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São Paulo, February 20, 2019

 

 

4Q18 and 2018 Earnings Release

 

 

Companhia Siderúrgica Nacional (CSN) (BM&FBOVESPA: CSNA3) (NYSE: SID) announces today its consolidated results for the fourth quarter (4Q18) and full year of 2018, which are presented in Brazilian reais and in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and with Brazilian accounting practices, 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. All comments presented herein refer to the Company’s consolidated results for the fourth quarter of 2018 (4Q18) and full year of 2018, and comparisons refer to the third quarter of 2018 (3Q18) and the fourth quarter (4Q17) and full year of 2017. The real/U.S. dollar exchange rate was R$3.8748 on 12/31/2018 and R$4.0039 on 9/30/2018.

 

 

2018 Financial and Operating Highlights

 

·         Adjusted EBITDA totaled R$5,849MM, up 26% over 2017, with an EBITDA margin of 24.4%, due to an improved performance in steel and mining.

·         Steel EBITDA reached R$2,645MM, 25% more than in 2017, with an increase of around 21% in EBITDA/ton in the segment.

·         Flat steel sales in the domestic market grew 20% in 2018, with an upturn of 33% in galvanized products.

·         Mining EBITDA came to R$2,621MM, up 35% over 2017, mainly thanks to higher average realized prices in 2018.

·         The leverage ratio fell 1.11x, closing the year at 4.55x, versus 5.66x in 2017, due to higher EBITDA and lower debt.

·         The financial cycle was shortened by 19 days, with an annual reduction of R$541MM in working capital despite the increase in net revenue.

·         Financial expenses (ex-exchange variation) declined R$470MM in 2018.

·         Net profit totaled R$5,201MM in 2018, versus net profit of R$111MM in 2017.

 

 

4Q18 Financial and Operating Highlights

 

·         Adjusted EBITDA totaled R$1,560MM, with an EBITDA margin of 24.7%.

·         Steel EBITDA reached R$594MM, with an EBITDA margin of 15.8%, moving up 8% in the domestic market.

·         Mining EBITDA reached R$835MM, with an EBITDA margin of 45.3%, driven by a 6% increase in sales volume and higher quality premiums.

·         Net profit totaled R$1,772MM in 4Q18, versus R$377MM in 4Q17, reflecting the recognition of tax credits.

 

 

 

 

 

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¹Adjusted EBITDA is calculated based on net profit/loss, plus depreciation and amortization, income tax, net financial result, 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 stakes of 60% in Namisa, 33.27% in MRS and 50% in CBSI until November 2015 and stakes of 100% in Congonhas Minérios, 37.27% in MRS and 50% in CBSI as of December 2015.

²Adjusted net debt and adjusted cash and cash equivalents includes the stakes of 33.27% in MRS, 60% in Namisa and 50% in CBSI until November 2015. As of December 2015, they have include 100% of Congonhas Minérios, 37.27% of MRS and 50% of CBSI, excluding forfaiting and drawee risk operations.

 

CSN’s Consolidated Result

 

·         Net revenue totaled R$22,969 million in 2018 and R$6,051 million in 4Q18, up 24% and 21% over 2017 and 4Q17, respectively. The performance improvement was driven by higher realized iron ore and steel prices and volume.

 

·         In 2018, the cost of goods sold totaled R$16,106 million, up 18% over 2017, due to higher raw material prices, the effect of the 18.5% appreciation of the dollar against the real in the period and higher volume. In 4Q18, the cost of goods sold totaled R$3,999 million, up 12% year on year.

 

·         Gross profit stood at R$6,863 million in 2018, 39% more than in 2017. In 4Q18, gross profit totaled R$2,052 million, up 10% over 3Q18. The gross margin moved up 3.6p.p. and 5.6p.p. over 3Q18 and 4Q17, respectively, to 33.9%, due to higher steel and iron ore prices.

 

·         Selling, general and administrative expenses totaled R$2,758 million in 2018, up 23.6% over 2017, slightly less than the 24% growth in net revenue in the same period. Selling expenses increased 24.7% in 2018, while general and administrative expenses grew 18.8%, accounting for 2.2% of net revenue, the lowest-ever level.

 

·         Other operating income and expenses came to a positive R$2,705 million in 2018, mainly due to the sale of the Terra Haute plant in the United States, the recognition of the exclusion of the ICMS tax from the PIS/COFINS calculation base, and the fair price marking of Usiminas shares to fair value through profit or loss.

