Companhia Siderúrgica Nacional (CSNA3) Earnings Call Transcript & Summary

[Interpreted] Good morning, and thank you for holding. Welcome to the extraordinary conference call for CSN to discuss the acquisition of LafargeHolcim. We have with us today the company's Executive Directors. We would like to inform you that this event is being recorded. [Operator Instructions] This event is also being broadcast simultaneously over the Internet and can be accessed at the IR site for csnir.csm.com.br where the respective presentation is also available. The replay of this event will be available soon after the closing for 1 week. Once again, you can flip through the slides at your own convenience. We would now like to give the floor to Mr. Marcelo Cunha Ribeiro, the Executive Director for Investor Relationship, who will make the presentation on the acquisition. You may proceed, Mr. Cunha.

[Interpreted] A good day to all of you, and thank you for participating in this extraordinary conference call. It will be a quick conversation. We would like to convey to you several of the details of this very strategic acquisition. And more particularly, we are at your entire disposal. I would like to share with you that at this conference, we have Benjamin, the Group Chairman; Edvaldo, the Director of Cement; and Helena Guerra, our Sustainability Director. Let us begin with a presentation, and then we will go on to the questions and answers. The first page shows you the unique and successful history getting to the acquisition. It's somewhat more than 10 years when the idea that Benjamin has always had of integration and verticalization of the business and once again no longer sell to third parties, work with grinding in Volta Redonda in 2009, already beginning with a plant of 2.3 million tons and very quickly growing a relevant business of this group. We have always had this DNA. In 2011, the integrated producer through our clinker at Arcos, and as of that point, the idea was to increase the business twofold. We increased participation in Arcos. In 2015, we made acquisitions. We continue to grow. Of course, the market took another direction, we did our homework. The market was very difficult. So we look for limestone reserves. And we put our foot on the accelerator with that belief that we are now within a sustained growth cycle, and we carried out our first acquisition, the Elizabeth cement plant. And now we have taken this step adding 10.3 additional million tons, of course, with a view to continue to grow as we will show you, going from 0% to 32% market share in only a decade with a relevant brand, CSN Cement, is the most efficient cement company in Brazil. It is still not the largest, but it does have the best margin and the lowest cost, which is what we would like to work with. What is it that this new acquisition brings us? It converts the cement into something strategic, and the coming year, it will be adding 10% to our cash. This is something very novel, allows us to have a great deal of diversity compared to steel and iron ore. And in the second semester, this will become ever more relevant. And what is it that brings about all of this volume? The elements that I have already mentioned to you, we're going to gain scale, almost tripling our volume, a geographic complementarity. We will be putting our foot in the center west, strengthening our presence in the northeast and, of course, work with very relevant leaders in this market. The brands that you see are extremely well known. They are traditional brands with decades of a footprint in the southeast Maua, Montes Claros and with a brand of technical products that have top quality. It's interesting, of course, to bring about new types with an image of quality as part of the cement portfolio. What is more interesting, it brings about significant limestone reserves besides increasing and enhancing the life of our mines. We're going to use new mines for new expansions and all of this within the portfolio that has been acquired. On the following page, we show you what our footprint represents. We have the plants in Arcos, in Volta Redonda. And we're complementing this with 5 integrated plants in Minas Gerais, Montes Claros, [indiscernible], one in Rio de Janeiro and another plant in Paraiba in [ Itatuba ] and 5 grinding plants in Bahia, 1 in Vitória, Espírito Santo, the third in the center west in Sorocaba, an additional plant, and the plant in Rio de Janeiro. As mentioned, we also have significant limestone reserves and a concrete and aggregate plant with all of this capacity. We have jumped from the fifth place to the third place in terms of capacity. And very relevantly so in terms of production and sales. We're the second player in this sector. What is it in terms of value creation that this acquisition will bring us? This, of course, is the core point, the key point of our decision. We will be able to create value in an already important platform to give you some figures. And this is what we're going to do this year, BRL 150 million of EBITDA, and we truly believe that we can add significant value when it comes to new strategies, cost reductions, increasing almost 50% the EBITDA, and this is where the value creation will come for shareholders and for the company. And these are equivalent conditions to the present day production without speaking of the increase in volume and, of course, market prices only through our management. We will begin with a new commercial strategy, a strategy that has become concentrated at CSN of selling less to a greater number of clients. We are the cement company with the largest number of clients, and this means that we do not depend on go betweens. We don't depend on wholesalers. We are able to obtain more attractive average prices, and we focus on the products and bags that have a better profitability through distribution. And through the product mix, we will extract the greatest value from this acquisition and doubtlessly through significant cost synergies as well. When it comes to supply, a supply of important items such as electrical energy and fuel because we do have a very wide range of contracts. While the logistics synergies are obvious, these are plants that are in a certain way, very close. We will be able to attract more clients, reduce cost and the synergies are very common in this type of deal and the EBITDA per ton will go from BRL 77 to BRL 103. This, of course, besides the tax synergies and others. Now what happens with the projects of CSN Cement? And the answer is we keep moving forward. I think the merit of this is very clear. We have the limestone reserves, long life. We have scale, a very privileged location when it comes to demand in -- but are now very clearly, we are complementing our geographic presence in the south of Brazil, in Pará that will also allow us this footprint in the north that we did not have an expansion in the southeast and northeast at the right time, allowing us to have ever more options we're going to accelerate or slow down in these projects, of course, depending on the market evolution and the speed of integration of the Lafarge assets. They continue to allow us an excellent portfolio. And of course, we will speed all of this better once the Lafarge integration has been fully concluded. This is what I wanted to share with you, and we are now at your entire disposal for your questions and doubts. And of course, I will offer the floor to Benjamin for his message.

