Companhia Siderurgica Nacional SA
BOVESPA:CSNA3
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Companhia Siderurgica Nacional SA
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Good morning, everyone, and thank you for standing by. Welcome, everyone, to CSN Conference Call to announce results relative to the first quarter 2018. Today with us, we have the company's executive officers. We would also like to inform you that this event is being recorded. [Operator Instructions] Today's event is also being simultaneously webcast and may be accessed through the company's IR website at www.csn.com.br/ir, where the slide deck is also available. The replay facility will be made available right after the closing of the session for 1 week. You may be free to select the slides.
Before moving on, I would like to state that forward-looking statements made during the call are based on the company's expectations and trends and on current assumptions and opinions of the company's management. Future results may, therefore, present material differences between the results and future events. Future statements are not projections -- not expectations. They are based on events that might differ considerably from those expressed or implied by these forward-looking statements and that might happen as a result of several factors, including general and economic conditions in Brazil and other countries, interest rates and exchange rate levels and future rescheduling or prepayment of debt denominated in foreign currencies, also protectionist measures in the U.S., Brazil and other countries and also depend on changes in laws and regulations and general competitive factors on global, regional or national basis.
Now I'll turn the conference over to Mr. Marcelo [ Cunha ] Ribeiro, IRO of the company, who will be making the presentation and highlighting the company's operating and financial results. Please, Mr. Ribeiro, you may carry on.
Good morning, everyone. Thank you all for participating in this conference call relative to the first quarter 2018. I now turn the floor over to our CEO, Mr. Steinbruch.
Now good morning, everyone. I'll be participating from New York, where I am right now, but I would like to start by emphasizing the separation from the operating front -- from the deleveraging front of the company. As we have been mentioning before, we were quite aware of the need to reduce the company's leverage level, and we have been working on that front for some time now, not only with the decommissioning of one asset but of several assets.
[ LLC ] our subsidiary here in the U.S., with the first asset to be decommissioned because the good opportunities came up in terms of appreciation, and we thought it convenient to carry on. Based on what's on the news, what's been announced, we see an appreciation of USD 400 million, USD 60 million of those for working capital and the remaining for assets plus the monetization of the surplus working capital, which sits around $100 million. So either through sale of our inventory for plates [indiscernible] and final galvanized products or by absorption on the part of the buyer. In any event, we will monetize our working capital at the end of the transaction or when we close the deal. So again, it is a transaction which will bring us a considerable result in accounting terms and also, in liquidity terms, also quite interesting. We're talking about a significant amount here.
And I would just like to emphasize that we will continue to work, to operate in the U.S. We will maintain our commercial activities in the U.S. We have an established market in the U.S., been here for 17 years in the lines of galvanized, painted products and also tin plate. So we will be separating all that. We will continue with the CSN LLP, which will become a distributing company and maybe, potentially, also, a producer, manufacture in the U.S. market, but we'll continue to sell plates and may be working on the finished product line, which we'll be sending directly from Brazil.
Within this big opportunity now to commission the assets, it will mean about BRL 1.8 billion in terms of reducing the company's leverage in the short term. And as I said before, it is the first step we're taking in that direction. As you all know, we are strongly committed, and also, I think we've said before, we're committed to reducing in the very short run about BRL 4 billion in terms of the deleveraging. And I want to give more, in the very, very short run, my desire would be to have a significant change in that debt EBITDA ratio by the end of the first half. In other words, we will try to find alternatives, immediate alternatives to allow us to reduce that leverage levels by the end of the first half of this year.
As to the operating front, I would like to say that we had isolated issues in the steel division, which implied an increase in cost, basically, in bringing raw material from the furnaces and also issues with the furnaces themselves. They have all been addressed and solved, and that will allow us to work throughout the second quarter with an increased amount and with decreased cost per plate.
And again because of isolated issues, we had higher costs than we have planned for and had budgeted for, actually. We're going to be working strongly around those issues because those operating problem should not happen again. Should it happen, it won't be because of failure on our part, both human failures or maintenance failures. That won't happen. We are determined to work strongly to avoid that from happening again.
Now in the second quarter, from then on, we will consider the situation normalized going forward. Predicted second quarter problems should not happen, but in our case, unfortunately, they did happen.
As for prices in the steel industry, we will implement another increase in June. We had already mentioned that we would be increasing the price again in June for long steel, and we will maintain that. [ So ] we're trying to recover on the gross sale side where it's still bit behind in terms of distribution. For the automotive industry, auto parts and other industry, we feel a recovery coming around, and we do believe that, sometime, that we are late, but we hope we'll see the economy recovering at some point. All of those who were optimistic, who expected the economy to recover this year are already redoing their calculations. We had a pressure to grow 3% of GDP, but we are now talking about 2% of GDP. We remain confident, we think, we believe that soon, sooner than later, the economy because of government actions, because of the market pressure, the economy will resume growth in a more consistent manner. The conditions are given for that to happen. We see interest rates dropping. We expect to have another cut in the SELIC rates today, and we believe that credit will be made available again, and then that will help speed up the economy as we go forward to the end of the year.
With that, we will maintain our price or pricing plan. As for amounts, we're still working at full speed. Some analysts made a couple of observations about the drop of 1% or 2% in terms of EBITDA when compared to the budgeted numbers, but I would like to tell you that's the micro picture. The macro picture is different. We are coming a good momentum with full production, cost reduction, both in mining and steel. It hasn't happened yet. It hasn't happened because of 2 specific issues which happened at the high furnace, but we are still within or within the lines we had budgeted for of working at full production and with an eye at reducing costs.
So in terms of mining, I'd like to emphasize the improvement in qualities, the sharp decrease in the cost of silica, which was harmful for us the first quarter. But now with the new address, the mine will have better quality ore at a higher amount for the second quarter.
And we also are counting on the purchase of ore, where we are being much more aggressive now, and that allows us to meet our budget. So really, we are working at full speed, full production with better quality.
As for cement, we continue to increase our amount of products sold. We had better prices, better margins. We saw an increase in margin, which was quite relevant just now, in the first couple of month or the first month of the second quarter, and we remain confident that we will be able to sell all of our production at better price levels and better results.