 

 

 

 

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·         The net financial result was an expense of R$1,496 million in 2018. Financial expenses (ex-exchange variation) dropped by a substantial R$470 million in the period, due to the decline in the Selic rate. In 4Q18, the net financial result was a gain of R$510 million, due to the depreciation of the dollar against the real in the quarter, leading to a positive exchange rate variation totaling R$215 million, plus financial revenue arising from monetary correction related to the recognition of the exclusion of ICMS from the PIS/COFINS calculation base.

 

¹ The financial result includes the stakes of 100% in CSN Mineração, 37.27% in MRS and 50% in CBSI as of December 2015.

 

·         CSN’s share of profit of investees was a positive R$136 million in 2018, versus a positive R$109 million in 2017. This was mainly due to improved results at MRS.

 

 

·          CSN recorded a net profit of R$1,772 million in 4Q18, versus a net profit of R$752 million in 3Q18. In 2018, CSN posted a net profit of R$5,201 million, versus net profit of R$111 million in 2017, supported by better operating results and non-recurring gains from tax credits and appreciation of investments (LLC and Usiminas).

 

¹The Company discloses adjusted EBITDA excluding interests in investments and other operating income (expenses) in the belief that these items should not be considered when calculating recurring operating cash flow.

 

·         Adjusted EBITDA totaled R$5,849 million in 2018, versus R$4,645 million in 2017, up 26% due to an increased contribution from the mining and steel segments. Adjusted EBITDA amounted to R$1,560 million in 4Q18, versus R$1,204 million in 4Q17, accompanied by an adjusted EBITDA margin of 24.7%, 1.7p.p. higher year on year.

 

 

 

 

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¹The adjusted EBITDA margin is calculated as the ratio between adjusted EBITDA and adjusted net revenue, considering the stakes of 100% in CSN Mineração, 37.27% in MRS and 50% in CBSI as of December 2015.

 

Free Cash Flow

 

Operating cash flow, as measured by free cash flow, stood at R$817 million in 4Q18, positively influenced by higher EBITDA and a more efficient financial cycle. In the last 12 months, free cash flow reached R$2,249 million, excluding R$1,670 million in proceeds from the sale of CSN LLC.

 

 

 

¹Our working capital includes changes in net current capital, excluding the impacts of the exchange rate variation, as well as the non-recurring increase in taxes to be offset related to the exclusion of ICMS tax from the PIS/COFINS base.

 

Debt

 

On 12/31/2018, consolidated net debt totaled R$26,616 million, while the net debt/EBITDA ratio, calculated based on LTM adjusted EBITDA, stood at 4.55x, 1.11x less than in 2017.

 

 

 

 

 

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Foreign Exchange Exposure

 

The net foreign exchange exposure of the consolidated balance sheet was US$476 million as at December 31, 2018, as shown in the table below. It should be noted that the net foreign exchange exposure includes a liability of US$1.0 billion in line item “Loans and Financing” related to the perpetual bond, which, due to its nature, will not require disbursement to settle the principal amount in the foreseeable future.

 

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

 

 

Investments

 

Investments totaled R$507 million in 4Q18 and R$1,319 million in 2018, an increase of 24% compared to 2017, due to the anticipation of investments related to scheduled stoppage of blast furnace number 3 in the Steel segment and the tailings filtering plants in the Mining segment, which will enable 100% processing of the production without the need to use dams in 2019.

 

 

Working Capital

 

To calculate working capital, CSN adjusts its assets and liabilities as shown below:

                                                                                                                                                                                               

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

·         Inventories: includes estimated losses and excludes spare parts, which are not part of the cash conversion cycle, and will later be booked under property, plant and equipment;

·         Prepaid taxes: composed only of the portion of income tax and social contribution included in recoverable taxes;

·         Taxes payable: composed of taxes payable under current liabilities plus taxes in installments;

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·         Advances from customers: Sub-account of other liabilities recorded under current liabilities; and 

 

 

 

Accordingly, working capital invested in the business totaled R$2,377 million in 4Q18, reducing the financial cycle by 19 days, compared to 4Q17, showing efficiency in working capital management despite strong sales growth in the year (+24%).  In relation to 3Q18, inventories grew due to higher raw material prices, as well as the purchase of slabs in anticipation of blast furnace stoppage # 3, while inventories of finished products were at their lowest in recent years.

