Canada Markets open in 5 hrs 51 mins

Edited Transcript of CSNA3.SA earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Companhia Siderurgica Nacional Earnings Call

Rio de Janeiro May 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Companhia Siderurgica Nacional earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Benjamin Steinbruch

Companhia Siderúrgica Nacional - President of Executive Board, Chairman & CEO

* Edvaldo Ferreira Miguel

* Luis Fernando Barbosa Martinez

Companhia Siderúrgica Nacional - Executive Officer & Member of Executive Board

* Marcelo Cunha Ribeiro

Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board

================================================================================

Conference Call Participants

================================================================================

* Caio B. Ribeiro

Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team

* Gabriela Elerati Cortez

BB-Banco de Investimento S.A., Research Division - Senior Analyst

* Jonathan L. Brandt

HSBC, Research Division - Head of LatAm Cement, Construction & Real Estate Equity Research Team

* Leonardo Correa

Banco BTG Pactual S.A., Research Division - Research Analyst

* Thiago K. Lofiego

Banco Bradesco BBI S.A., Research Division - Director and Head of the LatAm Pulp & Paper and Metals & Mining Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and thank you for holding. At this time, we would like to welcome everyone to CSN's conference call to present results for the first quarter 2019. Today, we have with us the company's executive officers. We would like to inform you that this event is being recorded. (Operator Instructions) We have simultaneous webcast that may be accessed through CSN's Investor Relations website at www.csn.com.br/ir, where the presentation is also available. The slide presentation may be downloaded from the website, and the replay of this call will be available for a week.

Before proceeding, we would like to say that some of the forward-looking statements are near expectations or trends and are based on current assumptions and opinions of the company's management. Future results, performance and events may differ materially from those expressed herein, which do not constitute projections. In fact, actual results, performance or events may differ materially from those expressed and implied by forward-looking statements as a result of several factors, such as general and economic conditions in Brazil and other countries; interest rates and exchange rate levels; future rescheduling or prepayment of debt pegged in foreign currencies; protectionist measures in the U.S., Brazil and other countries; changes in laws and regulations; and general competitive factors at global, regional or national levels.

We will now turn the conference over to Mr. Marcelo Cunha Ribeiro, Investor Relations Executive Officer, who will present the company's operating and financial highlights for the period. You may proceed Mr. Ribeiro

--------------------------------------------------------------------------------

Marcelo Cunha Ribeiro, Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board [2]

--------------------------------------------------------------------------------

Good morning to all of you, and once again, thank you for participating in our call for the first quarter 2019 for CSN. I would like to give the floor to our Chairman, Benjamin Steinbruch, for his initial remarks.

--------------------------------------------------------------------------------

Benjamin Steinbruch, Companhia Siderúrgica Nacional - President of Executive Board, Chairman & CEO [3]

--------------------------------------------------------------------------------

Good morning and a good day to all of you. Thank you for your participation. We are presenting the results, and I would like to invite analysts to carefully look upon the results of CSN and spend some time with our IR team.

As always, the secret lies in the details, and I'm convinced that we had an exceptional quarter, and this is not fully reflected in the figures that are presented. All of this is implicit as part of good performance of the mining segment and the not-so-bad results of the steelworks.

And I would like to mention some additional points that lead us to reflect. And once again, our IR team is at your entire disposal to clarify any doubts or comments that you may have.

We will begin with mining, that was the crown jewel during this quarter. We had an improvement in terms of price, quality. And as you are aware, we're working at full steam. We have a significant inventory of iron ore, both at the mine and at the forge and this due to the very good productions that we have been able to have in the last few months.

And I would like to mention that the figure of $82 does not reflect the reality of what our earnings truly are. We're selling for the future, and our reference price, as you know, will be in May. We were able to dispatch 8 shifts at the end of March, and we still have not received from this until the coming months. We have 3 additional shifts that have been contracted to -- for use in May, 1 in June. And we're seeking other alternatives to be able to shed a greater amount of product because, as I mentioned, in terms of quantity and quality, the production is very good.

When it comes to the prices that we are practicing in Asia, we're lagging behind 3 months. The price has had a reaction -- a rather delayed reaction when it comes to the shipments. And of course, this price will repeat, and this will be reflected in figures that are much closer to the reality than those that have been practiced in the market of around $92 or $95. Now when it comes to this price and as well as to the amounts and the qualitative part of the iron ore, I truly believe that it is worth spending some time to gain a full understanding and to be able to anticipate what will be collected in terms of results for the second quarter.