So as we open this call, I would also like to say that we are doing what we had pledged to do, be it from the deleveraging standpoint, be it from the operating results standpoint. I also emphasize that we will reach the end of the year with a net debt EBITDA ratio below 3x, and I also emphasize that decommissioning of assets, which many thought it was difficult to see materialize through, we already completed our first move on that front. And we hope to have in the very short run and then some other transactions like that to meet what the market had asked us to do, which was to have a debt EBITDA ratio which would be more comfortable for investors.
At the same time, and based on what we pledged to do, we hope we will deliver a significant financial results vis-à-vis the budget. So basically, that's what I had to open the call as a message to market.
Now I turn the conference back over to Mr. Ribeiro and our colleagues at the Board so that they can carry on with the presentation. Thank you, everyone, for being here.
Thank you, Benjamin. Moving on now. I'll start providing a bit more detail about -- of the sale. I'll try not to repeat what Benjamin said. But I think it's important to emphasize that we're not selling our U.S. business. Contrary to what was announced, what the media said, we are not leaving the U.S., far from it. We are just separating the business, reorganizing the company. And the import distribution side will be separate now, and we will use the quotas we have available after this 232 Session to take high-added value products to the U.S. That's -- that line of business historically has represented relevant EBITDA. When we see the results, we're not selling 100% of that EBITDA, it's something between 25% and 33%. And we will keep that share, which makes the deal even more interesting when we talk about the valuation of the asset.
Speaking of that production assets once more, the sale price was USD 400 million, but it's important to emphasize that our expectation was to get something closer to USD 500 million because, as Benjamin mentioned, we have what we call the target working capital, and also, the market value of those inventories allows -- allow us to anticipate, at the time of closing at the end of the quarter, we can anticipate an adjustment, which would lead us closer to USD 500 million. So when -- and we are arriving at that final number, BRL 1.8 billion, which would help us considerably in our deleveraging efforts as Benjamin also said.
Those were just a few details, and I will move back to the presentation. Now speaking of our financial and operating highlights in terms of consolidated figures.
In this quarter, we had an advance in EBITDA, 3%, reaching BRL 1.242 billion in the quarter. A margin of 23%, high levels, and we also had some good news in all our lines of business. The most relevant of this quarter was the recovery of Brazilian economy through a strong growth in terms of volumes in the domestic markets, which helped materialize what we had expected, a migration of volumes from the foreign market to the domestic market, with better margin and allowing for price increase. So those were all good news, it was good news, which was -- which were offset by an increase in [indiscernible]. As for mining quarter-on-quarter, we saw a growth of -- an increase of [ 55% ] because of this better pricing condition that the market [ had ].
And we also had quality to -- we're showing also better freight and the smaller amount of ore. That's also good news, allows us to grow by 30 million in the quarter. For equipment, we also advance because of better prices and volumes. We have reached EBITDA margins of 10% when we consider to the margins of last year, and we are going through a transition moment. We want to maintain that margin in double digits, at a high double-digit figure as it was mentioned before.
And finally, as shown in the first slide, that also, from the point of view in terms of expense reduction, which you have good news on that front as well. Our overhead reached probably the best historical level in percentage terms. SG&A over sales, that reached 2%, a very strong effort which was started a few years back, and we are now reaping the benefits of those efforts.
And now we move to financial indicators, which leads to what we think is more important. Cash generation in terms of CapEx, on the left-hand side, we see capital of BRL 223 million, in line with our guidance for the year, slightly lower when compared to the last quarter of last year and slightly higher than the quarter because of isolated investments, especially in mining, filtering project and magnetic equipment, which will allow us increased volume as we will detail going forward. The good news here, again, is that great investments in expansion, which we're making on cement, are now past. So this year is going to be a year where we focus on sustainability, will allow us to disburse less cash. The financial cycle, also good news on that front, we have better management already showing, especially with suppliers, not only in terms of new negotiations but especially in terms of sourcing, we're always looking for alternatives, especially in the purchase of raw materials we were doing transactions which -- with much more advantageous conditions than before, and there's more to come. I can tell you that.
Our inventories were slightly higher than last year. So the operation with the LLC will have a significant impact, of course. Our export operation for freight, for tolling in the U.S. would increase eventually, but this will be overcome, and we will manage to obtain some reduction there, which will help us in our working capital front.
Moving on. Financial expenses also doing well, and the drop in the SELIC rate has also helped on that front. And with that, on the right-hand side, our free cash flow reached levels, which we had been seeing for some time now. We managed to generate surplus to help reduce our debt levels, which is what can be seen on the next slide, Slide #7, where we have a snapshot of leverage and liquidity levels. We have been generating cash to pay out the debt. Our gross debt sat at BRL 29.5 billion. That's the lowest level of the previous quarter. There were isolated repayments early in some asset, we extended our deadline with Banco do Brasil, which was very beneficial. We almost doubled the duration, the average duration for that debt. So that negotiation with the Banco do Brasil helped us reduce our gross debt and had an impact on our cash, of course, which sat around BRL 3 billion, which is a level that can be sustained and which is a level which is quite close to what we consider to be minimum cash, which will allow us to navigate throughout the next quarter.
We also had [indiscernible] leverage, which increased isolated to 5.82, even with the cash generation, and that happen because of the couple of the mathematical effect. The EBITDA for the last year, last documents, was slightly reduced because in the first half -- quarter of last year, we were a little above, so that effect will be offset in the second quarter. We'll see a second quarter, which will be quite positive when you compare it to the second quarter of last year. So that means that accounts for almost half of that leverage level. Another important point, which is nonrecurring in the quarter was the payout of the historic dividends for the CSN Mining subsidiary, the dividend which were having such a presence in our balance sheet since 2015 to be paid out in 2016, and that payout was delayed because we had a problem in 2017 of that delay on presenting the balance sheet. So we normalized that payment in the amount of BRL 500 million and, of course, that also has an impact of 0.1x EBITDA. Hence, the increased leverage price. Our pathway, as Benjamin said, is quite positive. We managed the [indiscernible] indicator quite fast. We see now 5 8 -- 5.8, but we're coming closer to 5.4. And as we speed up the decommission of assets, we will soon be below 4.5 and then 4 until we reach our target of 3.5x as Benjamin mentioned.
