National Steel Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

Key Takeaways

  • Despite transportation bottlenecks in steel and mining, Q1 saw operational disruptions from plant logistics and heavy rains, with management expecting normalized performance in Q2.
  • CSN secured a BRL1.4 billion loan from the Japanese Development Bank (NEXI/JBIC) on ultra-competitive terms to accelerate the P15 mining project.
  • Q1 adjusted EBITDA of BRL 3.2 billion (+2.6% q/q) underscored diversification strength, though net leverage rose to 2.45× net debt/EBITDA with a goal of sub-2× by year-end.
  • CSN and CSN Min earned top-5 rankings from Sustainalytics, completed their GHG inventory, cut water use, reduced accident severity and boosted female representation to 21%.
  • Mining delivered record Q1 sales (1 mt) and BRL 2 billion EBITDA with controlled costs, while cement volumes rose ~10% following the LaFargeHolcim integration, setting up margin gains from April.
AI Generated. May Contain Errors.
Earnings Conference Call
National Steel Q1 2023
00:00 / 00:00

There are 2 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for holding. At this time, we would like to welcome everyone to Stifel's Conference Call to present results for the Q1 2023. Today, we have with us the company's executive officers. We would like to inform you that this event is being recorded and all participants will be in listen only mode during the company presentation. Insuing this, we will go on to the question and answer section when further instructions will be given.

Operator

We have simultaneous webcasts that may be accessed through CSN's Investor Relations website atri.csn.com.br, where the presentation is also available. The replay service will be available for 1 week. You may flip through the slides at your own convenience before proceeding. Please bear in mind that some statements herein are mere expectations or trends and are based on the current assumptions and opinions of the company management and they differ materially from those expressed here as they do not constitute projections. In fact, actual results, performances or events may differ materially from those expressed or implied by forward looking statements as a result of several factors such as overall and economic conditions in Brazil and other countries, interest rate and exchange rate levels, future rescheduling or prepayment of debt denominated in foreign currencies, protection measures in the U.

Operator

S, Brazil and other countries, changes in laws and regulations and general competitive factors at a global, regional or national basis. I will now turn the conference over to Mr. Marcelo Cunha Ribeiro, CFO and Investor Relations Executive Officer, who will present the operating and financial highlights for the period. Mr. Hibero, you may proceed.

Operator

Good morning to all of you and thank you for attending our conference call for the Q1 2023. With us here, we have the main executive officers, Mr. Benjamin Steinbroek, the Chairman of the Board, who will make comments after the presentation. First of all, the highlights, we were able to enhance the operational situation, although we faced a very difficult quarter in mining and demand because of bottlenecks in transportation. Had we not had these bottlenecks, we would have had considerably better results.

Operator

The good news is that we hope that the problems will be resolved during the Q2 and that we will have a performance that will be reasonably better than that of this Q1. We have taken on one of the largest loans and investments from the Japanese Development Bank, JPIC Nexi for a mining business of BRL1.4 billion, which will guarantee ultra competitive conditions to accelerate RP 15 project. The third highlight is referring to ESG. We have not only 1, but now 2 companies of the CSN Group as part of 5 best in Sustainalytics, one of the most renowned agencies in the world with C MEN standing in 4th place and CSN in 5th place. We will speak about financial performance and look at the EBITDA figures below.

Operator

We highlight the resiliency of our EBITDA based on our diversification. We have had very diverse activities and of course we have had the 3rd quarter of growth in this specific quarter. We had a great performance in terms of mining because of price realization and better freight conditions. And all of this was partially offset with the problems that we had in steel that limited volume. But there was an excellent quarter when it comes to volumes and we show you the results of the integration of the La Pla Cholesale platform, the cross selling that led to an increase in sales.

Operator

But the profitability pointed to lower prices due to seasonality. We had a growth of 2.6%, reaching BRL3.2 million of adjusted EBITDA. Let's go on to the cash. The CapEx was very similar to the same quarter last year, perhaps a little lower vis a vis the last quarter of last year. Our forecast is to end the year 2023 with BRL4.4 billion.

Operator

We're going to speed up our CapEx because of the main project, which is P15. In working capital, an important movement, but once again, in line with the seasonality that we had last year. We have an increase in working capital with a cash impact. But as we saw last year, these are temporary effects that will not be repeated during the year 2023. On the next page, we see the cash evolution.