[Interpreted] A good afternoon to all of you. This is a reason of great satisfaction to us because in a very pragmatic and objective fashion, we have been able to decrease the time that we had deemed necessary to become an important player in the Brazilian cement market. Now this, with the acquisition of Elizabeth and Lafarge, we're highly optimistic when it comes to this market. It is a market that is complementary, very close to us and where we have technological and commercial predominance. We strongly believe in the rapid expansion of this project. Our goal is to be the largest Brazilian cement group, perhaps not in terms of capacity, but in terms of amount marketed. And depending on this acquisition plan, we have a plan for organic growth, which will allow us to move ahead, as Marcelo mentioned in the southern region, in the northern region, in the northeast and center west. Now this challenge of materializing these projects is well ahead when it comes to the acquisition of equipment. As you know, we have 2 entire plants in boxes. And additionally, because of the reserves that we have, they will be complemented with the reserves that LafargeHolcim contributes. Evidently, we will carry out this growth in a very structured way, a strategic way. We're going to fully comply with CADE, the competition agency of the country. All of this within a very constructive spirit of cooperation and with immediate productions in the regions where we already have a footprint and the new regions that we will enter. We already are working with a highly mature team in terms of their market knowledge, the part of technology, logistics and with great knowledge of Brazil as a whole. And very hopefully, we consider this as a very good investment alternative to invest in the cement segment. As all of you know, Brazil has a policy in terms of infrastructure that should be built. And evidently, at some point in time, we will be able to redress these distortions of the past when it comes to infrastructure. And we also have the potential of growth in the civil construction market, another need in the market. There are millions of Brazilian families that will have to begin to reduce the scarcity of housing that impacts the large majority of Brazilians. For any government, for any country, this is a sector with a very good growth outlook. And we certainly want to be part of this. As mentioned, our goal is to become the largest in terms of the marketing capacity. And perhaps we won't be the largest in terms of installed capacity, but we would like to lead the market, and this is what we are working towards. Thank you very much for allowing me the floor, and I am at your disposal for any remarks or comments. Thank you very much.

[Interpreted] [Operator Instructions] Our first question comes from Leonardo Correa from the BTG Pactual Bank.

[Interpreted] Can you hear me?

[Interpreted] Yes, we can hear you, Leo. We can hear you perfectly.