Moving on, as for debt amortization, on the next slide, which is our Achilles heel. That decommissioning schedule will allow us then to reassure that -- allow us to improve the conditions of our debt extension, and we'll be able to remove that pressure in the short run. We've already started, once again, we had the debt with Banco do Brasil. But in February, already issued a new bond for 2019 and 2020. We are in negotiations with Caixa Econômica as well, and once we materialize that deleveraging plan, we will have the new objective: other partner bank. We plan to go back to capital markets with the new bond issues to pave the challenges of the coming 2 years. So that's our plan to extend our debt.
That closes our financial part of the presentation, and we now move to the business highlights. I give the floor over to Mr. Martinez.
Good morning, everyone. Before I start on steel performance, I'd like to emphasize the U.S. topic. Number one, we cannot leave behind such a strong market. We cannot afford that. The U.S. market, in terms of prices, in terms of volumes, it is the most appreciated market in the world. So leaving the market would be a very bad decision. We are not doing that. It's not our intention to leave the U.S. market. Also very important, we have a very strong client portfolio there.
So instead of working wholesale, we are working around more engineered products for niche market. So believe it or not, today we have several clients, who will continue to buy materials from CSN, but that's the important point to emphasize. We will maintain our key new assets, Marcelo and Benjamin have said, and we will have different innovative things to do in that American market.
Something else I'd like to comment is the metallic sheet or tin plate. Today, the U.S. is the net importer of that product, and we have surplus capacity in Brazil. We today produce practically 600,000, and that can easily reach 800,000 or 1 million tons of tin plates. So we cannot fathom being away from that market. We're talking about the quota issue and 322, and I'm sure it will have a positive outcome for all of them.
Going back to performance now. Benjamin said we are in a momentum. I'd say we are flying, commercially speaking. I am very pragmatic in terms of results. Our first quarter for 2018 saw a growth of 27% in the domestic market. The market grew by 13% and half rolled with 27%, in the coats, 33% and for galvanized, 54%. So if we look at data, in fact, we can always say our performance is at the very least quite adequate for the current economy.
In terms of EBITDA, Marcelo mentioned in the last call that we had an EBITDA of around BRL 713 million. [ We have not won ] the best EBITDA for the last 3 years. Now the first quarter of this year, we reached BRL 690 million, which is quite close to the value we posted in the previous quarter with the mix, which is not the most favorable for us. If we remove SWT, which is not a flat steel producer. Our mixed steel represents 69% of the internal domestic market, around 70%. And I'm trying to reach 85%. So I have an upside in the domestic market of 35,000 to 40,000, which has not been captured yet.
Another important piece of beta is that our revenues grew 20%. Pricing grew around [ 12%, 14% ] year-on-year. So I think all of that reinforces what I've been saying in the previous calls about our discipline to work at full production with the right portfolio, not curating all the eggs in the same basket and working towards improving our quality.
Doing the quick math, which I did on the last call, I talked about an average price for our portfolio of BRL 2,900. If we think that we have a price correction -- I'll be talking about that in a moment. And if you imagine that our costs had no reduction whatsoever, our costs would remain at around BRL 2,070, BRL 2,050, still, we would be talking about a margin of around 30%, a gross margin, 30%, which is quite healthy for the steel industry, which shows around about BRL 500 to BRL 600 per ton in terms of EBITDA.
The outlook for the second quarter is quite positive. In the last call, we saw an increase of 7 points percentage [ unit ], but because of the U.S. dollar rate, it was about [ 3 60, 3 62 ] for the exchange rate, that price increase might stay between 7.5% and 10%. And I'm not talking about distribution alone. We're also talking about the industry side because we cannot isolate that.
So the outlook in terms of increase is quite positive, as I said. Pedro will be talking about cost, and I still have that upside I mentioned in the domestic market, where we can still grow a little more.
As for our next slide where I talk about markets, we're talking about very relevant data, but you're probably aware of that, quite positive data. And as Benjamin said, industry is much better positioned than distribution. Still the physical investment in distribution is quite an important indicator for us. For the seventh month in a row, it has shown an increase of around 3%. Our forecast for apparent consumption in 2018 for flat steel remains at around 12 million tons, which would mean an increase of 8%, about 1 million ton.
The only factor which has not taken off at full speed is civil construction and investment in infrastructure. The outlook for the market is positive overall. It look -- shows a considerable increase when compared between the 3 years, and the trend, to me, is to remain robust, strong for the second half of the year.
As for our product portfolio, we have another upside in the first quarter. I worked with 40% of burden, tax burden. I still have an upside to increase that as well.
As for coated product and the opportunity I also mentioned in the U.S. for sheets or plates, we're still trying to capture some value there during this year. So as Benjamin said, we're going to be working at full speed, focused on the domestic market. We plan to reach 80% to 85% of the domestic market with a diversified portfolio working across different industries.
We have around 20% automotive, 40% in civil construction, and we are well balanced to capture other gains in the market.
I now give the floor over to Pedro, who will be talking about costs.
Good morning, everyone. On that slide, we have first important message there has to do with production. We see the plate production, when compared year-on-year, 7% up from the first quarter of 2017, which shows the company's resilience in terms of recovering plate production. It's the fourth consecutive quarter that we see an increase in plate production.
When we talk about deliveries, you saw in our report we were up 12% when compared to the first quarter of last year, showing that our [ products there ] is able to supply the commercial need efficiently, especially as the market recovers growth as we recover our market share in several areas. So those -- that's the good news.
Yes, we also saw an increase in the cost of plates and as we recover higher levels of production, we saw a couple of nonrecurring events, some of which in terms of high furnace and raw material replenishment and also an increase in raw material and not very favorable weather conditions involved over down there. I'd say that 40% of that cost increase are tied to those nonrecurring events.
On the other hand, part of that cost increase for the plates was also mitigated by a reduction in the cost of transforming the plate into rolled products. So can produce more at lower prices, and we expect to reach more stability this month as we resume our normal levels.
In other words, we plan to continue to produce plates at lower cost. I'll give the floor over to René, who'll be addressing our mining front.
Good morning, everyone. We have out here talking about the mining sales, and our team is out here with me today for this presentation, our mining team. [ I'd like ] to share with you our market view after 2017, which was a strong growth year in China. The expectation for 2018 is that indicators remain at similar levels as last year.
