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São Paulo, November7, 2018

 

3Q18 Earnings Release

 

Companhia Siderúrgica Nacional (CSN) (BM & FBOVESPA: CSNA3) (NYSE: SID) announces today its results for the third quarter of 2018 (3Q18) in Brazilian reais, and its consolidated financial statements, which are presented in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) and with the accounting practices adopted in Brazil, which are fully convergent with international accounting standards, issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM), pursuant to CVM Instruction 485 of September 1, 2010. The comments presented herein refer to the Company's consolidated results for the third quarter of 2018 (3Q18) and comparisons are for the second quarter of 2018 (2Q18) and for the third quarter of 2017 (3Q17). The Brazilian real/US dollar exchange rate was R$ 4.0039 on September 30, 2018, R$ 3.8558 on June 30, 2018 and R$ 3.1680 on September 30, 2017.

 

3Q18 financial and operating Highlights

 

·         Generation of adjusted EBITDA of R$1,627 MM, a 34% increase over 3Q17 and 15% over 2Q18, with EBITDA margin of 25.2%.

·         Higher domestic sales volume of steel since 4Q14, reaching 912 thousand tons and an increase of 14% in relation to the previous quarter.

·         Adjusted EBITDA from mining increasing 52% against 2Q18, reaching R$811 MM (EBITDA margin of 49%), with a higher volume of ore traded (+14%) and quality premiums.

·         Free cash flow, supported by working capital reduction, reached R$838 MM in 3Q18, against R$73 MM in 2Q18.

·         0.41x reduction in the leverage ratio, from 5.34x in the previous quarter to 4.93x in 3Q18, due to higher operating cash generation and EBITDA growth.

·         Net Income of R$752 MM in 3Q18, due to the strong operational evolution besides non operational revenues in the period, totaling R$3.4 billion in 2018.

 

¹Adjusted EBITDA is calculated based on net profit/loss, plus depreciation and amortization, income tax, net finance income (costs), share of profit (loss) of investees and other operating income (expenses), and includes the proportionate share of EBITDA of the jointly-owned subsidiaries MRS Logística and CBSI. Adjusted EBITDA includes 100% interest in CSN Mineração, 37.27% in MRS and 50% in CBSI.

² Adjusted net debt and adjusted cash account for 100% stake in CSN Mineração, 37.27% in MRS and 50% in CBSI.

 

 

 

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CSN´s Consolidated Result

 

·         In 3Q18, net revenue totaled R$6,165 million, 8% and 28% higher than in 2Q18 and 3Q17, respectively. Compared to 2Q18, the improvement in performance was due to the increase in steel products prices and volumes in the domestic market, and in the mining segment.

 

·         In 3Q18, the cost of goods sold amounted to R$4,299 million, 4.2% higher than in 2Q18, due to the increase in raw material prices resulting from the appreciation of the US dollar against the Brazilian real, as well as higher manufacturing costs.

 

·         In the third quarter of 2018, gross profit totaled R$1,866 million, a strong increase of 54% over 3Q17, with a gross margin of 5.1 p.p. higher than the same basis of comparison, due to the strong gain in the mining’s margin.

 

·         In 3Q18, general and administrative expenses totaled R$106 million, with dilution of 2.1% (2Q18) to 1.7% (3Q18) of net revenue. Sales expenses totaled R$569 million, or 9.2% of net revenue, 0.9 p.p. above the figure recorded in 2Q18 (8.3% of net revenue) due to the increase in transoceanic iron ore freight expenses in cost and freight (CIF) sales.

 

·         In 3Q18, other net income (expenses) reached a positive value of R$178 million, mainly due to the recognition in the results of judicial assets and the valuation of Usiminas shares in the period.

 

·         In 3Q18, net financial result was negative by R$423 million. Finance costs (ex-variation) continued to decline, due to the lower Selic rate, since interest rates on local currency loans decreased from R$ 377MM in 3Q17 to R$ 254 MM in 3Q18. Inflation adjustments and exchange variations were impacted by the appreciation of the dollar in the period, generating a negative amount of R$465 million, partially off-set  by hedge accounting positions.

 

                                   

 

·         Share of profit of investees was positive by R$44 million in 3Q18, compared to R$27 million in 2Q18. This result was mainly due to better results in MRS.