Operator

We see what happened in the Q1 of last year, and all of this was reverted. Now in this Q1, we have a negative cash flow of BRL2 million mainly due to that effect. If we look at the details of this, you will see the more negative financial results due to a temporary issue, which was the hedging of iron ore, almost BRL600 1,000,000 of cash in this operation and in line with our strategy to hold on to profitability and opportunity products. And if you look at the calendar year up to now, the

Speaker 1

results have been positive what

Operator

we had in terms results have been positive. What we had in terms of financial losses is being more than offset in the second quarter. Then we get to that negative cash flow of BRL 2,000,000. Now this cash flow, of course, has a punctual impact on leverage. This quarter, we reached 2.45x net debt EBITDA, which is something that we have forced in.

Operator

We had stronger periods last year when the year began with an increase in calcarean material. Now as that happened in the Q1 leading to an increase in leverage, the Q2 will have a contrary effect. As I mentioned, a better performance in terms of cost and volumes, a strengthening of prices in the market and this will take this leverage to the levels of our guidance, which is below 2 times. In terms of our net debt build up, we had a situation of stability and we were able to offset this increase that we had because of a negative cash with our hedging of iron ore with greater predictability in sales and more attractive sales with our partners. Now to speak about liquidity and payments.

Operator

Well, this had a very positive effect. We have BRL 500,000,000 in cash, which means we have come closer to our structural goal, our policy of BRL15 1,000,000,000. This quarter, we have BRL13.9 billion, which gives us a very comfortable coverage in terms of our results. In terms of our indebtedness, what we have to celebrate this moment is the loan that will be disambursed as the plant is being built. We have a very differentiated cost structure and this will, of course, fund our CapEx.

Operator

So going forward, we're working with instruments from multilateral banks, from the National Development Bank. We're always trying to remain at competitive levels in terms of our debt. Now to speak about our businesses on Page 10. In steel, a production of volume somewhat higher than the previous quarter. This is a sequence, but with different performances in the domestic market and the foreign market.

Operator

We had a good performance in volumes with a robust growth, especially in the United States. And after this review, we are able to work with hot turbines, working with slabs with good results and volumes in Portugal. But in the domestic market, which is our main market, we had a drop in production that we will see when we speak about production with bottlenecks in our steel plant. And of course, this reduced our growth vis a vis the 4th quarter. In terms of net revenue, a slight drop because of dropping prices, especially abroad.

Operator

We have observed resiliency. We see an increase in prices domestically. But abroad, there was a trough, especially in Germany, where during 'twenty one and 'twenty two, the prices were not very normal. They are now becoming more normalized with exceptional margins. And the price of scrap, of course, continues to be very interesting.

Operator

With this, we had a very similar EBITDA with that of the Q4, BRL 54,000,000. Now when we look at production, it could have been better because it was impacted by the higher costs. Higher costs that came from a decrease of costs and bottlenecks in the steel mill and problems with the transportation of and problems that were resolved during March, April and until mid May. We hope that between mid May and the end of June, we will have better production situation and resolve this with a positive performance of prices. We already see this happening in May.

Operator

The profitability per tonne in percentage terms is better than the previous quarter. Now to speak a bit about mining. We have had taste that we attained a record in terms of sales in the Q1. We had the first sales of our Q1, but we were not able to dispatch it. We had 1,000,000 tons, but because of bottlenecks, we were not able to do this because of the very strong rainfall.

Operator

In March, we increased the inventory and all of this will be sold during the second half of the year. We should celebrate our operational performance. This has helped us to maintain the cost under control, and we will make the most of price realization that has increased to 50% with an EBITDA of BRL 2,000,000,000. In the next page, we see how this aided and abetted the results. We can separate the results line by line.

Operator

Volume was a non relevant impact. We were successful from buying more iron ore from 3rd parties because of the price, opportunity prices and that gives us a good price ratio with an improvement in the plant price and a decrease in freight costs. So we have a positive adjustment of provision prices of BRL 2,000,000. Finally, when we speak about cement, if you look at this in detail, we observe a new reality. We see a company working with B2B, the 3,090 tons were sold in a fair comparison with the same period last year show a significant growth of approximately 10% in a market that remained practically stable.

Operator

So this is another way of approaching the market, making the most of synergy between clients, making the most of our distribution network. Now this is only because of a weaker price increase in the quarter. So the quarter was somewhat slower in terms of civil construction. Civil construction has proven to be very resilient. And beginning in April, we see new synergies materializing with the use of concrete.