The first quarter of 2018, we saw a positive sign with a growth of 6.8% in the Chinese economy as opposed to a 6.5% expectation for the year. We also highlight not only China but also the increase in demand in Europe, Japan and South Korea.
In 2018, the demand for steel is expected to grow by 2%, with strong demand coming from China. On the auto side, the transoceanic tons will reach up to the level, with the main mining companies showing growth in margin, not in volumes. Within this context, CSN Mining has been working with the expectation of having figures which would be similar to those posted last year at a $70 per ton level.
Another important move in the market has to do with quality adjustment. The one side, in January, we've seen a drop in cost of silica, which brought prices down, influenced mainly by the withdrawal on the market -- of the Brazilian market and Chinese concentrates. The market perception for aluminum and phosphorus also change because of a higher offer coming from Australia, which influence other increases. So under those conditions, the market is more eager to receive products from Brazil.
Aiming at meeting market structural changes and keeping the company in a good position in terms of competition, 2018 will be an important year. In terms of implementing a series of projects, which will base the growth of the company in the short to mid-run. Those projects aim at, first, improving the quality of products, decreasing dependence on them, reducing of costs and increasing production. We can highlight filtering, magnetic concentrators and the dry production plant, all with start-ups expected by 2019 and with all environmental licenses already granted. We will be going into more detail about each of those projects.
Now for our performance, CSN Mining presented strong number for the first quarter, among which, our net revenues of BRL 1.2 billion, in line with the revenues posted in the previous quarter, despite the drop in the volumes sold. The adjusted EBITDA of BRL 442 million quarterly increase of 26%, boosted by higher sales prices and better product quality. In that sense, the unit net revenues posted on the quarter set at $59.9 per ton, an increase of 12% when compared to the first -- fourth quarter of last year, despite a drop of this FIF sales. That shows our gains in quality. We saw increase of 26%, as I just mentioned in adjusted EBITDA. As for sale, we saw an increase of 200,000 tons, about 3% as you see on this slide. But there was a quarterly drop of 2.1 million, driven by a seasonal reduction in production due to higher rainfall, lower volume of purchases, also influence by seasonal effect, a negative net effect of inventory variations at about 400,000 tons and sales that was chipping off significant numbers as well.
In the next slide, in terms of quality and impact, on the left-hand side of the slide, we see our efforts to improve quality. The first quarter of 2018 marked the consolidation of the lower level of silica in our products, that enhancement combined with other adjustments resulted in a net gain of $4 per ton when compared to the previous quarter. As the market adjustment are still decreasing, and there's good demand for our products. The price of sale for the second quarter of 2018 should, once again, have a quality gain.
On the right-hand side, we update our main projects. They all aimed at reducing our dependence on dams, allowing greater production and better quality. Our filtering plant I, which will be started up in June this year. The filtering mill II expected to start early next year. Magnetic concentrator, which is expected to start in the fourth quarter of this year and a significant mill, which is the dry production mill, which will reduce, by 55%, our costs and which will start up early next year.
Thank you for your attention. That's what I have to share with you this morning.
This is Martinez again. The next slide touches upon our cement division. Our main priority there is to recover margins.
So what have we been doing for the past 2 years? We managed to acquire a good share in the Southeastern markets, especially in the State of São Paulo, Rio and Minas, which were our focus. And for a long time, we work to sell less to more clients. So that's the company's strategy to granularize, to disperse and to create synergy with our long steel businesses, our flat steel businesses and to work towards leveraging the value chain with the final clients.
Margins are crucial for this business. Today, the price of cement in Brazil is the worst price in the world. I think we're only second to China, but maybe you are at the same level as China. So we're talking about the price in Brazil of around $50, $45, maybe lower than that and an opportunity which is great because we have markets in Latin America for $100, $120 also in the U.S., $80 to $100 in Europe. So the priority in cement is to recover profitability, and that's what we're doing, and that's already translated in the results with a margin of 9%, and we're talking about a volume which is relatively lower in the last quarter.
So our strategy now because of an improvement in the market in the Southeastern region in Brazil, contrary to what we saw in other states, we focused on regions growing 3%, 3% is what we're going for, is to work with volumes of around 380,000 tons per month. That's our new volume target with margin recoveries, which is, again, crucial in the markets we decided to focus on.
Another important point to emphasize for cement, CSN has been working hard on the product front. I usually do not touch upon that topic. We talk about steel, the value-added, but today, CSN has a product, CP II and CP III cement, which are great, incredible products. Our CP III is equivalent, in terms of resistance, to a high-resistant cement, which is a high value-added product. So our focus now is on working with more technical clients so that we can capture that added value for cement for final application, be it in industrial construction, be it in infrastructure works and so on. That's a very exciting line of business we see, which is something linked to our strategy. It is part of the same supply chains for civil construction and long steel.
And I'll give the floor to Edvaldo, who is our mentor, if you will, in terms of costs where we have quite a significant competitive advantage.
Good morning, everyone. Just as a complement, what Martinez said in terms of the outlook for cement in Brazil and what we are doing to improve our competitive and profitability levels.
Brazil, after seeing a drop in consumption of around 30% in the last 3 years, we now see or now believe that there is an expectation of growth in Brazil for this year between 1% and 2%. And it's important to emphasize that, that growth is already taking place, mainly in the Southeastern region, which is where our market is located. And we expect this growth in that region to reach even higher figures than those anticipated.
And while we work on price, pricing and costs, we also be able to sell more volumes, as Martinez was saying. And that will surely increase our market share and will help our growth in terms of EBITDA. We've been working hard on cost reduction, as it was said, for cement and other line. We have been reducing costs at around 20% when compared to 2016.
In 2018, despite an increase in our -- in the main fuel for our furnaces of around 30% and increasing coke prices, that increased in U.S. dollars. But we are still working around the same levels as we did last year. But it's a series of initiatives we are trying to implement or have already implemented. In terms of fuel mixes, we are starting a new process of coke processing, which will also help us significantly in terms of cash costs, new raw materials, new cost control procedures. And with all of that, we hope to consolidate our position, which is already of high competitiveness in Brazil and especially in the Southeastern region as it was mentioned, and I hope that we consolidate that position as an important player in this industry.
Thank you to all our executive colleagues. That's what we have to share. We can now move on to our Q&A session.
[Operator Instructions] Our first question comes from Mr. Ivan Westin from Crédit Suisse.
