Gerdau Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 2 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Investor Relations and our presentation for the Q3 of 2023. My name is Renata, Head of Investor Relations. And participating in our video conference today are the CEO Gerdau, Gustavo Werneck and the CFO of Rafael Japor. We would like to inform you that this video conference is being recorded and will be available on the company's IR website, ir.girdal.com, where the complete material of the earnings release is available. You can also download the presentation using the chat icon.

Operator

We would like to remind you that the broadcast of this video conference is being done with simultaneous translation through the tool available in the platform. To access the feature, just click on the Interpretation button via the globe icon at the bottom of the screen and choose your preferred language, Portuguese or English. For those of you listening to the video conference in English, there is an option to mute the original audio in Portuguese by clicking on mute original audio During the company's presentation, all participants will have their microphones disabled. Following the presentation, we will begin the Q and A session. Analysts and investors can send their questions in advance via chat and can open their camera if they prefer during the Q and A session.

Operator

We wish to emphasize is that the information contained in this presentation and any other statements that may be made during the video conference concerning Gerdau's business prospects, projections and operating and financial goals are based on the beliefs and assumptions of the company's management as well as information currently available. Forward looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may differ substantially from those expressed in such forward looking statements. I would now turn the floor to Gustavo Werneck to initiate the presentation.

Operator

Please, sir, you may proceed. Hello, everyone. I hope you are well, and thank you very much for the opportunity to meet again during our video conference to announce Gerdau's results for the Q3 of 2023. I am joined by our CFO, Rafael Japore, And it's always a pleasure for both of us to talk to you about our performance and also to clarify any points that may arise during our presentation. I will start by talking about the macro business environment, the highlights of the overall results and then I will detail the performance of our business operations in the quarter.

Operator

Next, Japour will then share some information about our financial performance. And finally, I will highlight a few points from our ESG agenda. We will make a shorter initial presentation so that at the end, we will have more time to talk to you about the points that you want to elaborate in more detail. On the second slide, I would like to point out that we ended the 1st 9 months of the year with an accident frequency rate of 0.69. This result is below the rate of 0.76 percent recorded in the consolidated figures for 2022, which represents the lowest rate ever recorded in our annual historical series.

Operator

This performance renews our commitment to the health and safety of all of our people. At Gerdau, safety always comes first since no result is more important than people's lives. Moving on to the next two slides, I would like to point out that the macro environment in which Gerdau operates impacted our shipments of steel in the 3rd quarter. Issues like global inflation, high interest rates, military conflicts and weaknesses in the Chinese domestic economy contributed significantly to the slowdown in the level of activity in the markets where we operate. In turn, The Brazilian market was strongly affected by an excessive impact of imported steel, mainly from China, a movement that continues to occur in this 4th quarter and which requires urgent corrective measures on the part of the federal government, which I will elaborate further on.

Operator

Moving on to Slide 5, I will talk about the highlights of each of our business operations and the outlook for the coming months. For the North American market, after the strong growth recorded in the 1st few months of the year, we can already see a slowdown in demand, which is still at healthy levels, also due to the seasonality of the 4th quarter and amid an increase in imports, high interest rates and the inflationary economy. Our order book in the U. S. Remained stable at a high level of 60 days, and we continue to work on initiatives focused on cost control and operating efficiency, which allows us to maintain our profitability at levels above the other local players.

Operator

We are optimistic about the long term scenario since the recent measures taken by the U. S. Government, such as the Inflation Reduction Act and the reassuring movement, will still have a positive effect on the market in the coming periods as well as investments linked to infrastructure package. I emphasized that the North America BD is well positioned with its product portfolio and also prepared to continue meeting the future needs of our customers and sharing value with local stakeholders. Now moving to the next slide, I will now talk about our Special Steel business The automotive market in the U.

Operator

S. Continues to perform well with the production of light and heavy vehicles reaching 15,332,000 units, respectively, still below historical levels. In addition, the oil and gas segment remains resilient with rig counts stable when compared to the previous period. In turn, the outlook for the special steel market in Brazil continues to be influenced by uncertainties linked to access to credit lines and high interest rates, which contribute to restricting demand for vehicles. The National Association of Vehicles Manufacturers, was Amfavia, has even revised downwards its projections for the sector this year.

Operator

Light vehicle is expected to grow by only 3.2%, while heavy vehicle production is expected to fall by 34.2%, the latter also impacted by the changing truck technology to Euro 6. Production of agricultural machinery is also forecast to fall by 16% year on year in 2023. Despite the production of a record harvest and the increase in resources via the harvest plan, the late introduction of the plan in the devaluation of commodities in the international market have had a negative impact on the sector's performance. Moving on to the next slide, I will now talk about the long and flat steel scenario in Brazil, whose performance in the 3rd quarter reflects has a slowdown in demand for steel, but mainly the excessive influx of imports into the country, which has negatively affected the sector. Between January September, steel imports grew by 57.9% compared to the same period in 2022, totaling 3,700,000 tons.

Operator

In September, the penetration rate in Brazil reached of 23%, according to the Brazil Steel Institute. For 2023 as a whole, the Brazilian steel market is expected to post an all time record volume of around 5,000,000 tonnes with products from countries like China, Russia, South Korea and Turkey. I would remind you that the largest volume of imports ever recorded in the country was in 2010 with 4,400,000 tons at a time when Brazil's GDP was growing by around 7%. I would point out that if we take into account also indirect steel imports. The volume of imported materials entering Brazil is equivalent to the capacity of 2 large integrated mills.