Operator

The cost will continue to drop. It had already dropped during the quarter. With energy and oil dropping prices, our margin will increase beginning in April. With this, we end our discussion from the different businesses. I will give the floor to Elena Guerra to speak about ESG.

Operator

Good morning to everybody. We're going to present the highlights for the quarter. In terms of ESG, you can see that beginning this quarter, we're independently following up on each of these indicators. We also have qualitative cases and some highlights. This is material that will give us greater transparency in terms of our performance in individual areas.

Operator

Now in March of 2023, declaration of stability renewed for all of our dams. We're also moving forward in terms of work safety. We had ended 2022 with a historic rate. Now we have an expressive reduction in the accident severity rate when compared to 2022. We also concluded our greenhouse gas inventory.

Operator

We ended the quarter with 2% of total use of the company water, especially in cement and a reduction of 5 percentage points in carbon O2. Now you see a strike in social and diversity, an increase in the representation of women as part of our personnel. We already have a 45% representation reaching 21% presently. And when we compare this to the same period of 2022, this is important. And Marcelo has also mentioned this as well as Pedro, the environmental management of the company.

Operator

We have reached the 4th best result in terms of mining companies from among 156 steel companies that says throughout the world. We're the only company in the steel sector and in civil construction that were named and elected as industry movers in 2023 according to the criteria of this agency. And I see, yes. Now all of these that are part of our ESG agenda are a representation of our commitment. And of course, we will try to do better for our stakeholders after the integrated report that was released in April of 2023.

Operator

We have a full framework, a full list of the indicators, our areas where we are active. We also include a great deal of information on our growth. And of course, this will guarantee full transparency and of our information. Thank you very much. Thank you, Elena.

Operator

I will now give the floor to Mr. Benjamin Steinbrook for the final remarks regarding the company. Good afternoon to all of you. Well, I'm somewhat ahead of myself, it seems. Good morning.

Operator

It's a pleasure to be here with you. Some very brief comments on the presentation for the Q1 of 2023. I begin with Mining. As was said in the results release of Imin, we had a good quarter. We had a strong production with the quality that we had foreseen.

Operator

Purchases were also quite strong. The shipments unfolded very normally, which for us is important, the reliability and predictability at the port because of the increase of production and the increase of purchase and because of the guidance that we have set forth, we are going to deliver over and above what is included in the guidance. I would say therefore that we're in a good situation. We only didn't attain a record due to logistics issues that were hampered by a very strong earnings call. But internally, we are going to have the best month that we ever had at CSN Mining because of the production, the purchases and also the inventory, which we have resolved.

Operator

We have made the most of the strategy to guarantee sales of our less enriched iron ore and this is because of the hedge that we proposed. As was mentioned in this first quarter, we had lower results and this has been broadly offset regarding the hedge that is still open for May up to September. So this is due to the financial results and the hedge and of course, we have already fully covered this drop. Now regarding the mining, we had a coincidence of positive factors and we're quite satisfied with the results of mining in terms of the medium and long run. We will have the funding already in place for P15.

Operator

We have a schedule for P15 and it is quite adequate. I would say therefore that we're quite satisfied with the results of mining. In the case of cement, the same holds true. The synergies are much broader than we had imagined initially with the acquisition of La Farge Holcine and we also have a nationwide coverage. And we're exploring the good things of the 3 companies that we acquired and we begin to see the results in terms of the market and growth.

Operator

We had a nominal capacity of 6,000,000 tons. At present, we have 16,000,000. And the idea is to make the most of this and transform this nominal capacity with a good outlook for cement. We have attained reasonably good results in terms of what we had set forth to do. We have grown considerably and we truly believe as we do in mining, something I did not mention, but I believe that because of the price reduction of raw material along with an increase of production, we will have a cost reduction, which will of course be reflected in the results, not only for mining, but also for cement.

Operator

We mandatorily have to reduce our costs. We're going to go through this tide of drop of cost in diesel and coke and transform this into a greater margin. So both in mining and cement, we find ourselves at a very good moment with good news. In steel, unfortunately, we were surprised with a problem. We did not have any accidents.

Operator

Luckily enough, it was simply a poor management of logistics that caused us to feel somewhat suffocated. And although it seems incredible, we were forced to reduce production due to a lack of mobility, transportation in the plant. This is a primary error. Unfortunately, it happened. Mistake of my team and myself, it took me some time to perceive the severity of this.