What other assets are in your pipeline for 2018? And Benjamin mentioned a possible -- other possible potential in sales. What is in your pipeline? You received BRL 39 million in sales. And according to your quarterly reports in February, you concluded your rollout of that of BRL 4.5 billion with Banco do Brasil, and you gave as collateral stock share. How much stock was used as collateral? And the second question about steel. Martinez, you mentioned the commercial initiative, I'd like you to please quantify, if you will, how much you expect in terms of higher volume of sales in the second quarter and for the remaining of the year? Shall we see a balanced growth? You had a good first quarter, can you please quantify what you expect for the second half of the year domestically and abroad? And lastly, Martinez and Benjamin, you mentioned that -- just to confirm, what clients can you confirm will be implemented that increase?
Ivano, thank you for your questions. I had a chance to read your report and while you clearly state what happened in a very adequate [ way ], if I may, just as a complement and to give you some more color about what's happening around the world, I read reports from other analysts who talk about China. We need to talk about China when you talk about ore, iron ore and steel. And something that stands out is first, data coming from China is very positive now. Overall, in terms of China for downstream construction businesses, those numbers are growing faster than expected at the end of 2017, which is quite positive for us, too. Another important point, I'm not sure if we looked at it, but the average of steel produced in China went up 10% when compared to last month. They are producing 1.9 million tons every day, which is the equivalent of a utilization level of 7% in the Chinese industry, which is quite positive in the world balance. As for raw materials, we also believe that coal has reached -- has hit rock bottom, so we can also expect upside in terms of costs. Pedro might have something to comment on that as well. So the China environment is more positive than I imagined, and it has been confirmed as you analysts put out your perceptions, your reports about China. Still, on your other question, Ivano, our scenario for 2018 is quite positive. CSN has been going through a phase where we have several operating issues and problems. We were [ pledged ] in exports, but now, as Benjamin said, we are flying, as I said, commercially as we have always tried to do. But from the operating standpoint, we're also doing really well. What had to be put together as a plan has been done in terms of assets, in terms of maintenance, and we are trying to reach [ an end -- a ] number of around 85%, close to 3.4 million, that would be a possible guidance of what I imagine going forward for this year's volume for the domestic market. Quite an aggressive target, but in the first quarter, we already reached [ 7 81 ]. So it's nothing unreal to mention 3.4 million. As for pricing, Ivano, we increased the automakers. And contrary to what our competition -- of course, we had annual agreement. But our agreement allow for adjustment throughout the year, and we had increases for automakers at -- of around 18% to 20% earlier in the year. And for distribution and industry, which are also important pillars, we cannot have a great [indiscernible] of around 12%. We captured of -- about 5% to 6% in the first quarter, and if we are talking about a current mix, we'd be talking about around 10% of mix I am planning today. And we expect for the second quarter to see something around 3% to 4% if we exclude the price increase expected for June, which should sit around 7.5% to 10%, both for industry and distribution. As for the premium, it's also important to factor that in, today, I have just received an e-mail message. We have some information coming from China. The government mills are increasing USD 5 in coal and galvanized products. Cold-rolled, the private sector mills are increasing between 10% to 15% U.S. dollars. The most important piece of data is not here. The [indiscernible] terms are July, the end of July, which means that the industry is relatively picking up. Those are facts. No opinions involved. China prices today is [ 5 85 to 6 05 ] FOB pricing. If we work around the foreign exchange rate at 3.5 to 3.6, the premium today is some 0 to minus 5 for the hot-rolled products. We cannot survive in a market with imported materials with a negative premium, of course. So we are leaving money on the table, a lot of money. For the cold-rolled products, the situation is similar. Maybe for the hot-rolled, we may be close to 2% to 3% negative when compared to domestic products. Where we may have some more difficulties, which is an issue of pricing as you know, are under galvanized and coated materials with a [ dollar ] of [ 3 50 to 3 60 ], that premium, it varies from 7% to 10%, which is quite palatable, if you will, for the kind of product we deliver to our clients. So the outlook -- if you look at a growing market, a growing U.S. dollar, you look at CSN gearing towards the domestic market at a strong pace. With all of that, the outlook is quite positive for this year. I have no doubt in my mind to say that our results will grow quarter-on-quarter towards the end of the year. As for product portfolio, [ human ] rolled product, cold and hot, have been quite selective in terms of markets to operate. But increasingly, we are operating directly with the industry because that's where we have some market value which had not been captured by the market, I believe, not adequately. So the industrial [indiscernible] working directly with industry becomes something very important for the company. Today, CSN sells for construction industry, more players in the market, but we do believe that it can increase our [ proposition ] through our value chain, our value network directly in the industry. Sorry, if I [ extend ] myself, but I chose to give you the bigger picture. Have I answered your question, Ivano?
Oh, yes. Yes, you have. Now if Marcella and Benjamin could perhaps address the first question. I'd really appreciate it.
Okay [indiscernible] we -- in terms of our decommissioning target, we won't touch on specific items. We want to be strategic, and we want to optimize the values we obtain as the sale of asset. That happened with LLC. [ We sold LLC ] before [indiscernible] maintenance, from the point of view of execution, one was much easier than the other, and that's why we still count on the guidance, 3 to 3.55 for the next 12 months. And for that, we also made, on top of those, BRL 2 billion, which we have already sold. We would need to sell another BRL 3 billion. So even if it's evaluated at 1.2 billion to 1.3 billion, other [ set of line ] -- or other assets, rather, that could help make up that number. So those are the assets that, throughout the next few months -- and Benjamin made it clear that we're going -- moving forward at a fast [ moment ], so those assets would be monetized shortly to help us deleverage. As for the Banco do Brasil question, as we mentioned in our report, about 50% of our preferred shares for [indiscernible] were used as collateral for that loan, something close to BRL 600 million of the total debt responsibility, which is today sitting around 6 billion. So you could say it is a symbolic collateral in terms of amount. I hope I have addressed your questions. Anything else, Ivano, if you'd like to understand better?
No, Marcelo. Quite clear.