 

 

 

 

·          In 3Q18, the Company recorded net profit of R$752 million, totaling R$3,428 million in 9M18.

 

 

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¹The Company's adjusted EBITDA excludes equity interest and other operating income (expenses) as these items should not be considered when calculating the cash flow generated from operating activities.

 

·         Adjusted EBITDA totaled R$1,627 million, against R$1,420 million in 2Q18, a 15% increase resulted from the operational improvement especially in the mining and logistics segments. Adjusted EBITDA margin reached 25.2%, or 1.3 p.p. above the previous quarter.

 

 

 

 

 

Adjusted EBITDA Margin is calculated based on Adjusted EBITDA divided by adjusted net revenue, which includes 100% stake in CSN Mining, 37.27% in MRS and 50% in CBSI, as of December/15.

 

Free Cash Flow

 

In 3Q18, operating cash flow, as measured by Free Cash Flow, was R$838 million, positively influenced by higher EBITDA and a more efficient financial cycle. In the last 12 months, Free Cash Flow reached R$1,687 million.

 

 

¹Our working capital include changes in net working capital, disregarding the impacts on the exchange rate variation, as well as increase in non-recurring tax recovery in the amount of R$725MM, related to judicial settlement on the exclusion of ICMS from the PIS/COFINS base.

 

 

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Debt

 

As of September 30, 2018, net adjusted debt reached R$ 27,057 million, while net debt/EBITDA ratio, calculated based on adjusted EBITDA of the last twelve months, reached 4.93x. In the quarter, the deleveraging effects from the increased LTM EBITDA and cash generation led to a reduction of net debt/EBITDA by 0.41x, even considering the impacts of the exchange rate variation on dollarized debt.

 

 

 

Foreign exchange exposure

 

The net foreign exchange exposure of our consolidated balance sheet was US$1,433 million on September 30, 2018, as shown in the table below. It should be noted that within the net FX exposure, a liability of US$1.0 billion is included in the “Borrowings and financing'' line related to the Perpetual Bond, which, due to its nature, will not require disbursement for settlement of the principal amount in the foreseeable future.

 

The hedge accounting adopted by CSN correlates the projected exports inflow in dollars with part of the scheduled debt payments in the same currency. As a result, the exchange rate changes in the US dollar-denominated debt is temporarily recorded in equity and subsequently recorded in profit or loss when revenues in US dollars from exports occur.

 

 

 

 

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Investments

 

R$ 325 million were invested in 3Q18, an increase of 24% over 2Q18, mainly due to project seasonality. The increase in steel and mining expenses are related to investments for better coking/sintering and filtration performance, respectively.

 

 

Working capital

 

To calculate Working capital, CSN adjusts its assets and liabilities as demonstrated below:

 

·         Trade receivables: excludes dividends receivable, advances to employees and other receivables;

·         Inventories: includes estimated losses and excludes the spare parts, which are not part of the cash conversion cycle and will be subsequently recorded in Fixed assets when consumed;

·         Advanced taxes: solely composed of income tax and social contribution included in line item ''Recoverable taxes";

·         Taxes payable: composed of line item "Taxes payable", in current liabilities, plus taxes in installments;

·         Advances from customers: recognized in line item "Other payables", in current liabilities;

 

Accordingly, working capital invested in the Company's business totaled R$2,727 million in 3Q18, reducing the financial cycle in 9 days when compared to 2Q18, due to the reduction in accounts receivable from the sale of CSN LLC and the decrease in the inventory position, normalized after the truck drivers' strike in 2Q18. 

 

                                            

 

 

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Business segment reporting

 

The Company maintains integrated operations in five business segments: Steel, Mining, Logistics, Cement and Energy. The main assets and/or companies comprising each segment are presented below:

 

 

 

As of 2013, the Company no longer reports the proportional consolidation of its jointly-owned subsidiaries Namisa, MRS and CBSI. For the purposes of preparing and presenting the information by business segment, Management decided to maintain the proportional consolidation of the jointly-owned subsidiaries, as historically presented. For purposes of reconciliation of the consolidated result, the amounts recorded by these companies are not included in the "Corporate expenses/elimination" column.

After the closing of 2015, after the combination of CSN´s mining assets (Casa de Pedra, Namisa and Tecar), the consolidated result includes this new company´s information as a whole.