Operator

Beginning in December, we had a full idea of what had been caused. We began with a different combat strategy for this problem. We went through the 1st 4 months of the years at the mercy of this problem. But beginning in May now, we will return to a normal production. And I do hope that in May, we will be able to revert this situation and that we will have a year working at full steam returning to our normal quantities and normal costs as well.

Operator

This will not only be benefited by the reduction in cost of raw material, but also an increase of production that will return to normalcy. We don't have to invent anything simply, do things correctly and we're working on this as we mentioned with the 2 other businesses, mining and cement. The cost of mining is somewhat high and we're going to reduce it beginning in May because of a resumption of a normal flow of production at the plant. In mining, therefore, despite this primary error or problem that occurred and because of the errors that we committed, we are addressing this and we are already on our path to normalcy in May. And we will see the results in the second quarter.

Operator

Regarding the ESG, as Elena just mentioned, we were awarded at CSN and CSN Mining were extremely satisfied. Miners, we're delivering what we had set forth to do and this is our priority. This is the guidance of our business. Now in terms of the leverage, I think that I would like to reiterate our commitment that we will remain at less than 2x net debt evident till the end of the year. We have a normal trough that is foreseen in our budget for the Q2.

Operator

We had a high reimbursement last year with the acquisition of the hydroelectric plants, the CEE and LafargeHolcim. It's natural therefore that the leverage increased. Now the synergies that we have obtained with that investment are well known and they will be recorded beginning in the second quarter. Our commitment is there. It will be maintained and we're deploying all possible efforts to reduce costs.

Operator

We do hope there will be price stability. We're not counting upon anything extraordinary to reach this goal, simply continue working normally in terms of production in our 3 businesses. And we also have that option at the right time to ensure that the energy business that we have created will become strategic for the market so that we can continue on with this 4th business, which is our energy business. We understand the concern that you may have with leverage, but you can be sure that it is our obligation to reduce it according to guidance below 2 times net debt EBITDA. We're counting upon an improvement of margin in the 3 businesses as of this moment.

Operator

And market prices and more specifically because of cost reductions, which is what we will have to work on. I'm convinced, therefore, operationally that we will deliver what we have set forth to do. And consequently, we will obtain the results that we have committed to not only operationally, but also through the use of the assets that we have acquired. Of course, going to the market to have a better market structure, but also to grow, which is what we have set forth to do, especially in the energy business that we deem to be highly complementary to what we would like to do. This is what I wanted to share with you.

Operator

I would like to thank all of you for your attendance at your call, and we are at your entire disposal for questions that you may have. Thank you very much. Thank you. We will now begin the question and answer session for investors and analysts. Our first question is from Edgar Solta from Itau BBA.

Operator

Hey, good day to all of you and thank you for taking my question. My question refers to the steel business. Last year, you commented that if the production improved, you could raise prices beginning in April. Well, there has been a drop in the domestic market. Therefore, what will happen with the price dynamic, if you could share with us the level of parity that you are thinking of for prices?

Operator

My second question refers to cement. Last quarter, you spoke about a gradual recovery of margin, but we have seen a drop in margin, especially because of the lower prices explained by the seasonality. Is there room to recover either margin or prices? And do you expect the continuous reduction of price in cement, which will be the price dynamic for cement therefore and which will be a reasonable margin in the medium and long term for cement? Because you have already incorporated Elizabeth and LafargeHolcim and what will happen to prices going forward?

Operator

These are my two questions. Thank you. Edricar, this is Martinez speaking. First of all, regarding the results of steel in the Q1, I'm quite comfortable. I won't say satisfied because you cannot be satisfied with that situation.

Operator

But to calm down the market, everything that we have here depends entirely upon ourselves. It no longer depends on the market. These are controllable variables and it depends exclusively on production. To give you an idea, I have a portfolio of orders of 680,000 tons already placed orders, which gives us a certain tranquility to say that we have a sufficient portfolio of clients for at least 2 or 3 months to be able to service the market. And this is a one time situation that is happening now.

Operator

Regarding the prices, and I mentioned this in the last call, I said I wanted to increase prices and distribution and civil construction up to 7.5%. We are at a somewhat lower level. We are at 7.5%. And in some cases, I was more surgical, taking into account the premiums we have on the higher added value products, we were more selective, smarter to capture more value in April. And this is real information.

Operator

We had our average price increase by 4.5%, which is good news, 4.5% for April. Now to go back to the Q1 to offer you even greater comfort about our strategy. In January, to give you an idea, we shipped 120,000 tons in February, 177,000 in March, when we in fact began to work and enhance production reducing inventory. To give you an idea, in the quarter, we reduced inventory by 100 and sometimes we went to 200,000 tons in March. So we have already begun this operation and it will continue during the Q2.

