recent moves in the energy sector. We would like to inform you that this event is being recorded. [Operator Instructions] Today's event is also being broadcast simultaneously over the Internet and can be accessed at CSN's IR website at ri.csn.com.br, where the presentation is also available. The replay of this event will be available shortly after the closing for a period of 1 week. Once again, you can choose slides at your own convenience. Let me mention that some of the forward-looking 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 the forward-looking statements as a result of several factors: overall and economic conditions in Brazil and other countries; interest rates and exchange rate levels; future rescheduling or prepayment of debt denominated in foreign currencies; protectionist measures in the U.S., Brazil and other countries; changes in laws and regulations; and general competitive factors at a global, regional or national basis. I will now turn the conference over to Mr. Marcelo Cunha Ribeiro, the CFO and Investor Relations Executive Officer, for the presentation. You may proceed, Mr. Ribeiro.

Good afternoon, and thank you all for attending this special conference regarding our special strategy. Today, we have Rogério, our Head of Energy and our M&A teams. We're going to speak about a topic which perhaps is not a novelty for the market. We had already mentioned this in our CSN Day, our desire to delve deeper into the energy sector for our industries, and we were making investments and stakes in hydroelectric plants. Recently, with the CEEE auction, we decided to hold a specific presentation to speak about the fundamentals of our strategy, which is something difficult to do in our results call. That is why we have this presentation with details that we have collected regarding the sector in the last few months and then we will go on to questions and answers. Additionally, at our IR site, there will be a link so that you can get to know more about the assets acquired. An image or a video, of course, is worth much more. And that way you will know what we are speaking about. We will go on to the presentation, which is available to you. We begin with our strategy. We carried out these investments because they're good investments in terms of capital allocation. We're speaking of returns above 20%. In a low-risk business, we have good margins and with an excellent track record and good energy variation with little hydrological variation. Everything points to our industrial competitiveness. And energy is very important for steel, iron ore and cement, and we have had a significant cost increase in energy last year. Because of the hydrological problem, we had increases. And it is important for a company like CSN to become self-sufficient in this area. One more reason, to allocate capital. The third point refers to sustainability, SG, reduction of CO2 emissions. We already have a differentiated position in terms of CO2 emissions. Most of our energy is sustainable, but we will now have 100% renewable energy, hydroelectric and otherwise. Fourthly, CSN, not as an industry but as a group, find it very possible to diversify business. We think it is very interesting to soften out volatility in a business with less volatility, good margins. And this investment will allow us to turn energy into a true business with revenues and margins and not only a unit that will allow us to be competitive in costs. And that is why we have decided to speak in detail of the investments made lately. We have an investment in Sacre and Santa Ana, a small hydroelectric generator assets from Brooklyn. Sacre is a much larger asset. It is the star in this package, considered to be the best small hydroelectric in Brazil because of its capacity. It is able to generate 100%, which is quite unique. And you will see how the asset is in the videos that I mentioned. It has a solid generation history with very low volatility, close to 30 megawatts and works as clockwork. It not only gives us the benefit of a potential production, it also creates encouraged energy with a 50% discount on the distribution and transmission tariffs. Now this is an additional factor, not only the low cost but a reduction as well. What is important in this asset is the long concession deadlines. As tested in recent cases, we can extend these deadlines even further which means we will have the asset during an exceptional period. 100% of the energy has been allocated to CSN cement. You don't need to work with a puzzle to see how good this is for CSN. It represents a reduction of 73% in energy costs. We're referring not only to the cost of energy, but also the social charges, and we're going to see the size of this impact. The acquisition price was BRL 466 million, 80% financed through a commercial operation, anticipating a PPA which makes the potential return even better and enhances the company's balance because we're not speaking about indebtedness. This deal has been concluded and impacts the company since June 30. On Page #4, the second acquisition, the Quebra Queixo hydroelectric plant. This is a larger plant with 57 megawatts, generating above the physical warranty generation. It has uncontracted energy beginning in 2023. 100% of this available energy will be used in CSN Mineração with a very relevant cost reduction, 75% for CSN Mineração, with a very strong impact on the industry. The concession deadlines are long. And once again, these concessions can be renewed. And this is an upside which does not normally happen in the regulatory side of Brazil. The acquisition was BRL 427 million. This still has not been concluded. It is being examined by the antitrust company and ANEEL. And this transaction will be financed with a commercial operation. It will begin to bring returns and will strengthen our balance. This, once again, does not refer to indebtedness. On Page #5, the most important acquisition, the CEEE. This is not as the small hydroelectric plants and hydroelectric plants, an asset, this is a platform. It has 15 owned assets between larger and smaller hydroelectric plants. And the projects are under development, especially in the wind field. It's 400 megawatts of physical warranty and these owned assets. This is a potential that we count on for use in CSN. And through these minority stakes, it generates 156 megawatts that it sells to third parties, generating financial revenues for CEEE as a company. So this energy can be sold if the partners exercise their purchase option, but we will not count with that energy. On the other hand, we could increase the energy if these options are exercised. As the map shows you, these are