Regarding the steelworks, the steel plant, if you analyze the figures, I think that neither the qualitative nor quantitative part, the amounts and the prices invoiced were not good. They were foreseen because of the minor fluctuations of 2% in the amount quarter-on-quarter and very little in terms of prices because of the product mix. And later, we will explain what happened in terms of price and quantity.

So there hasn't been a market improvement. Prices continue to be the same. And through prices, we have a 10% opportunity for recovery depending on the type of product. We are going to implement this price rise, and we're firmly convinced of a resumption of demand. What had been foreseen during the last quarter of 2018 still has not materialized in the domestic markets. We're awaiting this improvement, and invoicing and demand, per se, are due to the weakness of inventory that we had at the end of the year due to the consumption. But it is our understanding that there will be a repositioning in the second quarter along with price changes. And if you analyze prices and amounts, they're doing well.

Our problem refers to the costs. We're not performing well when it comes to the steelwork production, especially due to blast furnace #3. As you are aware, there will be a scheduled stoppage in the month of June to carry out a minor overhauling that will take 60 days approximately with an investment of 200-and-some million. In 2001 when the last report of this blast furnace was carried out, the magnitude was much greater and the cost was steeper.

We believe that this overhaul will be done without any problems. And when it starts up again, it will have a better productivity, an increase in productivity. We're doing everything not only to increase productivity but also quality. And in September, as forecast, we should have very good figures when it comes to cost.

19 years of campaign of this blast furnace, we're somewhat surprised with the end of this campaign. We did not expect these difficulties. But because of the natural difficulties of the operation at the end of a campaign and quality, we're having only timely problems in terms of production.

Blast furnace #2 is operating normally. Now this increase in cost was a surprise, had not been foreseen. And the purchase of slabs that we carried out since the beginning of the year allow us to be prepared for this scheduled stoppage at an average price that is much lower than that of the blast furnace. We believe that, in the second quarter, we will have a significant enhancement in terms of prices as well as mix.

We're quite optimistic in the resumption of the economy. We believe that this resumption will come. It has not materialized so far. The entire country is awaiting this improvement, not only the approval of the social security reform, but we believe that other measures will be put in place to favor employment, consumption and a growth in demand. Unfortunately, none of these activities have improved, but we do believe that they will very soon, allowing for a improvement in domestic demand.

When it comes to the cement, we're working full steam. This should enable us to have a lower cost. And as far as the costs that are being leveraged, we do believe we will have good results.

On the accounting viewpoint, we had a significant cash consumption once again due to the increase in the slab inventory. We were getting prepared for the overhauling of the blast furnace, and the price of the Usiminas shares had a slight trough, now once again reflecting the performance, but we do believe that we will go back to normal levels with the market improvement that we're expecting. This market improvement will be per Usiminas, Gerdau and ourselves, and we do believe that the situation will be better for the entire steel segment.

Now the timely issue of the blast furnace has caused some confusion when it comes to the results of the steelworks, I suggest that you deal with this as a one-off effect as something that has a defined period for recovery. And beginning in the third quarter, there will be figures that reflect the truth, both in quality and production.

The topic of the hedge account will be reviewed, offering us greater benefits in terms of net income. The net income should have been higher and has not been for -- a problem, not of course of performance but of perhaps an imbalance between the mining activity and the rest.

And once again that accounting issue of the currency. For the coming quarter, we're optimistic. We're quite eager. We do believe it will be the best quarter in the history of CSN not because of any specific changes but simply because we will be able to prove what we have been practicing since last year. This is a deleveraging working at full capacity and fully working with a full restatement or correction of prices.

If you analyze the results of mining, based on slab 92, as I mentioned previously, it is very different from the reality of 95, and we will get there. These are future sales, and we will have an update in prices, of course. As I mentioned, they are lagging behind.

In terms of mining, we're convinced that this will be the best month in the history of CSN in terms of quality, quantity as well as price. And when it comes to the steelworks, we believe in an improvement in demand and an improvement in the price levels as we're already implementing some price raises.

This month in terms of costs, we're already working with a better cost level. And in May and June, if everything continues as present, we will have a reduction of the cost until the stoppage of the blast furnace. Basically, these are my initial comments. I do not want to convey false optimism.

We truly are optimistic. We believe that the steelwork market will be better. We believe in mining. We believe in cost improvements and better margins for cement. This is a given. We're not mentioning anything novel, and it is up to you to become updated to our team and receive this information because this is already happening. And we're working towards this. Our commitment is the $2 billion of EBITDA and $5 billion of net debt.