Operator

Another important point shown by Marcelo, We lost 200,000 tons of production in slabs. Obviously, this would generate 180,000 of products and I could sell 80% or 70% of this. So it's completely opposite of what happened. The dropout volume in the Q1 of 'ten was probably 10% above what we presented. Now why am I explaining all of this?

Operator

Because I have the portfolio, I have the clients and in truth we had a problem, a problem that is up to us to resolve. It's now something due to the market. We have the market price portfolio and clients. The rest is in our hands. Now regarding the market dynamic, we need to better understand what is happening.

Operator

In truth, the world is very different. In China, regarding the last call, there is still some volatility, somewhat different perhaps. In China, we always speak about growth of 5%, strong investments, infrastructure work that should be finished, civil construction. I remember I said that the BT was €530,000,000 Nowadays, it is pointing towards €580,000,000 which means there has been a reasonable drop. We're going to have to manage this.

Operator

If you look at the result of Chinese steel companies, they all have very poor results, but they won't remain that way. They will work with higher value. And the inventory, the positive side, are under control. From the viewpoint of China, they're operating with steel, iron ore. They don't let iron ore shoot up to 125, they work with 106.

Operator

And once again, they've gone up to 580 or 560 in terms of steel. Now in the United States, everything positive is happening there. The location, the chips are coming back, domestic manufacturing. But from the price viewpoint, there is a slight drop in PQ, minor drop, dollars 40 to $50 for PQ at $190. I'm going to prioritize exports therefore because the premium and profitability will be better.

Operator

Nothing therefore that will impact us. Nothing that will shake our position in the United States. And in Europe, a mature market, Turkey with some scrap, but Europe has that stability. Now if we have this as a backdrop of the world market, the premium here in the domestic market when we think of the Chinese coil at BRL560, BRL580, BRL580, BRL580, BRL580, BRL580, BRL150, BRL150, BRL150, BRL500, BRL500,000,000,000,000,000,000,000,000,000,000,000 around 15% to 7% this premium is between 15% 17%, relatively high, but still sustainable from the viewpoint of the market. We have a competitor, an international competitor that is supplying the plants in Europe and we have another domestic competitor that is undergoing maintenance and has problems with slab.

Operator

It's not a problem, therefore. What is typical is in the portfolio of zinc or galvanized products where the premiums are much higher and where exports imports could grow. So the price dynamic, as Benjamin said, we have an increase of 4.5% for April, but they will remain stable. Now regarding the sectors, and I'm answering all the questions at once if you allow me. Sectors that are positive.

Operator

In the industry, 5%, the industry is referring to 3%, percent. Civil construction still positive with 2%. Automotive, depending on how you look on it, some say the glass is full, others say the glass is empty. But from the viewpoint of production, it could still be positive because it had a very low level in the past. Distribution market with a highly controlled inventory at 2.2%, 2% growth.

Operator

And the white line with a drop with a growth of 10%, we're considering only 6. And sectors which last year and last quarter were growing like trucks with anticipated purchases because of the euro at 5 or 6. So this is on the drop, buses and trucks. And this will impact the agribusiness. But this is not a considerable problem for the steel market.

Operator

Now we're working with a scenario of stability for the market. For CSN, a growth of 5% to 6%. Now, some are speaking about a drop in this scenario and our guidance for this year is a domestic market of 3,000,000 tons practically. This is what we had last year as well. So this is the scenario where we think about prices, market and strategies for this year.

Operator

Well, thank you. And cement of course. Cement is a very interesting business. I was surprised. I didn't imagine this business with Cristo Gullit.

Operator

We are 8 months away from the acquisition of La Farge Holcine and we had a volume growth that was very expressive. The market remained stable, had a drop, but we're growing 6.5%. We're not being aggressive towards the market. That's not our intention. We're adjusting production with 3 plants.

Operator

We're working And we And we were a company focused on the retail segment, 85% retail. We're now working bulk, 40% bulk. And although it may sound incredible, for the first time in history, bulk has a higher price than the bagged product. And that is our portfolio. So in terms of volume and channeling, in terms of positioning per channel, whether it is bulk or wheat, so far, it's all good.