[Interpreted] Congratulations for this important move. We have some timely questions. And if you prefer, of course, we can do this off-line as well. The first question refers to the rate of use of Lafarge in Brazil. We know that at present there is surplus capacity. Which is its rate at present? And how do you intend to increase the utilization rate going forward? The second question, and I do apologize for the details I'm asking about margins. How much is from Lafarge? How much belongs to CSN? Which is the EBITDA gap in terms of the assets at present? And finally, if you have an estimate of present value of the fiscal benefits that will arise from this transaction. We can imagine, of course, that this asset must have several accrued losses. And how are you going to make the most of this going forward?

[Interpreted] Thank you for the questions, Leo. Lafarge produces 6.5 million to 7 million tons, a competitive nominal capacity of 10%, I would say, coming very close to 70%. Now among the choices that were made, the -- we know that the plants are ready to produce, they do have this effective capacity. And through several years where we had a less thriving market, they sought out more profitability and lower volumes. We believe that at present, with our commercial strategy and in a more favorable market, we can have 2 things. We can have profitability and greater volumes. Of course, this will not be done immediately. Our levels are close to 9 million, but this has taken years. We're going to accompany the market prices. We're going to increase the number of clients, of course, moving away from that fragmented or pulverized market. And I think the losses are not relevant, and we will be able to grow significantly with all of these synergies. And with a greater scale, the EBITDA margin will accompany this. At present, theirs is 20%, ours is somewhat above 40%. This is a gap that we will close through all of the initiatives that were mentioned by Benjamin. From the taxation or fiscal viewpoint, yes, they are significant rates between losses. We're calculating BRL 800 million at present value because of these tax loss carryfoward.

[Interpreted] Our next question will be in English from Mr. Francisco Suarez from Scotiabank.

Milestone. The first question was to understand if there is a clear gap between utilization rates between the Elizabeth assets and the LafargeHolcim assets? And secondly, what kind of synergies can we expect more on the sustainability front? I am interested in how you are addressing transition risks. And what do you find valuable in the assets that you acquired from Holcim?

[Interpreted] I was about to answer in English. Very well. Regarding the utilization rate, the Elizabeth plant at present is operating very close to 100,000 tons per month. If we look at the last 12 months, the situation is not different. It produced 1 million tons with a capacity -- nominal capacity of 1.3. In terms of utilization rate, it somewhat beyond 70%, 75%, which is a clear opportunity to increase production. This is a market that is growing and the utilization capacity should also grow concomitantly. Regarding the sustainability front, Lafarge has a very positive aspect, which is the use of alternative fuel. They use coprocessing much more than we do at CSN. And this is an aspect that we are going to enhance at Lafarge itself and also adopt this strategy at CSN Cement. It's an interesting synergy because they already use alternative fuels in scale, which is something we do not do. We will learn from them. And from the viewpoint of emissions, linked to the greenhouse gas effect, they have emissions that are somewhat higher than ours. CSN tends to have more modern streamlined plants, but their emissions are better than the average ones in the sector, and they will be aided and abetted by the projects that we have to renew equipment, equipment that will be implemented in coming years. I think that's very clear. We have CO2 emissions of Leopoldo plant that are extremely low. They are the lowest in the sector in Brazil, precisely because there is that very broad use of coprocessing in their 5 main plants. We have 4 of them in coprocessing, the use of score. And of course, all of this enhancement will be sought out. And I imagine that we will create a completely new goal for CO2, considering Lafarge along the lines that we had already set forth, proposed. Francisco, did that respond to your question?

Yes.

[Interpreted] Our next question comes from Isabella Vasconcelos from Bradesco Bank.

[Interpreted] And congratulations for the acquisition. I have 2 questions. First, about the EBITDA of Lafarge. And if you could comment on the present day rates of the company. Secondly, the available capacity, the -- if the 10.3 million tons of Lafarge are already ready for operations? Or will they require additional CapEx and which will be this additional CapEx?