Something that we have been mentioning since the beginning of the year, we already do have some reductions in terms of our leveraging. Net debt/EBITDA is 4.07. It could have gotten to 3.90, but we prefer to leave the good news for the coming quarter. So in terms of our commitments and with the additional aid of a market boost and a price enhancement until the end of the year, we will be able to deliver everything that we have set forth to do.

Thank you once again for your presentation. And after Marcelo's presentation, we are at your disposal to respond to any questions. Once again, thank you for participating in our conference call.

--------------------------------------------------------------------------------

Marcelo Cunha Ribeiro, Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board [4]

--------------------------------------------------------------------------------

Thank you, Benjamin. A very quick presentation on our consolidated indicators, our main business, and then we will go on to Q&A. We are accompanied by Luis Martinez, Pedro Gutemberg and Mr. [Habelo], who are at your disposal to respond to questions.

We begin with Page #2 with the highlight of the quarter. In the 3 axes that we have selected as being necessary to recover our financial health and excellency, improving operational results, reprofiling financial liabilities and acceleration of deleveraging was excellent news during these months. As Benjamin mentioned, in terms of EBITDA, we have the best result for the first quarter in the company's history. We will speak more about the future in a few seconds.

When it comes to our debt -- lengthening of the debt, we have had a very significant lengthening, showing the new company's status in the capital markets. We have issued $1 billion in bonds, once again, significantly lengthening the debt. And in the third place, perhaps what is more important, reducing the relative indebtedness to 4x, which is more sustainable, and we're on the path to attain our target, which is 3-some in terms of EBITDA this quarter, also aided by good news, which is iron ore.

I go on to Page #4, where we observe a consistent and continuous enhancement of our quarterly EBITDA. We have a 40% growth practically between the first quarter of 2018 and the first quarter of this year with a growth of 5 percentage points in the margin thanks to the greater share of the mining business, which during this quarter, had margins above 60%, margins that used to be 30%. We also had a growth of 11%, mining more than 40% and offset by a trough in the steelworks that has already been mentioned. At this point in time, we're quite comfortable with our guidance of 7.5 million during this year with the results obtained in the first quarter and what we see in the short term.

We go on to Page #5, financial indicators. Regarding investments CapEx, it was BRL 313 million for the quarter, a considerable increase vis-a-vis just last quarter as we have important projects in steelworks, the reform of blast furnace 3 and the tailing dams that -- enabling us to be completely free of these dams. We're also aligned with our guidance of BRL 1.5 billion for the year.

In terms of the financial cycle, we had an increase -- a timely increase of 48 to 68 days. This was the great impact on the cash flow during the period. Stock price has increased BRL 500,000 due to a slab that we purchased. And when it comes to receivables, well, something very timely, the sale of several tons of iron ore in the last days of the quarter, and we still have not received the BRL 700 million that, in April, will already be reverted. This led us to a negative cash of almost BRL 500 million but simply a transition situation. In the last 12 months, we show you a generation closer to BRL 3 billion supported by the sale of our asset in the U.S.

Even with a negative cash generation, as we see on Page 6, we do have good news when it comes to leverage and liquidity: a drop in net debt, a drop in gross debt and a cash increase thanks once again to the prepayment of iron ore that we have announced and executed in the period of BRL 2 billion, good liquidity.

And what helped us was a trough of the relative leverage, dropping to 4x. As Benjamin mentioned, that's not where we're stopping. In half a year, we will reach 3.5; and at the end, 3x. And Benjamin's personal goal is to reach a leveraging of 2x. We will obtain this with the operating enhancements and with the initiatives that we have communicated to the market. We're working on streaming the potential sale of assets abroad, new prepayments, that is to say a series of alternatives that will allow for an operating enhancement, allowing us to attain this leverage.

On Page #7, we show you that this rapid deleveraging has already helped the company to gain access to new credit with greater quality offering greater confidence to the market as a whole and the capital markets. These are all of the initiatives that we have carried out beginning with some banks and important debt issuance.

This is a new phase at the company. More than BRL 9 billion have been pushed from 2018 to 2020, removing the liquidity pressure in the short term, enhancing the term of debt and allowing us to have our credit ratings recognized. S&P and Moody's show that we're on the path to new ratings thanks to the initiatives that we will announce very briefly.

I go on to Page #9, a very quick comment on our main businesses. We begin with the steelworks performance that will also be mentioned in greater detail.