Operator

Now in terms of prices, I think we've been quite resistant. The Q1 was always the worst quarter of the year. We got everything bad. Even the problem of the MRS impacted us, the railway transportation to regions such as Mahwah, for example. So going forward, we will only be in a good position.

Operator

We need to sustain our volumes. We're going to fragment evermore. There are regions where we have little activity. We're interested in traveling further with our cement, with our distribution channel. We have good coverage in the panel.

Operator

We have good coverage in the Northeast. We should reach the center West. We're going to impact the South a bit more. We have competition working alone there. And with the reduction of costs that Benjamin mentioned, we should be able to increase profitability.

Operator

Now regarding price build, on May 1st, I announced a new price increase. We're the 1st company to announce this in May. And we have been leading the market. We don't tend to leave these opportunities on the table. Obviously, we are leaders and we hope the market will understand that there's the opportunity to increase margins.

Operator

We only lose to China. So the trend is for stability. Price stability this month, slight increase of price in June July. And going forward, respecting the season ality of cement and increase in volumes. Well, we will use more cement with the return of My House, My Life, Casa Mia Pina, and we hope that the work in infrastructure will be resumed until the end of the year.

Operator

Thank you. Well, thank you, Martinez. That was very clear. Our next question is from Caio Brainer from BTG Pactual. Good morning to all of you.

Operator

Thank you for taking my question. The first question is about cost looking at the coming quarters. You mentioned that in May, we should have a return of normalcy, which will be the cost of slabs for the second quarter. There are several variables. So what can we think about cost for the second and third quarters?

Operator

You said that there would be a drop beginning in the Q3. The second question, your volume had a significant drop. Of course, it should have been much higher. You had a drop of 10%. Now which will be the return of CSN?

Operator

Will you be ever more aggressive in price? Will you go for market share? Or will you base yourself on a more gradual strategy? Thank you very much. Well, to begin speaking about costs and this is Marcelo speaking.

Operator

They will be marginally better in these quarters because of 2 effects, significant enhancements in the second half of the quarter especially. It won't be an effect for the entire quarter, but the raw materials will help us iron ore, coke, coal, there will be a drop in prices. What is more important is that the Q3 will show us completely different levels, the increase in cost of slab that we don't see for 1.5 years. And as we return to the production of slab, 1,000,000 tons, which is what we did in the Q3 last year. In terms of volumes, Martinez will give you the answer.

Operator

Well, Caio, in truth, we still don't know what we're going to do. We're going to do what we have always done to work, to sell everything that we produce. If you see what we did in the Q1, we reduced the inventory, although we lost 200 tons of slab in the Q1, we didn't purchase any slabs. We used them all in the Q4. I haven't purchased slabs in the Q2.

Operator

I have to count upon the production that we have. I have 160,000 tons of material that is delayed in production and 640,000 tonnes in orders. We're going to catch up on this order portfolio. The orders have already come in. It's not about acting on price or volume.

Operator

It's what I always say. We have a fragmented customer base. We have a strategy that is very different from that of the competition. To give you an idea, our competitors gave a 12% discount for the automotive segment. An international competitor gave 10%.

Operator

We only gave 5%. And I increased the price in April by 4.5%. Our portfolio will award the distribution product, the civil construction product. Since we have a portfolio that is fragmented, we're going to do what we have always done, sell and go to market with our product. We're going to add on added value.

Operator

We're going to have to work strongly against imported material. And there's something shameful that is happening in Brazil, the commercial agenda of Brazil. And I had the opportunity of speaking with some local authorities about this. Unfortunately, we're receiving material from China, enormous dumping, the metal sheets, the galvanized material. This material comes with specifications that are out of line and we're forced to compete with this.

Operator

So regardless of what is happening in the market, we're going to have to act upon all fronts. This is where we're stronger in CSN, in civil construction, in the automotive part, we're quite limited. We work with spare parts, with some assembly plants that are quite focused in our portfolio. And I truly do not believe there will be a huge supply in the domestic market, something that will lead to a fight in market share. This is happening now in the long steel market because new markets have new players have entered the market.

Operator

Some years ago, in long steel, we had Gerdau, Arcelor. We're now speaking of Cenac, Solverdes, Enobras, and the dynamic is very different. And you will see that the prices have had a more significant drop. So we're going to keep working as we have always done, preserve our market share and grow. We are going to grow.

Operator

The Q2 is for recovery and the 3rd and 4th to put together our heads and regain the market leadership. Our next question is in English from Carlos Thiele, Bob from Morgan Stanley.