 

 

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CSN's steel results

 

According to the World Steel Association (WSA), global crude steel production totaled 457.1 million tonnes (Mton) in 3Q18, or 6.7% higher than in 3Q17. Asia produced 324.9 Mton in 3Q18, 7.8% higher than the same period in 2017, while the European Union and North America increased by 0.7% and 4.4%, respectively, on the same basis of comparison.

 

·           In 3Q18, CSN's plate production totaled 937 thousand tons, a reduction of 6% compared to 2Q18 due to maintenance stoppage. In turn, the production of flat rolled products in 3Q18 remained stable when compared to 3Q17 and 8% lower than 2Q18, totaling 899 thousand tons. According to data from the Brazilian Steel Institute (IABr), in the first nine months of the year, domestic sales reached 13.8 million tons of steel, up 9.6% over the same period of the previous year. Apparent consumption reached 15.6 million tons in the same period, an increase of 8.7% over the same period of last year. Brazilian steel production totaled 26.1 million tons, up 2.5%.

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·         CSN's total sales amounted to 1,290 thousand tons of steel products in 3Q18, or 2% and 1% lower than in 2Q18 and 3Q17, respectively. Adjusting for the effects of the sale of the plant in Terra Haute, USA, total sales would have grown by 4% against 2Q18.

 

 

 

·          In 3Q18 , the volume of steel sold by CSN in the domestic market totaled 912 thousand tons, 14% higher than in 2Q18. Of this total, 859 thousand tons refer to flat steel and 53 thousand tons to long steel products. The greater domestic market orientation with higher performance in the automotive, white goods, packaging and OEM segments resulted in a strong increase in sales of cold-rolled flat steel products (+21% - 3Q18x2Q18), galvanized items (+17% - 3Q18x2Q18) and tin plates (+20% - 3Q18x2Q18).

 

·         In the foreign market, CSN's sales in 3Q18 totaled 378 thousand tons, 28% lower than in the previous quarter mainly due to the sale of Terre Haute plant at the end of 2Q18 (-12% adjusting to this effect), in addition to the strategy of redirecting galvanized to the domestic market. In this period, 48 thousand tons were exported directly and 329 thousand tons were sold by the subsidiaries abroad, of which 65 thousand tons by New LLC, 185 thousand tons by SWT and 79 thousand tons by Lusosider.

 

 

 

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·         In 3Q18, CSN maintained a high market share of coated products as a percentage of domestic sales volume (45% in 3Q18 against 44% in 2Q18), following the strategy of adding more value to its product mix. Sales of coated products such as galvanized items and tin plates accounted for 48% of flat steel sales, considering all markets in which the Company operates.

 

 

·         Net steel revenue reached R$4,099 million in 3Q18, stable compared to 2Q18. Excluding distortions resulted from the sale of the plant in the US, net revenue grew 10% in the quarter. In addition to volume growth, the increase was also due to higher average price of steel, both in the domestic market (+5% vs. 2Q18) and in the external market (+8% vs. 2Q18).

 

 

·         Cost of goods sold in 3Q18 increased by 3.2% when compared to 2Q18, totaling R$3,380 million, chiefly influenced by the 9.6% devaluation of the Brazilian real against the US dollar in the period.

 

 

 

·         Slab production cost in 3Q18 reached R$1,704/t, 4% higher than in 2Q18. The increase in prices of the main raw materials was additionally impacted by the exchange rate variation in the period.

 

·         Adjusted EBITDA reached R$ 652 million in 3Q18, 7.9% lower than the R$708 million recorded in 2Q18 due to  seasonal fluctuations in the performance of subsidiaries abroad. Adjusted EBITDA margin reached 15.9% in 3Q18, or 1.4 p.p. lower than in the previous quarter.

 

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CSN's mining results

 

In 3Q18, steel production in China was 242,4 Mt, reaching a quarterly production record and representing a 10% increase compared to 3Q17. Resilient demand, capacity constraints and operating margins of steel companies produced a positive effect on prices, especially higher quality products. In this context, the iron ore price ratio closed 3Q18 averaging US$ 66.68/dmt (Platts, Fe62%, N. China), 2% up on 2Q18. The average dollar variation between the periods was +9.6%, benefiting iron ore revenues in local currency.