We grew more than the market, 4% growth year-on-year when the market was practically stagnated. In export products, we had a growth. What happened was a drop in EBITDA once again to costs and volume, lower productivity of blast furnace 3 and the increase in the price of raw materials, especially iron ore, and the weaker demand that did not allow us to transfer these price increases to our prices.

The good news is that this is a provisional situation, and we hope to return to our normal levels in slab costs and profitability in mid-August and September. And this will be fully reflected in the fourth quarter of this year.

We go on to Page #10. The unit was our best performance. Mining, where all valuable contributed a growth year-on-year of sales and a significant enhancement in production. Since the end of the year, we have eliminated the bottlenecks associated to the use of the dams. We're carrying out the dry stackings. We went from 27 million tons to 32 million tons, enabling us to have more production.

And this helps us in our cost dilution, all of this in terms of quality premiums, a recovery of prices, lower freight prices because of the supply of iron ore in the markets, contributing to multiply EBITDA 4x year-on-year, reaching BRL 1.3 billion, coming from a margin of 31% (sic) [38%] to 61%.

Now we still have more news. As we can see on Page #11, we do have a situation where quotational periods have -- benefiting us. We're very attentive to the price situation in this environment of a continuous increase in the solvency of our prices and greater volume. All of this will lead to a positive variation of our quotation periods. Now along with quality premiums that are between $1 and $2, our price realization is excellent.

These are the main indicators that we wanted to share with you, and we will now go on to our Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Leonardo Correa from BTG Pactual.

--------------------------------------------------------------------------------

Leonardo Correa, Banco BTG Pactual S.A., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

My first question to Martinez. Looking at the evolution of EBITDA because in the steel business, we clearly see a sequential difference. And by following up on the evolution 2 years, we see that the results are somewhat low. Is this due to costs and nonrecurring events?

Now the EBITDA generated in steel was BRL 600 million or BRL 700 million per quarter, closer to the BRL 700 million per quarter. This quarter, the results have fallen practically 50%. At the beginning, Benjamin mentioned an improvement in the third and fourth quarters after the maintenance is carried out. Nevertheless, I would like to attempt to understand the performance of the second quarter. It seems that prices are about to be raised if there will be a sequential improvement. And how can we imagine the performance of steelworks in the second quarter, steel under pressure, of course? But I would like to hear from you what will happen in the second quarter. And what do you think about the second semester?

Now if we talk about another issue. It's always difficult to look at net revenues for liquid tons. Martinez, I'm not going to speak about this. I'm going to speak about a mix. I imagine there was a worsening in the mix. But I would like to hear from you the price trend domestically. The activities have had a slowdown. So which is your perspective of the price evolution?

And finally, a question to Benjamin. Benjamin, there's always a doubt in the market that the company will sell its assets. And they question the urgency that will exist at CSN when it comes to the sale of assets. The scenario is favorable. The cycle is positive. The metrics are positive. And there's a certain impatience in the market in terms of what had already been discussed and has not come to a final process of definition. Therefore, what are you thinking of in terms of the sale of assets in this more benign or positive scenario? These are my questions.

--------------------------------------------------------------------------------

Luis Fernando Barbosa Martinez, Companhia Siderúrgica Nacional - Executive Officer & Member of Executive Board [3]

--------------------------------------------------------------------------------

Leo, this is Martinez. And allow me to give you an outlook of what happened to better explain what will happen in the second quarter and to speak about the second semester, more importantly.

At the end of last year, the economic atmosphere was very positive with great expectation for stronger growth at the beginning of 2019. This has not materialized, as mentioned by Benjamin. And I'm speaking about facts and data and not a market opinion. Distribution increased inventory. We got to an inventory of 4.3, according to the data from INDA. Now this is a data that we can find in the market.

Now another market that we have some contracts with the white line, home appliances and the automobile market, both sectors were aware that there would be an increase beginning in January 1. What happened was an anticipation of purchasing, and we had a sensational fourth quarter 2018. The first quarter 2019 began, and what happened, the impacts that we had, CSN saw the same volume in the first quarter 2019 as in the fourth quarter 2018, 1,175 compared to 1,181.

And what happened in the domestic market, and I'm not minimizing this, is that our volume dropped from 835,000 to 811,000. 30,000 tons that we lost in terms of galvanized material that the automotive market and the white line market did not purchase. The galvanized represented 51% of our portfolio. It's dropped to 48% with an impact on price and EBITDA. Since the prices will be better explained, but this will also undergo an evolution in the second quarter.