 

 

Results by Segment

 

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 ceased the proportional consolidation of its jointly-owned subsidiaries Namisa, MRS and CBSI. For the purpose of preparing and presenting the information by business segment, Management opted to maintain the proportional consolidation of its jointly-owned subsidiaries, in line with historical data. In the reconciliation of CSN’s consolidated results, these companies’ results are eliminated in the “Corporate Expenses/Elimination” column.

Since the end of 2015, after the combination of CSN’s mining assets (Casa de Pedra, Namisa and Tecar), the consolidated result has included all the information related to this new company.

 

 

 

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CSN’s Steel Results

 

According to the World Steel Association (WSA), global crude steel production totaled 1.790 billion tons in 2018, 4.5% more than in 2017. Asia produced 1.258 billion tons in 2018, 5.59% more than in 2017.

 

·       CSN’s slab production reached 1,013,000 tons in 4Q18, up 8% over 3Q18. CSN’s flat steel output came to 3,785 million tons in 2018, 3% higher than in 2017. According to the Brazilian Steel Institute (IABr), domestic production closed 2018 at 34.7 million tons, 1.1% more than in 2017. Apparent consumption reached 20.6 million tons in 2018, 7.3% more than in 2017. Domestic sales came to 18.3 million tons in 2018, up 8.2% over 2017. 

 

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·          In 2018, total sales reached 5,069,000 tons, 3% more than in 2017. Excluding the effect of the sale of LLC, sales would have grown 9%. Total sales came to 1,181,000 tons of steel products in 4Q18, 6% under than in 4Q17, although sales volume moved up 2% excluding USA market.

 

 

 

 

 

 

 

 

 

 

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·         In the fourth quarter, CSN maintained a high share of coated products as a percentage of total sales volume, following the strategy of adding more value to its product mix. Sales of coated products such as galvanized items and tin plates accounted for 51% of flat steel sales, 3.3 p.p. more than in 3Q18, considering all the markets in which the Company operates. It is worth noting that the share of coated products in flat steel sales in the foreign market increased from 60% (3Q18) to 88% in 4Q18. In 2018, sales of coated products grew 33%. 

 

According to ANFAVEA (National Association of Automobile Manufacturers), in 2018, the production of automobiles, light commercial vehicles, trucks and buses reached 2.9 million units, an increase of 6.73%, compared to 2017. Exports showed a weaker performance, with 629,175,000 vehicles sold, a decrease of 17.86% versus 2017. Anfavea expects vehicle production to grow 9%, to 3.14 million units, in 2019. According to ABRAMAT (Construction Material Manufacturers’ Association), sales of building materials climbed 1.2% between 2017 and 2018. The association expects sales of building materials to grow 2.0% in 2019. According to IBGE (Brazilian Institute of Geography and Statistics), home appliance production moved up 0.4% in 2018 over 2017.

 

 

·         Net revenue from steel operations reached R$3,768 million in 4Q18, 9% higher than in 4Q17. This was mostly due to higher steel prices both in Brazil and abroad, as well as an increase in sales volume of coated products. In 2018, net revenue totaled R$15,634 million, 21% higher than in 2017, due to increases in steel prices across the chain throughout the year. In the domestic market, average steel prices climbed 13% in 2018 and 2% in 4Q18 against the previous year.

 

 

·         Adjusted EBITDA totaled R$594 million in 4Q18, down 9% from R$652 million in 3Q18, due to the seasonal decline in sales volume, although the EBITDA margin remained flat at 15.8%. In 2018, EBITDA amounted to R$2,645 million, 25% higher than in 2017, due to a combination of price adjustments and the transfer of volumes to the domestic market. The EBITDA margin moved up from 16.3% in 2017 to 16.9% in 2018. 

 

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CSN’s Mining Results

 

Steel production in China came to 236.3Mt in 4Q18, 9% more than in 4Q17. Resilient demand and less stringent winter production cuts had a positive effect on steel production. In this context, the commodity's price averaged US$71.58/dmt (Platts, Fe62%, N. China) in 4Q18, up 7% over the previous quarter.

 

In regards to maritime freight, the BCI-C3 (Tubarão-Qingdao) route recorded an average of US$18.33/wmt in 4Q18, a decline of 18% compared to the prior quarter driven by lower demand for ships in the period, in addition to a drop in oil prices.