Marcelo, this is a complement to your answer. This is Benjamin. I'd say the following. We have been discussing [indiscernible] preferred shares for some time. And we will sell them when we find it fitting. We have sold part of it, [ 40 million ] before. And as we believe we have reached the right value, and we are, of course, following up on that quite closely. And with that monitoring, we will know when to do it. We haven't sold yet. It's because we do believe that those shares have an uptrend potential. We have also been talking for a long time about possible assets to sell, and again, it is a matter of reaching the right price. Likewise, [indiscernible] figure, which is another asset we have been penalized EUR 53 in the imports from Brazil to the European community, which still makes the Portugal asset profitable. But within that penalty, we have been able to pay, which makes no sense to us. Now that might end up being an asset that might be interesting to another American, U.S. or American steel company that does not need to pay taxes on that. That might be interesting to one of those companies in the U.S. As for the mining asset, we might sell part of it or even the assets that we hold and that are not part of the [indiscernible] mine [ that can split with another ]. We can use those to monetize the company so that we can reach that figure we mentioned before. My idea is that we accomplished the deleveraging of another BRL 10 billion in the very short run, in other words, by June, July, and then I expect to have another BRL 2 billion by the end of the year. In other words, our wish, our intention is to decommission at least one EBITDA by the end of the year, of which most -- it is my desire, once again, and my will more than the wish, my will, my determination to do that still in the first half of the year. So there is no change in terms of what we said before, but it's a matter of the right moment and the right price as I said. All those assets that we have that were mentioned are good assets, assets that produce positive EBITDA, assets that make sense strategically for the company and for countries where you do not have to pay taxes on exports. And again, Brazil, in my opinion, is being unfairly penalized both by Europe and the U.S. That's part of the game, okay? If we do not have power enough to improve ourselves, we need to recognize the facts and assume strategic positions. So just emphasize that [indiscernible] Portugal, part of mining and/or [indiscernible] all of those assets might be the target of the commissioning in the very short run, and by the end of the year, for us to produce at least a net one EBITDA in terms of deleveraging. And my target -- my base target is June the 30th to complete the first phase of that.
Our next question comes from Carlos De Alba from Morgan Stanley.
Just I wanted to mention that I understood the negotiation with Banco do Brasil already finalized on time. And also, can you tell what is the status of the renegotiation with Caixa? And then finally, of the 4 billion potential asset sales in the next 6 months, how much did you expect of EBITDA that would go away with all the divestitures? In other words, what is the EBITDA you expect to use by selling these assets? And then finally, the target, I think you mentioned 3.5x net debt-to-EBITDA, that's what you expect to reach. But it wasn't very clear or at least, it wasn't very clear to me, what is the date or the time and the year you expect to be at these levels. If you can be a little more specific, that will be very useful.
With respect to Caixa, we announced late January in a material fact that we had [ fewer ] conditions of [ extensions ] between Banco do Brasil and Caixa. We were in the process of issuing the bond. We closed that with Banco do Brasil, and we obtained the approval with Caixa as well. We would not implement what was approved, did not implement. So we have been working with Caixa to renew the conditions which are approved, perhaps changing them to reflect the company's new condition, the condition of less risk. That's where we are now. We are discussing with Caixa so that the new conditions, which were invalidated, might reflect the lower level of risk. So we believe that by the end of the quarter because of the timing of the other deleveraging activities, by the end of the quarter, we hope to be able to announce the extension with Caixa already reflected [ those fewer ] conditions of lower risks. As for the deleveraging, we always had in our horizon mid-2019 to reach the 3.5x debt EBITDA ratio. What we're trying to do now is to speed up that process. Benjamin mentioned that. We want to get there sooner. So let's benefit from the momentum we have to produce the deleveraging level that we expect, and with -- along with the growth in EBITDA, would allow us to bring that ratio down by mid- -- tops, by mid-2019. That's the best projection we may give you now, mid-2019 to reach 3.5x debt EBITDA ratio.
This is a complement. I did not emphasize the Caixa issue. But when we go back to Brazil, this is Benjamin again, when we go back to Brazil, our next priority will be to deal with the debt with Caixa, and I'd like to have that done and completed by the end of May or early June. So we will be dedicating our time and effort to negotiate debt with Caixa. Those negotiations are quite advanced, but we're going to be working hard to close that extension by late May, early June. As for the specific question about EBITDA, what it represents in terms of EBITDA, I say that [indiscernible] and Portugal are strategic assets. But from the point of view of contribution to EBITDA, they were complementary, if you will, for us. Portugal [indiscernible] is a great potential to expand throughout the years, but it will require investment. It will require economic growth so that we can materialize that potential or that potential growth. Portugal, it's a smaller business but also complementary, allows us to add value to our products in the European market but with a penalty of EUR 53 penalty that we have been levied that has decreased significantly our ability, has affected our strategy in that respect. So in other words, they are not very meaningful in terms of contributions to EBITDA. The mining thing is another story [indiscernible] that we sell, mining will mean a loss in EBITDA as you know. But as for [indiscernible], we're talking about assets with very good growth potential. That might be addressed differently, either incorporating them to Congonhas, or we could sell them or sell a small share of Congonhas, but that would contribute to reaching that reduction of at least one EBITDA. And I insist, we have to be ready for us to realize. One thing -- what we did with LLC is going to happen again soon. [ We ] expect to end -- to reach the end of June with at least part of the deleveraging plan completed. Just mentioning 2 examples [indiscernible] talk about 1.2 billion with no EBITDA reduction. That's a nonconsolidated asset, and so Tecon, just as an example, recent reductions show high double-digit figures. So those 2 transactions have the ability of a strong deleveraging capacity. There is very little EBITDA leaving to a lot of cash coming in. We're trying to do what we just did with LLC. That's how we're going to deal with the next asset.
Our next question comes from Jon Brandt from HSBC.
My first question, I'm just hoping you can clarify the actual sale of CSN [indiscernible] and just how much exactly that the proceeds are. You mentioned that it's $400 million plus an additional $60 million in working capital post closing. Steel Dynamics is recording that it's $340 million plus the $60 million in working capital. So I'm just trying to figure out exactly what the cash proceeds are that you'll be receiving. Is it $340 million, is it 400 million, is it $460 million, just if you could clarify that for me. And then the second question is just on the mining side of things. The mining plan this year, if you could comment a little bit about some of the quality of the iron ore that you're expecting will [indiscernible] potential [indiscernible], discounts, et cetera, that'd be great.