What will happen in the second quarter? We had a price increase of 10% implemented in distribution and civil construction. And there's data in the industry that these prices are also being implemented. We cannot deviate too much from these prices. It would not be sustainable.

So in the second quarter, we do have a recomposition of inventory in distribution; resumption of some export clients thanks to the foreign exchange; trucks; the agricultural sector. The automotive sector in terms of trucks had a positive sales volume. They have now consumed their inventories, and they're going to come back with better levels compared to the third quarter. As Benjamin mentioned, there hasn't been a worsening. The trend for CSN is to improve regardless of what happens in the markets.

In civil construction, we follow up on an improvement in launches but not sufficient to live with the market as a whole. Now what we're doing now strongly is the imports of galvanized of 180,000 for the quarter. We're referring to 60,000 per month that CSN can capture also due to the appreciation of the dollar. And this is what we will pursue in the second quarter and in the second semester.

In terms of our sales strategy, as I always tend to say, we're working at full steam. Despite our maintenance problems, added value continues. [MI] reached 86%. This is a significant data. The trend is for it to come closer to 90%, and we will occupy the space of imports somewhat, and we're very well positioned in the markets. We're not all in the same basket. We have the ability to better manage this.

In terms of the guidance given in the last call, I referred to 3,300 tons in the domestic market. Nothing has changed. And I think I can do this quite simply. In the domestic market this year, the problem is where to start up. We have had a price raise, market raise. And we have to understand what is happening in the worldwide economy. The cold-rolled product at present is negative 4%. We would have to increase the prices 10% now to regain our margins. And this is what Benjamin mentioned. We need to have a greater focus on profitability. We expect an improvement of EBITDA in the second quarter, but those BRL 600 million to BRL 700 million that we had already achieved without a doubt will be obtained in the second quarter. Now this is the market situation.

--------------------------------------------------------------------------------

Benjamin Steinbruch, Companhia Siderúrgica Nacional - President of Executive Board, Chairman & CEO [4]

--------------------------------------------------------------------------------

Leonardo, regarding your question of the -- mobilizing this, well this -- all these words are not part of my vocabulary of losing our impetus to sell assets. What I can say is that we're devoting ourselves fully to the streaming operations, BRL 500 million. We're attempting to continue the prepayment with Glencore. And we're also working arduously to achieve an operating improvement. So what you said about impetus and urgency, well, all of this is being focused on an improvement of operating performance. The EBITDA will go from 28% to 34% in the coming quarter. And this will award the efforts being carried out at the company, and that began in 2018. As I said, all of this has not been fully reflected in the accounting figures that we are presenting.

Now the issue of Germany, yes, we have not focused on that so far. It's coming very close to a conclusion. We are discussing this issue step-by-step as was done in the United States. To be able to materialize this, we have to look upon the market favorably when it comes to the price of this transaction.

Now we carried out a very surprising transaction in the United States, something that was done at the right time of divestment. And we're also working so that, in the specific case of Germany, we can repeat this performance.

We continue with our conversations. We're very close to coming to a conclusion, a closure, but we're now discussing price which is the exclusive hurdle. If we do reach appropriate price, without a doubt, we will sell this asset in Germany.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Mr. Jonathan Brandt with HSBC.

--------------------------------------------------------------------------------

Jonathan L. Brandt, HSBC, Research Division - Head of LatAm Cement, Construction & Real Estate Equity Research Team [6]

--------------------------------------------------------------------------------

My first question is for Marcelo. I just wanted to ask about working capital. I know there was a pretty big outflow this quarter, which you explained as being more of a one-off in the build-up in slab inventories, and the iron ore volume is concentrated at the end of the quarter. Should we expect that to normalize in the second half? And is a normalized working capital level back at that BRL 6 billion to BRL 6.5 billion. In other words, I'm wondering if we should see a pretty substantial working capital release in the second half.

And my second question for Benjamin. I think you had mentioned the leverage target of 3x by the end of the year or maybe potentially in early 2020. But you also mentioned that you would like to go to 2x, that that's your personal target. I'm wondering how M&A fits into that? I mean, should we expect no more M&A until you hit that 2x leverage? You talked a little bit about sort of that 3-year strategy of the company, where you get -- what the strategy is after you hit that 3x. Does it continue to delever until you get to the 2x? Is there a different strategy on, say, more of a medium-term outlook?

--------------------------------------------------------------------------------

Marcelo Cunha Ribeiro, Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board [7]

--------------------------------------------------------------------------------

Very quickly and thank you for your question, a question about our 3-year strategy. That is more interesting, and I will allow Benjamin to answer this.