[Interpreted] Isabella, thank you for the question. When it comes to the history, the background, we have a somewhat touchy situation so far. The dissemination of information from Lafarge to Brazil will have to be approved by the seller initially. We have not included this in the presentation. And of course, we will share these eventually. The second part is more relevant. We have the run rate, as you can see in the presentation. We're at BRL 540 million of EBITDA presently for 2021 based on the results for the last quarter, and this figure is materializing. To respond to the second part of your question, capacity.

[Interpreted] Isabella, this is Edvaldo speaking. The capacity of Lafarge, of those 10.3 million, is there available. And as we grow, we are going to fully occupy this capacity without the need of any CapEx practically. We are going to focus our efforts in terms of CapEx, on sustainability and cost management products to reduce the gap that we have in terms of EBITDA margin. We do have a significant room to move forward, and we are going to heavily focus on cost reduction. Additional capacities may come about through time. And we're going to eliminate bottlenecks in other operations as well. But once again, all of this will depend on the market growth.

[Interpreted] [Operator Instructions] Our next question comes from Leonardo Correa from BTG Pactual Bank.

[Interpreted] My next question, and I take advantage that Benjamin already referred to the competition agency, CADE. It's too early on to foresee any of the movements of CADE. Of course, they will have to think about the market share in the Southeast. You're diversifying your investment to other regions vis-a-vis your initial position. Are there any additional comments you would like to make? Is there a clause that could put this deal under risk or a slightly more better remedy perhaps? I don't know if there's anything you can add in terms of the position that CADE may take that could sway things.

[Interpreted] I think Benjamin was -- picks a very right expression. We're going to do whatever CADE suggests. The President solution, of course, is the approval of CADE. We have done our homework. We fully trust our results. We do believe that we will receive a positive response. Well, this is not such a long and complex process. We're quite optimistic that this will move along quite quickly with a very calm ending when it comes to the complete approval of this business.

[Interpreted] Our next question will be in English from Jon Brandt from HSBC.

Congratulations on the acquisition. I just wanted to clarify one thing. Did you mention that Lafarge's EBITDA margin was around 20% and yours was around 40%? And I think you mentioned that the goal was to bring that closer to 40%. How long do you think you would be able to -- in order to bring that, Lafarge's margins, closer to yours, is that something you could do in the next 3 years? Or is this -- given the older assets and some of the issues that Lafarge has, do you think that this could take longer? And then if I could just sort of maybe follow up on Leo's question. You have some significant organic growth options in the pipeline, but the industry is still operating at a pretty low utilization rate. Could you see the opportunity for more M&A in the future? Or would CADE potentially have some issues with this? And then I guess just sort of related to that, how should we think about potential cement's IPO? It's something that I think you've mentioned in the past. Is that still something that you guys are considering?

[Interpreted] Thank you for the question, Jon. When it comes to margin gains, all of our initiatives will be implemented in a period of 18 to 24 months. This margin convergence shouldn't take longer than that. In up to 3 years, as you mentioned, yes, we will be able to carry out this convergence. Perhaps we will not reach the 40% as these are completely different assets compared to our asset base, and they are quite peculiar. Well, our base is very streamlined and we have a very large scale with competitive energy resources integrated with the plants. All of this will have to be replicated. We are going to come closer but not necessarily reach the 40%. When it comes to M&As and organic growth, let's be realistic. There aren't that many more targets that we can plan for. But if the CADE allows for this or not, this will be a completely localized issue. We're going to continue analyzing opportunities but they will be very isolated and opportunistic. And yes, we have a great deal of structuring and planning involved, schedules that will either speed up or slow down the integration with Lafarge. But in this market, specifically, we do not have any concerns in terms of the use of the low capacity. The market is sound. And recently, we have had a great deal of growth in civil construction. We had a scarcity of cement. And we -- people will be demanding a new cement capacity very soon. So we're going to proceed along these lines.

[Interpreted] As we have no further questions, we will return the floor to the company for their closing remarks. Thank you very much.

[Interpreted] Thank you for your interest. Thank you for participating in the call. The idea was to convey more information to the market on this issue and on CSN in general. Thank you very much, and have a good afternoon.

[Interpreted] The extraordinary conference call for CSN ends here. We would like to thank all of you for your participation. Have a good afternoon. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]