CSN's Profit Soars, Equals Estimate - Analyst Blog

Companhia Siderurgica Nacional (SID) or CSN’s financial results for the second quarter 2010 were encouraging as its net income surged 167% year over year and 85% sequentially to R$894 million (US$496.7 million), or R$0.59 per share (US$0.33 per ADR). Earnings per ADR were in line with the Zacks Consensus Estimate of 33 cents.
 
The sequential rise was attributable to higher volumes combined with higher prices for iron ore and steel products and lower interest expense, which more than offset increases in income tax and social contribution expenses in the quarter.
 
Revenue
 
Considering the top line, net revenues of R$3,872.6 million (US$2,151.4 million below the Zacks Consensus Estimate of US$2,184 million) increased 55% year over year from R$2,491.7 million (US$1,192.2 million) in the year-ago quarter. The growth was due to higher prices and volumes sold.
 
Crude steel production in the quarter soared 38% year over year to 1.2 million tons versus 0.9 million tons in the year-ago quarter. Steel sales volume improved to 1.3 million tons, registering an increase of 37% year over year. Of the total steel volume sold, 88.5% accounted for domestic sales and the rest international sales. Price for steel products per unit went up 6% year over year.
 
Margins
 
During the quarter, manufacturing costs increased 18.9% year over year to R$1,784.8 million (US$991.6 million). Gross margin at 48.3% improved 17.1% year over year. As a percentage of net revenue, selling expenses declined by 170 basis points year over year, while general and administrative expenses plummeted by 130 basis points.
 
In the reported quarter, EBITDA totaled R$1,795.8 million (US$997.7 million) with a margin of 46.4% compared with 29.2% in the year-ago quarter. Financial expenses declined by 21.1% year over year to R$474.7 million (US$263.7 million).
 
Balance Sheet
 
Exiting the second quarter, Companhia Siderurgica had cash and cash equivalents of roughly R$9,672.2 million (US$5,373.4 million), up 5.7% from R$9,148.9 million (US$5,082.7 million) in the previous quarter. Loans, financing and debentures, net of current portion were R$16,472.4 million (US$9,151.3 million), up 12.2% from R$14,684.5 million (US$8,158.1 million) in the previous quarter.
 
Cash Flow
 
Net cash flow from operating activities improved significantly to R$994.3 million (US$552.4 million) versus an outflow of R$1,358.0 million (outflow of US$649.8 million) in the year-ago quarter. Capital spending in the quarter totaled R$1.1 billion (US$0.61 million).
 
Free cash flow in the quarter was R$523.2 million (US$290.7 million) compared with an outflow of R$3,075.8 million (outflow of US$1,471.7 million) in the year-ago quarter.
 
Our Take
 
Companhia Siderurgica produces hot- and cold-rolled flat steel, galvanized sheets, and tin plates for the packaging, automotive, and construction industries. In the fiscal year 2009, the company accounted for approximately 47% of the galvanized steel products and 98% of the tin mill products market share in Brazil.
 
The growth outlook of Companhia Siderurgica is encouraging due to various projects being carried out by the company. Moreover, its entrance into the cement business would be an expected synergy. According to the World Steel Association, global steel demand in 2010 is likely to hike by 10.7% and 5.3% in 2011. This enhancement is based on recovering economics, increasing private and public capital spending, falling unemployment levels and growth of the emerging economies, especially China.
 
However, high cyclicality and growing competition in the industry are major hindrances to growth. Prime competitors of the company are privately held ArcelorMittal Brasil S.A. and Metalúrgica Gerdau S.A.
 
We currently maintain our Neutral recommendation, which is supported by Zacks #3 Rank  (Hold).