--------------------------------------------------------------------------------

Benjamin Steinbruch, Companhia Siderúrgica Nacional - President of Executive Board, Chairman & CEO [8]

--------------------------------------------------------------------------------

In terms of working capital, it will return to normal levels throughout the year. In the second quarter, we will have BRL 600 million in terms of accounts receivable. There will be an inflow, but the levels will continue to be high and will become more normal at the end of the year. This is our commitment. And with this, we will comply our guidance of free cash flow of BRL 3 billion a year. Now, Jonathan, when it comes to the deleveraging, we propose to deliver at the end of the year as a company a net debt/EBITDA ratio of 3x, which would be attained with the streaming operation, prepayments and the sale of an asset and, of course, an enhancement in our operating results. Now we continue as a company to be committed with that figure. And when I was in the United States the last time when speaking to the investors about the launch of our bank, I took the personal commitment, the challenge of reaching a delevering of 2.5. That is to say 2.5 net debt/EBITDA ratio, and this 2.5 would be repeated twice for EBITDA and 5x net debt.

But that jointly would allow us to have this 2.5 net debt/EBITDA ratio. Now this 2.5x, this is a personal challenge and is to be able to face the demand that we received from friends in the market to have the company attain the AAA rating. The idea, therefore, is to truly achieve this at the end of the year and to deliver these figures.

I believe that if you analyze, as I suggested that you analyze, the evolution of the results of the company, you will observe that it should not be a surprise to anyone to see the figures that we will present in the second quarter. They're given and they're part of a reality, something that the market so far has not understood.

As I mentioned, we're working based on 3 different pillars: streaming, the prepayments and the operating results. Because it is these operational results that we're in the pursuit of, the company has always stood aside in terms of the margins that we presented to the mining market and the steel market, and it is mandatory until the end of the year to recover these historical margins. Now if you observe that combination of the operational part, the streaming, the prepayment and the sale of assets, we can fulfill that challenge that was set forth by the company and personally by myself.

In terms of the coming 3 years this year, we would like to definitely -- and with that capital reinforcement, the capital structure of the company, we believe that we have been able to accrue very good assets during this time. And once they are able to have a better performance and we no longer have that weight of the payment of interest imposed upon us in the last 3 years and when we can work with normal interest rates as in Brazil, the interest rates were completely atypical, a reality that set itself aside from the world, the world working with negative real interest rates. And here, our interest rates were very high in the years 2015, '16 and '17. We had an improvement in 2018 and a better one in 2019.

As far as a return of lower inflation and real interest rates, as I mentioned, we're going to work arduously until the end of the year on that net debt/EBITDA ratio. We're going to invest in productivity gains in the steelworks through the sintering the coking and blast furnace reforms. Once again, we're going to have our own mining ore, the purchase from third party. And shipments through third-party ports, as our port has reached maximum capacity and will take at least 18 months to be able to dispatch 40 million tons and invest, of course, in opportunities that are very close to us. The generation of energy is one example. This has always been a differential for us, the possibility of being self-sufficient in energy production. And with the growth that we have had in the long steel, in mining and steelworks, we will become energy buyers. And we want to escape that with investments that are not very high, and we, of course, will see new business opportunities. Our motto will be the issue of leveraging so that we can harvest the fruit of our positive assets and not detour from other businesses by paying interest rates.

I do believe we will have growth and moderate growth from the organic viewpoint. And in the year 2021, 2022, a strategy of maintaining the company with a low leverage with the assets that we have and by performing well, we will have operating results above any expectation from the market, shareholders. And the value of our equity and our bonds will increase. At least, this is my vision for the coming 3 years.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question is from Gabriela Cortez from Bank of Brazil.

--------------------------------------------------------------------------------

Gabriela Elerati Cortez, BB-Banco de Investimento S.A., Research Division - Senior Analyst [10]

--------------------------------------------------------------------------------

Yes. Can you hear me now?

--------------------------------------------------------------------------------

Unidentified Participant, [11]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Gabriela Elerati Cortez, BB-Banco de Investimento S.A., Research Division - Senior Analyst [12]

--------------------------------------------------------------------------------

First, regarding mining. There was a drop in sales of 6% and a drop quarter-on-quarter. I would like to know if these movements come from the increase in inventory. And the working capital that you'll spend on slab, was this also due to the mining -- iron ore, I'm sorry? Now when it comes to cement, there has been an advance of 3% year-on-year. Now in terms of sales, the performance was 7%. Could you give us more detail in terms of what happened? And which is your outlook for the second quarter? When it comes to the third-party volumes to complement the third question, what can we expect for the second quarter?