throughout the state of Rio Grande do Sul. In Slide #6, you will see the acquisition of this asset. It was a privatization. CEEE is a state energy company. Rio Grande do Sul had already privatized transmission and generation assets, so the transaction perimeter was the percentage of the shares held by the government of the state of the Rio Grande do Sul sold through an auction. Now the price was BRL 928 million. But things don't stop here. The privatization was an agreement of the state with the federal government. The owned shares will have their concession renewed for a 30-year period. At a moment in which the business, CSN will pay that grant bonus allowing us to enjoy this concession for an additional 30 years for BRL 1.9 million. Now the buyer can work with CapEx to streamline this plant, which is very interesting. This will enhance the generation of the owned assets. And with this, we have acquired 47 megawatts per CSN. 56% of this energy will be allocated in steel, cement and mining to reduce our costs, 60% of reduction in energy costs, and it will have an interesting use for our sectors. On Slide #7, you can see how we're going to fit this energy into CSN. We begin with the energy balance for steel. Steel, so far, does not have a growth plan that has been announced. We're working with 350 megawatts supplied through a self-production coming from the Itá Plant and our thermoelectric plant and through contracts. In the future years, these contracts will be replaced by the CEEE energy with considerable savings, BRL 46 million a year. When we replace our contracts with our own generation with a huge benefit in terms of mining, we do have contracts for 48 megawatts. There is no self-production. And beginning in 2023, of course, we will have a very representative savings in energy bought from third parties without the social charges, a lower energy without obstacles, savings of BRL 146 million, supplying our present day needs. And what we will have in terms of new demands with the growth projects in mining magnetic production. And here, we have the Quebra Queixo energy allocated. In the case of cement, we show you how demand will grow with the assets. It will go from 43 megawatts to 145 megawatts. We have energy from the Igarapava Plant. And we will also have the energy from CEEE. And in EBITDA, this will represent more than BRL 100 million. So at the bottom, right, we will have more than BRL 113 million of savings and BRL 350 million and a benefit in EBITDA in terms of savings and energy costs every year and with our growth of consumption being supplied with the energy produced by CEEE. On Page #8, we see the energy balance within CEEE. It is going to generate a growing volume of energy because of the investments made. We will carry out the CapEx investment during the coming years. The generation will reach almost 400 megawatts, starting from 300-and-some. And the energy generated will be done in 3 blocks: one block of energy used in self-production, as we showed you previously; one block that at start-up will be contract for the medium and long term. This is important because we don't want to be exposed to the risk of uncontracted energy. After our investment strategy, we want to have this benefit, have some exposure in marketing and have 14% of uncontracted energy for shorter terms where we can obtain better prices. Now we are speaking about 125 megawatts for long-term contracts, which will reduce our risk of exposure and will allow us a good financing within CEEE. To speak about economic and financial returns and impacts on Page 9, we show you the results of all of these efforts carried out with this investment. The returns are of over 20%, very close to the cost of capital. Anybody investing in CEEE would have this. But we have gone beyond. We have identified the opportunity for CapEx synergies, OpEx and we have something that others did not have, a benefit for our production. So the benefit will be above 20% without counting on important upsides, the possibility of purchasing additional stakes as part of the auction. We would have to work with a publication of purchase and potentially, we could deliver these shares at a very interesting price so the return could increase. We have a majority stake that could be sold, and it could reduce the initial impact on equity and increase the returns of CSN, an upside that we have not counted on. Now all the sectors we show you here are deleveraged. We can have an improvement in the financial returns because of this investment. And with an expansion of our wind projects through our complex, we can enhance this sector. Nowadays, we don't have more energy than the project has foreseen, but we can obtain better results from our wind complex, another upside that would enable us to go beyond those 20%. Now the energy cost, we show you very clearly how to reduce the cost of energy, vis-à-vis the contracts that we have in-house. One part referring to the energy price, another part is not having the charges for a transition or sectoral charges. This would be the average reduction. What is left pending is what happens with the capital structure of CSN after the acquisition? The impact is quite low. We have a sequential deleveraging that will be very strong of 0.89 in March and pro forma, this additional debt that we will consolidate because this will be consolidated in the CSN balance as well as in our equity, but the EBITDA and the energy savings will reduce the deleveraging. Therefore, the impact will be minimal. We do have challenges and next steps that we want to be very transparent about. Important steps, the validation of the auction that will happen in September; the approval by the antitrust agency, CADE and ANEEL. We will sign the concession, pay the grant bonus step by step that will go until the first semester of 2023. Ensuing this, we have to leverage CEEE as a new company. We have a senior team at CSN that complies with all of these requirements, but we do want to reinforce the CEEE team. Now these are old plants. They are excellent assets that will require a revamp to enhance the physical availability. This is a very interesting challenge that will bring forth CSN exposure to wind energy. We also have a very interesting solar energy project. We're going to convert a hydro, wind and solar project and as of the corporate level, we're going to create synergies with CEEE. And we're going to make a CEEE a small commercial operation. Now these are the messages that we wanted to share with the investors, and we are at your entire disposal for questions. Benjamin is here with us, if you would also like to address some questions to him.