Speaker 1

Just a couple of quick questions on the financials. One is, how do you see selling expenses? For the 2nd quarter, they remained elevated almost twice the level that we have seen in prior quarters. So Q4 and Q1, a little bit of a significant bump. And so I wanted to see how do you see the trend going forward?

Speaker 1

And then on the other operational expenses, there was a $400,000,000 loss on stocks or inventories. I just wanted to understand a little bit what happened there and what is it related to? It seems that it's related to steel, but or at least in Usina and Presidente Vargas, but I just wanted to make sure if it is yes, if you can give us some color there as to what happened.

Operator

Thank you for the question, Carlos. When it comes to sales, there has been a great volatility and our sales in mining are quite high and they change quarter after quarter. There is no structural variation. And as I mentioned, the freight have gone in the right direction. There has been a drop of $2 So it's more about volume.

Speaker 1

Sorry, Marcelo, I was talking about selling expenses.

Operator

In Cement, there are significant free rates. And last year, when we did not have the volumes at La Parcels Inc, they grew substantially as this quarter we had a record production of cement. This had that effect. I don't think it's something that will reduce our profitability and we wanted to clarify this. You have to look at the mix between the businesses.

Operator

Now regarding those BRL400 million, there are 2 main effects here and they both refer to steel, BRL150,000,000 BRL160 million were lost because of the bottlenecks that we have at the steel mill. We had a product, big iron that was thrown into the well that we're going to use in future production. As we don't account for this stock, it generates an expense and in the future, it will be reduced. And it was an operational expense, a loss of inventory, but it's not really a loss because we're going to use it in other quarters. I'm referring to pig iron that will be used in the 3rd and 4th quarters.

Operator

The second question, the BRL 100,000,000 is provision for a decrease of inventory. We were exporting to Luozao mainly during a period of higher prices. And in certain periods, they have taken very of a comparison of the market price compared to the inventory price. And there will be a write down of that inventory. They're going to sell them with a higher margin.

Operator

But in this quarter, we had a provision with a drop. So these are non recurrent events without an impact on cash. The next question is from Carlos Marcellos from Santander Bank. Sorry, I think there was a mistake. My name is Rafael from Santander.

Operator

Thank you for taking my questions. First of all, I would like to congratulate you for your new ESG structure. I do have a question regarding that topic in the program for the characterization of dams. We have a program for the Beguilla dam for the second half of the year. I would like to know if this remains unchanged.

Operator

And how can this impact your current operations? I know that the dam of Beja is in a processing complex. Could there be an operational impact on this complex? My second question refers to capital allocation. If you could explain the company priorities in terms of growth, this would be interesting.

Operator

We are aware of the projects in mining. But besides that, would the priority be in cement, in the steel business? And your timing, especially, we know that the company is very attentive in terms of leveraging. So how are you thinking about this timing for more significant and new investments? Thank you.

Operator

Well, thank you for the question. Now regarding the Baha do Vigia, the characterization, it has been maintained for the second half of the year. What is pending is the regulation, I am, that we're working on and we think that we will have the backup of these two agencies to conclude the characterization of the Bijia dam. This does not impact production. It's part of the investment portfolio of the company to work with the tailings and this is what will be done going forward.

Operator

What we're doing is piling up the tailings for future processing. Now regarding capital allocation, to repeat what Benjamin said a short time ago, everything goes through maintaining our commitment with a deleveraging to attain our goal. Now given this as a backdrop, we do have other priorities that we share with the market. In the case of mining, the project of P15, which is underway, especially with the loan from the Japanese bank, we're going to speed up. In the case of cement and steel, we have a mission of becoming international.

Operator

We're always in the quest for opportunities, especially in the U. S. Market, which is not easy. There is enormous competition, consolidation. So it's not something that we can say we're going to do, but it's something that keeps us very attentive to opportunities from the viewpoint of significant movements.

Operator

Therefore, there is nothing that might happen very soon. We're focused on operational performance. We do have a second half of the year with better results and significant improvements in house. For example, the energy sector bringing in a partner to guarantee that the leverage will be only 2x. And if we see a very good opportunity as part of these priorities, we will do our homework and make the most of this opportunity, always respecting the self imposed limitations.

Operator

There is no priority that is mature now, but our priority, of course, is to internationalize in terms of dividends. This has already been communicated to the market at the end of the year. They are being paid now. We are moved away from our recent historical standard. But beginning in the second semester, we will be more in line with our historical payouts, maintaining interest in remuneration for the shareholders, perhaps for the lower value to ensure that the leverage remains at 2 times.