--------------------------------------------------------------------------------

Unidentified Company Representative, [13]

--------------------------------------------------------------------------------

Gabriela, this is (inaudible). The sales volume in the first quarter was 1 million tons below the fourth quarter 2018 because of the lower volume of purchases. And we had heavy rainfall decreasing the pace of shipments, and this did not allow us to fully export our production during the semester. We have had an excessive reduction in the inventories during the year. Now we have to outflow all of this. And because of this, we have closed 3 different shipments, 2 leaving in June, and then -- excuse, me, 2 leaving in May and another leaving in June. And in terms of third parties, of course difficulties have increased. The expectation is to have a reduction. We have had a lower offer of suppliers, once again impacted by the accident in Brumadinho and other factors. Thanks to the high levels of production, we will have a significant net growth in sales with higher profitability in 2019.

You had a question on slabs, I believe. Now slabs were purchased simply because of the forecast of the stoppage of blast furnace 3.

--------------------------------------------------------------------------------

Edvaldo Ferreira Miguel, [14]

--------------------------------------------------------------------------------

And Gabriela, this is Edvaldo. And in terms of cement, where accident in the Southeastern Region, where there was a drop of approximately 2% in the market. We had a price repositioning to improve profitability, and we had a period that we took to carry out maintenance. And we're well positioned for April and -- to recover what we had lost during the period.

For the second quarter, therefore, we should have an advance in terms of these figures. Yes, this is the expectation. And of course, we depend on the resumption of the market as we mentioned at the beginning, something that has not happened, but we're convinced it will.

--------------------------------------------------------------------------------

Luis Fernando Barbosa Martinez, Companhia Siderúrgica Nacional - Executive Officer & Member of Executive Board [15]

--------------------------------------------------------------------------------

This is Martinez. CSN grew 6% in the cement market in the last 12 months. In the last 2 years, the growth was practically 60%. Once again, we're working at full steam. There's no difference between cement and steel. What happened in the first quarter, and this holds true to all the cement plants, is that we carry out maintenance. We're also concerned with profitability. This factor is very depressed in terms of prices. So we're working towards improving our profitability through prices. In the second quarter, we're working with levels of 340,000 per month. In the second quarter, we should reach 1 million -- 100 million tons, and this will remain going forward.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from Gustavo with Santander Bank.

Our next question is from Caio Ribeiro from Credit Suisse.

--------------------------------------------------------------------------------

Caio B. Ribeiro, Crédit Suisse AG, Research Division - Head of LatAm Metals and Mining Team [17]

--------------------------------------------------------------------------------

I would like to know if you could speak about your transition and if you're going to comply with this process until the end of the year. And in mining, what is happening with the operation and how much you can further reduce your cost based on the initiatives that the company is implementing? And the possible expansion in terms of galvanized products that you mentioned in the past, are you still considering this? Or has anything changed? At the beginning of the year, we see somewhat weaker figures in the automotive sector. So if you could please give us an outlook in terms of these 3 areas.

--------------------------------------------------------------------------------

Unidentified Company Representative, [18]

--------------------------------------------------------------------------------

Caio, this is (inaudible). The tailing dams, the first is full. The construction of the second dam ends in June. And so a ramp-up at the -- until December, we should become fully self-sufficient. The works are proceeding well, and this will set us aside. When it comes to the cost -- the cash cost of iron ore in China, it reached 35.9 per ton. The curve is 62, and this cost was 35.9 per ton. Our production is strong. In the second quarter, we will continue to operate strongly. We're going to reduce the cost through our production. And the outlook is very good going forward.

--------------------------------------------------------------------------------

Luis Fernando Barbosa Martinez, Companhia Siderúrgica Nacional - Executive Officer & Member of Executive Board [19]

--------------------------------------------------------------------------------

Caio, this is Martinez. When it comes to the galvanized line, it's at the point of the conclusion of the project. We're going to do something innovative back to back. We're going to put the line in place and under operation, full of customers and contracts. This is important, and we are at the completion stage.

Another important point is that, in terms of the galvanized products and our capacity in Brazil, we can easily use at least 1 more line. We're speaking of investments of BRL 1 billion, $350 million for a galvanized line. We're in the final stages of sizing the line and finding a location. I have no doubt that those who get there first will be awarded, and we are going to build this line.