[Operator Instructions] Our first question comes from Ricardo Monegaglia from Morgan Stanley.

Congratulations for the acquisition. A truly interesting step to bring together the operations to have more efficient energy. Now if you consider all of the acquisitions, CSN could be a net seller of energy. Does it make sense to presume that this is your last acquisition in the energy sector? Or does the company still want to acquire perhaps wind or solar energy? That's my first question. The second question. Greenfield projects for the very short term. Are there any forecast of when your 3.5-megawatt wind assets will be approved and when you can begin working on these greenfield projects? If we could have an idea of the CapEx and how the return of these projects compares with what you have at present?

Ricardo, thank you for the question. Our stated goal, our initial goal in the sector was to have sufficient energy, and we did this very quickly with very interesting alternative. We're now low in energy which was also a goal. Our appetite now will be more opportunistic. We're going to work in-house first to integrate the assets and to conclude our projects. But as is the CSN DNA, we will always be attentive to new opportunities. However, as part of the strategy, we're not actively going to grow in this sector. Now in terms of our greenfield projects, they're still at the engineering stage, regularizing the grant with the state. So we have no visibility of when they will be concluded. But to be very efficient, perhaps we need 1 more year and 2 or 3 years for the construction. But these are very interesting returns. Of course, we do have access to energy and everything will depend on if we will use this in-house because, of course, the company will continue to grow or if we're going to sell to third parties. These are investments with a return that is over and above the cost of capital.

Our next question comes from Isabella Vasconcelos from Bradesco BBI.

Marcelo, thank you for the presentation and the details. Everything was made quite clear and is aligned with what we were thinking. We have a question to see which is the energy price that you are considering to obtain the benefits that were mentioned in terms of long-term EBITDA.

Isabella, we have used a mix of [ 130 and 150 ] very broadly. The average is between [ 150 ]. More contracts would stand at [ 150 ]. Thank you. And the 14% of IPPA that we have taken on are the short-term opportunistic contracts at [ 150 ]. For the long-term contracts, PPA, the price would be [ 130 ].

Our next question comes from Leonardo Correa from BTG Pactual.

Well, taking advantage that Benjamin is there, a question about strategy. The first point. Marcelo, you spoke about a dilution that is persistent. Now through time, depending on the leverage level that you have, this could become a headache. In Brazil, if we look at other companies, other groups, what we have seen for many years is a Brazil selling nonstop commodities. Is it reasonable to understand that going forward, you will have a dilution of all of this? And that you will focus more on the new business. Perhaps this will bring you greater resiliency and some semesters go. Well, I imagine that the group will want to have more hard currency. The commodities are being pegged to the dollar, of course, and the assets are not real. Most of your assets are in reals. So in terms of diversification, I would like to know if you have something new. These are our questions.

Well, Leo, I think that the 2 questions are connected in truth. The dilution and more dilution of volatility of the business in Brazil than a dilution of the commodity, which, of course, will be important in steel, iron ore and cement, where we have access to markets with less volatility. It's what we said last year for some semesters, we went from 50% of sales outside of Brazil to 20% or 30%, and we're actively following that direction through the greenfield projects in the U.S.A. for cement and steel. These projects continue to move forward. We will refer to these in our call in some days. And opportunities in developed countries with less volatility, especially Western Europe and the U.S.A., of course, in the last place. This is how we speak about diversification. Now the issue of energy refers to relevant inputs for steel and iron ore. And it does have that side effect of reducing what is a cycle. It wasn't the goal but this is the effect. I hope I have responded to your question.

[Operator Instructions] Our next question comes from Rodolfo De Angele from JPMorgan.