 

·         In 4Q18, CSN’s iron ore production totaled 7.4 million tons, 3% lower than in the previous quarter due to seasonality. Iron ore purchases reached 2,478,000 tons in 4Q18, up 65% over 3Q18. In 2018, CSN produced 27.9 million tons or iron ore, representing the beginning of the Company’s new strategy of using the tailings filtering plant, reducing its dependence on tailings dams.

 

·         CSN sold 9.9 million tons of iron ore in 4Q18, 6.5% more than in 3Q18, with 1.4 million tons sold to the Presidente Vargas Steelworks and the remaining volume sold in Asia and Europe. Sales moved up 7% over 2017, totaling 34.8 million tons in 2018, 5.2 million of which to UPV.

 

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

 

·         In 4Q18, net revenue from mining reached R$1,843 million, 11% higher than in the previous quarter, fueled by a 6.5% upturn in sales volume. The Platts 62 index reached US$71.58/dmt, up 7% in the quarter. Realized price stood at US$63/wmt, 11% more than in the previous quarter, due to an adjustment in FOB sales, combined with quality and sales conditions.

 

 

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·         The cost of goods sold in the mining segment came to R$1,054 million in 4Q18, 20% more than in 3Q18, due to higher sales volume (+6.5%) and an increased share of ore from third parties. In 2018, COGS amounted to R$3,586 million, 19% higher than in 2017.

 

·         The EBITDA margin stood at 45% in 4Q18, down 3.5 p.p. from 3Q18, while EBITDA totaled R$835 million in 4Q18, up 3% over 3Q18, due to higher volume and prices.

 

CSN’s Logistics Results

Railway Logistics: Net revenue stood at R$398 million in 4Q18, generating EBITDA of R$156 million, accompanied by an EBITDA margin of 39%. In 2018, net revenue stood at R$1,506 million, generating EBITDA of R$610 million, accompanied by an EBITDA margin of 40.5%.

 

Port Logistics: Sepetiba Tecon shipped 162,000 tons of steel products and 19,000 tons of general cargo, in addition to handling around 63,000 containers in 4Q18. Net revenue reached R$72 million, generating EBITDA of R$21 million, with an EBITDA margin of 29%, higher than in the previous quarter. In 2018, Sepetiba Tecon shipped 584,000 tons of steel products and 210,000 tons of general cargo, in addition to handling around 247,000 containers. Net revenue reached R$266 million, generating EBITDA of R$61 million, with an EBITDA margin of 23%.

 

 

CSN’s Energy Results

 

According to EPE (Energy Research Company), electricity consumption in Brazil increased 1.1% between 2017 and 2018. Energy consumption grew in the three segments, industrial (1.3%), commercial (0.6%) and residential (1.2%), over 2017.

In 4Q18, net revenue from energy operations totaled R$103 million, EBITDA stood at R$23 million and the EBITDA margin was 22%. In 2018, net revenue from energy operations totaled R$411 million (+1% over 2017), due to increased availability and energy sales in the free market. EBITDA totaled R$113 million and the EBITDA margin was 28%.

 

CSN’s Cement Results

 

In 2018, domestic cement sales totaled 52.7 million tons, down 1.2% from 2017, according to preliminary date of SNIC (National Cement Industry Association). Also according to SNIC, the 2018 sales result largely reflected the truck drivers’ strike in May 2018 and the slow economic recovery.

In 4Q18, CSN’s cement sales declined 9% compared to the previous quarter. Net revenue amounted to R$145 million, while EBITDA was negative, due to a non-recurring increase in raw material costs. Despite the sector downturn, CSN’s cement sales grew 5.5% in 2018 over 2017. Net revenue totaled R$588 million (+21%), while EBITDA reached R$63 million (+314%).

 

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Capital Market

 

CSN’s shares depreciated 5.05% in 4Q18, while the IBOVESPA moved up 11.78%. Daily traded volume (CSNA3) on B3 averaged R$74.9 million. On the New York Stock Exchange (NYSE), CSN’s American Depositary Receipts (ADRs) depreciated 2.19%, while the Dow Jones declined 13.47%. On the NYSE, daily traded volume of CSN’s ADRs (SID) averaged US$4.7 million.

 

 

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CONSOLIDATED SALES VOLUME (in thousands of tons)

 

 

 

 

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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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