Sorry, the proceeds from the LLC will [ arrive from potentially the following: ] the $400 million inclusive of the USD 60 million [indiscernible], that's the target working capital, which was negotiated. What happens is -- or as it usually happens in transactions like this, there will be an adjustment of working capital at the closing date comparing to working capital on that date with the working capital, which was a target. The target is USD 60 million. Now historical working capital for LLC was always high because the company operated by buying in the market or importing from Brazil. So with a very high inventory when compared to other players. So we had negotiated that target working capital at -- between working capital that Steel Dynamics would operate [ and start ] working capital, which will be reflected at the closing date. It continued to be higher in that, and it is higher because it had been shipping freight to be rolled in the U.S. to become raw material for galvanization in that plant. So the working capital will be -- when compared with $60 million figure will lead to a surplus, which today we estimate at USD 90 million, 9-0, USD 90 million. So the cash proceeds are $400 million, which is the asset value plus an adjustment of working capital, which to date is estimated at $93 million to be exact, USD 93 million. Hence, our expectation of the proceeds generated will reach BRL 1.8 billion. And now I give the floor to [indiscernible] to talk about mining quality.
From January to April 2018, the average quality of the CSN was 63.4% iron, 5.5% silica. The average quality for China was [ 62% ] iron and 6.5% silica. Did that answer your question? I think we can move on to the next question then.
Next question from Mr. Leonardo Correa from BTG Pactual.
My first question to Martinez actually refers on that 7.5% to 10% price increase for June. We have been seeing some comments and have been talking to market people, and we have felt some caution, both within the demand and the pricing holding off on the adjustments. Of course, abroad, it's a different scenario. And exchange rate has been surprising somewhat. How do you see things [indiscernible]? Your peers will follow up on your price adjustment. What's the trust level for the price rise in June? And just to confirm what you said, I know that CSN works with yearly contracts for automotive companies, you mentioned a possibility of adjusting prices for automotive setting as well during the conference. So are you going to be announcing an increase for the automotive industry as well in June? Or are you only talking about for [ contribution and ] industry, just to confirm? And then a couple of things for Marcelo. Just to confirm, Marcelo, when you talked about the dividends for [ national mining ], it is clear. What you said is clear. I have one question. Is there any outflow of cash relative to that still in the horizon, just to confirm? And for the working capital, that was a good job that you guys delivered through the quarter, which helped the company's net cash flow. I'd like to hear the expectations you have going forward on that front.
Leo, this is Martinez speaking. Thank you for your question. I am following up on the market very closely, that's the thing I do most, and I'm out there on the battlefield, if you will. I cannot sit behind a desk and just watch the market work, but there are a few things, and you understand this better than I do, the secondary issues, also. And we're talking about recent events, not something that happened long ago. In the last call, if you remember, I was talking about an exchange rate of 3.25, and premiums -- at the time I remember saying something like, if my memory serves me, premiums are 3.5% to 5% in half load at a starting price of $0.0580 to $0.06. What has changed since that last call? The major change might have been, and I know that you study the market. In the Chinese [indiscernible] we had [indiscernible] [ which was a huge event ], and I believe the impact for CSN will be minimized because we'll continue to be [indiscernible], but what has changed from then is that China prices went up. And in your report, you mentioned that the steel prices went up to [ 5 88 ] if I'm not wrong [indiscernible] China. But that's not the situation. But that's not the price we see in the market today. The price today is $0.0580 to $0.06 in China. I think the exchange rate changed levels. That's my opinion. And there are other executives here with me who know a lot more about exchange rates than I do. But I'm working around [ $3.50 ] as a minimum exchange rate. So the increase has to be 10% at a minimum, plus you'd be able to recover the premium on nationalized [ imported ] products. That's a [ second solution ]. The market -- part of the market size, that's an important thing I haven't mentioned, I haven't been asked, is the import question. In 2017, the import penetration set at around 13%. In my last call, I was working with a figure. The best figure for 2018 would be of 4%. Import in the first quarter is sitting at around 11%, 12%, but it's happening in cold and hot flat-rolled products where we have 0 premiums or negative premiums right now. So the issue here is to recover some cost and recover margins. We cannot go back to the margins we had before. If we move to other markets or higher value-added markets, then CSN has a position which requires caution. I have capacity for galvanized products of around 1.2 million a year in terms of capacity for -- the total capacity for galvanized products. Pedro will be delivering those numbers by the end of the year with all the modifications we are implementing. So for galvanized and prepainted products, for those products, the premium [indiscernible] was around 10% to 12%, and that figure has dropped to 7% to 10%. So I need to be more cautious there, and I'm talking about civil construction, which is the focus of the company there. The company's more focused on the [ lifeline of ] civil construction and tries to be lax towards automotive -- the automotive industry because the profitability of changing prices because of their contracts, the changes are lower for those clients. So your question was, are we going to be followed by other peers in the market? I don't know. We are not trying to get market share at any cost. No. We think about profitability first. And my first dogma, if you will, is to go back to having at least 30% of gross margin. I'll only be satisfied when I do the math, cost and price and have a 30% gross margin at the minimum. That's our priority. Of course, the U.S. issue is influential because I have a layout which allows me to send material their way and make money. So the price in [indiscernible] is to work with our portfolio as best as we can. Usually, I am -- I tend to be optimistic because I see what's happening. To grow 27% in a quarter is something quite relevant, Leonardo. So we have what -- we have reason to celebrate, right? And the outlook for those with -- for somebody who spent 2 years rock-bottom, we are doing way better now. So that's the outlook for the year. So I imagine we'll close the year with a number of around 80% to 85% in the domestic market and about 50% of coated products. That's the outlook for 2018.
About working capital. But an important step, but it's not everything we are exploring to do, as I mentioned during the call. We have had significant advances, 10 days in terms of average term for supplies, it can improve slightly. But what we have is always the result of a lot of hard work. In terms of inventory. Before, we had trends that did not allow us to bring that number down as we wanted, but we do believe that, going forward, we will have lower numbers. Today, we're talking about 100 days. We expect to bring that number down by 10% for the next quarters. As for the dividend -- [ your ] question, that was a one-off payout, nonrecurring payout, which was the focus of intense negotiations [ now ]. It was a contract obligation that we have. But that is passed now because I said it's nonrecurring. What we have now, we have a normal dividend payout policy, which will be established in the coming months, but whatever happens now will be within this more strategic [indiscernible] of the company, which has an eye on deleveraging. As it was mentioned is to get as fast as we can to a level below 3.5x.