 

The decline in the global supply of high silica since 2Q18 resulted in a strong reduction in the market discount of this impurity in 3Q18. On the other hand, the low impurity of Alumina in the Casa de Pedra product, added to lower silica discounts and with better ore content in the quarter, provided a premium of US$2.1 /dmt for CSN.

 

In terms of maritime freight, the BCI-C3 (Tubarão-Qingdao) route reached an average of US$ 22.33/wmt in 3Q18, an increase of 28% over the previous quarter, driven by higher transoceanic volumes and higher oil prices.  

 

 

 

 

 

·         In 3Q18, CSN's iron ore production totaled 7.6 million tons, 13% higher than in 2Q18 due to the successful implementation of the mining plan and start-up of the first filtering plant. Iron ore purchases reached 1,501 thousand tons in 3Q18, down 20% from 2Q18.

 

·         Iron ore sales totaled 9.3 million tons in 3Q18, 14% above those recorded in 2Q18, with 1.1 million tons sold to the Presidente Vargas Plant and the rest distributed in the Asian and European markets.

 

              Production and sales volumes include 100% stake in CSN Mineração.

 

·         In 3Q18, net revenue from mining reached R$1,659 million, 25% higher than in the previous quarter, due to the higher sales volume (+14%) and appreciation of the US dollar against the real. The CFR unit revenue for exports in 3Q18 reached US$69.4/dmt, a quarterly increase of 4% driven by alumina premiums. On the other hand, the CIF+FOB reference was US$56.8/wmt, stable compared to the previous period, impacted by higher maritime freight and FOB sales.

 

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·         Mining sales cost totaled R$882 million in 3Q18, 3% up on 2Q18, due to the higher volume traded in the period (+14%). 

 

·         Adjusted EBITDA margin reached 49% in 3Q18, or 8.8pp. higher than 2Q18, while adjusted EBITDA reached R$ 811 million in 3Q18, 52% higher than 2Q18 due to higher volume, lower unit cost of ore placed on the ship, maintenance of realized price and appreciation of the dollar in the period.

 

CSN's logistics results

 

Railway Logistics: In 3Q18, net revenue reached R$406 million, generating adjusted EBITDA of R$179 million and adjusted  EBITDA margin of 44% (+4.3 p.p. against 2Q18).

 

Port Logistics: in 3Q18, Sepetiba Tecon shipped 88 thousand tons of steel products, in addition to 63 thousand tons of general cargo and approximately 63 thousand containers. In 3Q18, net revenue reached R$64 million, generating Adjusted EBITDA of R$ 15 million, with adjusted EBITDA margin of 23% (+4.6 p.p. against 2Q18).

 

 

CSN's energy results

 

According to the Energy Research Company (EPE), the domestic electric energy consumption in Brazil increased by 1.3% in 3T18 compared to the same period of the previous year. The industrial sector posted an increase in energy consumption of 1.6% in the 9M18 versus the same period last year. The residential and commercial sectors increased energy consumption by 1.2% and 0.4%, respectively, compared to the same period.

 

In 3Q18, net revenue from energy totaled R$104 million (+2% vs. 3Q17) due to greater availability and sale of energy in the free market. Adjusted EBITDA was R$32 million and adjusted EBITDA margin of 31%.

 

CSN's cement results

 

In the first nine months of 2018, domestic cement sales totaled 39.5 million tons, according to preliminary industry data released by the National Cement Industry Union (SNIC). This amount represents a fall of 2.2% from the same period last year. According to SNIC, sales volume in the third quarter reflects the poor performance of the economic activity.

 

In 3Q18, CSN's cement sales was higher than in 2Q18. Net revenue reached R$ 160 million, 6% higher due to price and volumes increases, despite the adverse scenario in the sector. Adjusted EBITDA reached R$17 million, with adjusted EBITDA margin of 11%, impacted by higher raw materials prices, especially pet coke.

 

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Capital market

 

In the third quarter of 2018, CSN's shares appreciated by 18.83%, while the Ibovespa index appreciated by 9.04%. The daily traded volume (CSNA3) on B3, in turn, totaled R$74.3 million. On the New York Stock Exchange (NYSE), the Company's American Depositary Receipts (ADRs) appreciated by 12.87%, while Dow Jones rose 9.01%. On NYSE, the daily traded volume of CSN´s ADRs was US$4.8 million.

 

 

 

 

 

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This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

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