Operator

Thank you. Thank you very much. Our next question is from Caio Ribeiro from Bank of America. Good morning, everybody. Thank you for taking my question.

Operator

My first question is about potential M and A, especially in terms of energy assets. You mentioned that ESN as well as other players would be interested in these assets. If you could speak about this asset, if in fact you are interested, if you're assessing it? And how can this business complement the assets you already have in Europe? Secondly, about leverage, it is 2.4x net than EBITDA.

Operator

EBITDA. Is there any level that you would consider to accelerate your level of investments in 2015? And which would be the minimum level of CapEx you would run with? Thank you. Hello, Caio.

Operator

About M and As, we're always attentive to opportunities, especially with differentiated assets in markets that are very important such as Europe and the United States. I don't think it's worthwhile remarking on this specific situation. There is nothing concrete. Good assets that come to the market are rare and few in between when they do come will be attentive. But presently, we have nothing to comment.

Operator

Regarding the leverage, we're very far away from a point where we would change our investment costs, especially in Cemin, where we have a large project, which is the P15. Our capital structure has been planned for this and complementary projects for the processing of tailings, for example, that are very interesting. And the de characterization of dams also makes sense to take these away from their present day schedule. We're speaking about the group as a whole. We're going to look at mining as we did in the IPO, perhaps bring in partners, bring in outside capital to keep a strong balance.

Operator

We have the cement IPO. So we have sufficient levers therefore to guarantee that our leverage will be consistent and all of these projects of course are of interest. Thank you. Thank you very much. That was very clear.

Operator

Thank you, Marcelo. Our next question is from Vanessa Quiroga from Credit Suisse. Good morning. My question is the following. Your line of suppliers in working capital, if you could refer to this and we expect that the reduction that we saw in the Q1 will be maintained during the year.

Operator

My last question. What is that one off event that you are referring to in the release? Thank you. Venice, last year, we had a situation in terms of raw material and this was reverted in the Q2. This year, we had a change in suppliers between the Q4 and the Q1 of this year and this ended up in a rupture of the average term.

Operator

Our plant purchases will return to the average that we had in 2022. So we will be recovering our working capital levels and this will help the operational cash flow during 2023. The next question is from Thiago Lofiego from Bradesco BBI. Just one question. Most of the questions have been answered.

Operator

Let's go back to cement. Do you believe there is potential for greater consolidation regardless of the players. What do you think about the competition of cement in the coming 2 years if there is a change of mindset? Still speaking about cement EBITDA per ton normalized given that you're in the process of incorporating La Plage with very good results. Well, thank you, Thiago.

Operator

Now the consolidation, I don't think it's worthwhile referring to specific names, but we compare the Brazilian market with markets elsewhere. It's still a fragmented market and a market where we have players with isolated plants, players who don't have the scale or the cost of other plants and besides having players who are undergoing financial difficulties and that are going to seek a solution. So all of these are factors that lead us to thinking that this market will have a great deal of activity in the puts and a higher level of consolidation, which is healthy for the market. Regarding EBITDA per ton, there is potential to more than double that EBITDA per ton that we see in this first quarter. Not differently of EBITDA per ton that we delivered in the past, especially with the acquisition of La Flage Holcine and a potential for cost and competitiveness that will of course increase our level.

Operator

Marcelo, if the price remains at that level, which would be the normalized EBITDA per ton, if you could give us more color? Doubling it is reasonable, in line with the synergies that we will have to attain and they will come from logistic, from energy, from greater volumes. We're convinced that we can double this. Well, thank you. Thank you, Marcelo.

Operator

As we have no further questions, we will return the floor to Marcelo Cona Ibero, CFO and Investor Relations Executive Officer for his closing remarks. Thank you all for your participation. And we close with a self assessment of the Q1, which operationally was not a good quarter. But we have our class that is more than half full. We have clear opportunities for improvement and they will appear during the second half of the year.

Operator

Whatever we can in CSN, we will do. We are already doing it and that is why we are highly optimistic, especially in the steel part mining and cement have also delivered results. And there will be a significant difference in steel beginning in the second half of the year. 2023 will be better than 2022, which was our 2nd best year. This is the message that I close with.

Operator

I thank all of you and I hope to see you in our next results release. Thank you very much. The results conference call for CSM is concluded. We would like to thank all of you for your participation. Have a good afternoon.

Operator

Thank you.

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