Okay. Just to confirm, CSN will resume paying out dividends when the leverage level reaches 3.5x. Am I right in understanding that? Or are you planning on paying out dividends before that?
That's something that might come from shareholders. That hasn't happened. I'm just trying to [ schedule ] things. Any dividend policy will have to be linked to the deleveraging plan. And when that happens, the market will be informed within our [ schedule ] of keeping our deleveraging profit within the pace we have established.
The next question from Mr. Thiago from Citibank. The next question is from Gabriela from Banco do Brasil.
I'd like to have a bit more color about the LLC transaction. You announced the sale of the production part, but you have kept distribution part. Will this new subsidiary -- will be supplied by the local CSN? How is that going to work? And how much will that represent for the company's EBITDA going forward?
Gabriela, thank you for your question. I was reading your report. It's interesting to know that Banco do Brasil has been giving a very clear picture what's happening in our industry based on the numbers you have reported. Anyway, something interesting that you mentioned is the following. The domestic market reaches a stronger division here domestically. Today, we have even the possibility of having that company abroad because of our [indiscernible] and have a possibility of operating as a trading company, in other words, of buying plates and delivering the plates there in the U.S. Of course, as I mentioned before, it would not be very responsible for us to just leave behind such a powerful market with such attractive margins. And where we have a quota which belongs to CSN. CSN last year was the largest exporter of galvanized plates in Brazil. It exported 350,000 tons to the U.S., so our plan is to continue to be there with our quota. And as I said before, working in market niches, working with products nobody else wants to work and working with the clients, which have become [ local ] to us for the past 7 or 8 years to a very strong sales team, which has been maintained. Our people there will remain there operating in the American market as they have always done. Of course, we have an operations in the U.S. We have much more flexibility. We are a Brazilian multinational company with clients and products in the U.S. and have clients and have products in other markets. That's what we expect going forward with our new consideration in the U.S. As for the EBITDA, I cannot really quantify. What I can tell you is that the U.S. delivers yearly around BRL 200 million for our EBITDA. As Benjamin also said just now, it is -- is it relevant [indiscernible], but it is complementary, and during our hardest time, that number allowed us to work at full production. A steel industry, when it's not working at full production, it sees its expenses and cost structure change completely. Our strategy has always been, since 2009 when Lehman Brothers went under, we sped up, whereas everybody else was coming to a halt. So we want to work at full production with high added- value products and [ tapping ] all the world markets we have available. Lastly, as for tin plates, the American market for tin plates, buy 2.8 million tons of tin plates, 60% of which is imported. Brazil has a right and a duty to provide that material, and we have the capacity for it. So there is a starting upside, which might come to life in the coming months. This is a complement. In the last year, EBITDA in the U.S. was around [ USD 40 million ], 25% to 33% generated by the distribution business. So those numbers might be maintained, even grown further.
The next question from [indiscernible] from Bradesco.
I have two questions, Martinez and Pedro. The cost impact is clear. And theres' obviously [indiscernible] reduction also going forward. I'd like to understand a little better the nonrecurring part. What kind of impact do you expect coming from coal, iron? Any reduction in your horizon? And the second question, congratulations on the numbers for the quarter, but as the new projects come on board, what can you expect in terms of your improvement, in terms of production capacity and also in terms of the operation of the projects, which are [indiscernible]?
This is Pedro Gutemberg. Thank you for your question. We have a sort of delay for coke from China, from Colombia, coal from around the world. So we still have something to happen in the second quarter, and that drop that we recently saw in coal, especially for coke, we will start to feel it in the coming months.
Now [indiscernible] speaking about the mining question. Our focus now in mining is to focus our operating model on the highest margin product. That's how we work operationally. So we're going through a big transformation this year towards that end to converge. To look for a product of a high margin means to have more longevity in the [ dams ]. That's a second aspect, which will be a differentiating [indiscernible]. Number one, quality and number two, increasing in the coming years, [ we tend to ] depend our -- to decrease our dependence on [ dams ]. And how do they converge those projects? Good quality, reduced [ cost ], and we'll depend less and less on [ dams ]. That combines to provide more longevity to our assets. And throughout this transformation, throughout the first quarter of next year, all those projects I said, all those products have been environmentally improved, and as we move forward, we will have a third technical step, which will increase the level of the production, the amount of production.
This concludes the Q&A session, and I turn the floor back over to Mr. Ribeiro, company's IRO, for his final remarks.
I'd like to thank you all for being here with us in this call, 1 hour and 45 minutes. Benjamin, would you like to say something in closing?
Yes, I will make a final comment. I'd like to thank you all for participating in our call. I'd like to reaffirm our commitment to meet all our deleveraging objectives as soon as possible. By June, as I said because we did the LLC, we want to reaffirm our commitment towards continuously delivering results, continue to for long time and also to reaffirm our perspective with the market. We want to have plans to make in terms of full production, in terms of bringing costs down. We'll be deliberate in the second quarter. That's what I hope and believe. We have a few isolated issues in the first quarter, as just mentioned in the production costs, but now, in terms of the outlook, it remains quite positive. As Martinez said, we are trying -- we are -- we have taken off with a bit of luck. In terms of seeing the economy really recover, we will be able to deliver very good operating results. Along with that, as we [ issued bonds early in ] the year, and I was surprised by investors who said that because of the instability, uncertainty moments that we have in the world, we like to feel comfortable with companies -- to build companies, to have less than [ 3.5 ] debt EBITDA ratio. And I thought 3.5x would be acceptable to the market. So we issued the bond partially. And we are extending with Caixa, and as we come back, we will, by June, significantly reduce our debt and reduce by the end of the year at least one EBITDA in terms of reduction of our leveraging levels. And with -- as for the operating results, I'm sure I'm confident we deliver the number, which would be less than 3.5x [indiscernible]. Thank you. We remain committed and willing, [ just ] thank our -- my executive colleagues who participated, our associates, employees who are working hard for us to be able to deliver the results and the market expectations by the end of the first half. Thank you, and have a nice day.
Thank you. CSN's results conference call is now over. You may now disconnect your lines, and have a nice day.