Simply to complement this, our blast furnace reform will enable us to increase our production by 400 million tons, increasing the production of slab for this galvanized line, maintaining added value. So the magnitude of the production of the galvanized line would be 500 million tons. Yes, this is what Pedro will achieve in terms of production with the reform of the blast furnace. So we will have added value. We're going to maintain the same portfolio of other products but increasing the coded products.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question comes from Thiago Lofiego from Bradesco BBI.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director and Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [21]

--------------------------------------------------------------------------------

I have 2 questions. In terms of iron ore, are you using your own iron ore or is that a third-party this year? And how do you see the competition of iron ore in the Mexican market given the situation of supplies that we see?

My second question refers to the accumulation of inventory in the first quarter. Are you betting on higher prices? Or are you simply using this as a protective measure or using the iron ore in the domestic market as there has been a decrease in production of iron ore in Brazil?

--------------------------------------------------------------------------------

Unidentified Company Representative, [22]

--------------------------------------------------------------------------------

Thiago, this is (inaudible). Our production has overcome our expectation. And we hope to have a significant increase in growth with higher profitability. And all of these factors are aligned, luckily, and there's a great deal to explore in this, especially in the second quarter. And what happened with the inventory we had, a bottleneck at the mine, and we're now undoing this bottleneck. We're in a full production process, and the outlook is very good. We have a large volume of materials to ship. This will be done at the end of the quarter. Two ships in May and another in June. And going forward, we should have a very good production outlook. The volume of iron ore sold will always be greater than those in 2018 and decreasing the volume of material that we purchase due to the accidents. So expectations are very good in terms of margins that we will attain with our own iron ore with significant figures until the end of the year.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director and Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [23]

--------------------------------------------------------------------------------

Could you give us guidance of sales for iron ore this year, (inaudible)?

--------------------------------------------------------------------------------

Unidentified Company Representative, [24]

--------------------------------------------------------------------------------

Going beyond 38 million, I would say.

--------------------------------------------------------------------------------

Thiago K. Lofiego, Banco Bradesco BBI S.A., Research Division - Director and Head of the LatAm Pulp & Paper and Metals & Mining Equity Research [25]

--------------------------------------------------------------------------------

And of those 38 million, what will go into long?

--------------------------------------------------------------------------------

Unidentified Company Representative, [26]

--------------------------------------------------------------------------------

Well, for third parties, perhaps 5 million or 6 million, I'm sorry. How much goes through now our bottleneck at present is to ship this material out.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Thank you. As we have no further questions, I would like to give the floor to Mr. Marcelo Ribeiro, Executive Investor Relations Director, for the closing remarks.

--------------------------------------------------------------------------------

Marcelo Cunha Ribeiro, Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board [28]

--------------------------------------------------------------------------------

I give the floor to Benjamin for the closing remarks.

--------------------------------------------------------------------------------

Benjamin Steinbruch, Companhia Siderúrgica Nacional - President of Executive Board, Chairman & CEO [29]

--------------------------------------------------------------------------------

I would like to thank all of you for participating in our conference call and say that we continue to be confident and optimistic when it comes to the second quarter and the full year 2019. Well, the situation is given. What we have to do is materialize everything that we have done in terms of mining and other areas. And we're looking forward towards June with a trend of stability and an increase in price in iron ore and an increase in quantity, of course, maintaining quality in the steelworks. There is that outlook of resumption in terms of price and volume and a cost reduction. We're working -- focused on costs at present in production. And with the stoppage of the blast furnace beginning in June with over formal coking and sintering that will be done hand-in-hand and allow the company to produce more and better during the second semester.

We understand that the economic resumption has not arrived yet. We're betting on this, but we're quite optimistic in terms of the performance of our company. We're well positioned to present excellent figures this year.

And I vehemently reiterate our commitment with deleveraging as part of the assumption of the company to end up with a net debt/EBITDA ratio of 3x. I personally will try to improve this ratio to position the company to take advantage of the opportunity that may appear in terms of 2020, opportunities in the domestic and international markets. Once again, thank you for your participation, and I return the floor to Marcelo.

--------------------------------------------------------------------------------

Marcelo Cunha Ribeiro, Companhia Siderúrgica Nacional - Chief Financial & IR Officer, Executive Director of Finance & IR and Member of Executive Board [30]

--------------------------------------------------------------------------------

Thank you very much. And the IR team is at your entire disposal. Thank you, and we hope to see you at our next call.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Thank you. The earnings results conference call for CSN ends here. You can disconnect your lines and have a good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]