Operator

Competition with Asian still is unfair under normal market practices since the prices charged are lower than production costs. With this backdrop, since half of this volume of imported product comes from China, which exports with unfair and predatory trade practices, it is urgent for the federal government to temporarily raise import tariffs to 25% in the short term in order to ensure the sustainability and competitiveness of the national skill sector, are similar to moves already made in regions like Europe, the United States and Mexico. The steel sector in Brazil employs 3,000,000 people, including direct, indirect and ancillary jobs. And a significant portion of these jobs are at imminent risk in the face of this challenging short term scenario. If prolonged, the situation will also accelerate the deindustrialization of the country, which is already under and threatens the investments planned by the steel sector for the coming years.

Operator

Now let's move to the next slide where I I'll start speaking about Argentina, where steel demand remained stable in the 3rd quarter, driven by the construction, mining and energy sectors. Of inflationary pressure, restrictions on imports and the presidential elections remain points of attention for the performance of the market in the coming quarters. Uruguay scenario remains positive, reflecting good levels of steel consumption, particularly in the agribusiness sector and also due to public and private investments. In Peru, on new weather issues continued to have an impact on the domestic market, particularly in the construction sector. I will now hand over to Jean Por, and then I will be back to talk about our ESG journey and to answer your questions.

Operator

Thank you, Gustavo. Hello, everyone. It's always a great pleasure to be here with you once again for our results presentation. Starting with Slide 11, we have some of the financial highlights of the period showing that the slowdown in global demand and the excessive penetration of imported steel in Brazil led the company to report lower results when compared to those posted in previous quarters, but still very robust results when we look at our historical numbers and our 122 years of If we were to conclude the year of 2023 today with 9 months to date, these 9 months alone would be equivalent to the 3rd best year in the company's year. This shows how strong our results are both today and also in terms of our historical numbers.

Operator

Moving now to Slide 12. I will talk about our cash flow and the company's working capital. We ended the quarter with working capital of BRL 15 of BRL0.8 billion, 4% lower than the previous quarter due to lower inventory levels. I would like to mention that this is now the 4th consecutive quarter of reduction in our inventory levels. Our cash conversion cycle still remains high due to a decline in net sales during this past period.

Operator

Therefore, we believe that there is room for further release of working capital in the coming quarters. Now moving on to the right hand side of the slide, we will talk about our cash flow. Gerdau generated this quarter BRL2.246 billion of free cash flow in the quarter, our adjusted EBITDA is to the BRL 3,349,000,000 with a margin of approximately 20%. We had a working capital release of BRL501,000,000, which compensated for the slightly lower result when compared to the Q2. We invested BRL 1,000,000,000 of BRL 486,000,000 in CapEx, in line with our guidance of BRL 5,000,000,000 for 2020.

Operator

In the next slide, we will talk about our liquidity and debt.

Speaker 1

We continue to have an excellent level of leverage with a net debt over EBITDA ratio of 0.34x. We ended September with gross debt of RBL11478 1,000,000,000 below our limit of BRL12 1,000,000,000 set by our policy despite a U. S. Dollar rate 4% higher than in the previous quarter. On the right hand side of the page, we show a breakdown of our liquidity and our debt amortization schedule.

Speaker 1

Considering the cash position of $6,000,000,000 added to our revolver line of US875 $1,000,000 equivalent to approximately 4,500,000 BRLs, which is fully available and absolutely undrawn, this adds up to more than RMB 10,000,000,000 of liquidity available for the company. We strongly believe that the maintenance of a deleveraged balance sheet With maturity dates well distributed over time, it's critical to allow us to make the investments required to develop and enhance our operations. Even in more challenging times, which are so common in an industry that is cyclical and capital intensive. Moving on to Slide 14, let's talk about return to our shareholders. As you can see in the chart on the left, Our dividend payout remains above the targeted minimum of 30% set by our policy.

Speaker 1

Even in the midst of a more challenging scenario, reaching a payout of 58% for Gerdau in the quarter. Last week, we concluded the company's buyback program. We performed a significant share of the program, buying 45,000,000 preferred shares of Gerdau S. A. And 48,000,000 preferred shares of Metalogica Gerdau.

Speaker 1

Both Gerdau and Mitalujica Gerdau will assess the potential for new of share buyback programs in a timely manner. Lastly, thanks to the results delivered and our cash position and liquidity this quarter, The company decided to pay dividends both at Gerdau S. A. And Metallurgica. Dividends will be paid on December of 13 and 14 respectively Gerdau S.

Speaker 1

A. Will pay 0.47 dollars per share, equivalent to a total of approximately BRL 822,000,000 whereas, Metallurgica Gerdau will pay $0.93 per share, totaling RMB960 1,000,000. Both cases will take into account the position of the shares held on November 17, 2023. Finally, on Slide 15, we give you an update on our progress in the company's strategic CapEx. Of the BRL 11,900,000,000 to be invested between 20 21 2026, Approximately 1 third has already been disbursed by Q3 2023, earmarked mainly for investments in the Rolland Mill and Melt Shop in the North American operation, in the casting and finishing capacities in the Specialty Steel operation and naturally, needless to say, important investments in our operation in Brazil.

Speaker 1

Here, we highlight investments in mining and processing of iron ore and the expansion of the coiled Hot Rolled Mill in Ouro Branco displayed in the cover of this quarter's presentation, showing a little bit of our progress and the status of the construction works. Guys, thank you very much. I'll give the floor back to Gustavo, who will talk about some ESG initiatives, and I'll come back at the end for the Q and A section. Thank you, Jean Paul. On the next slide, I'll dive deeper into our investments in renewable energy.

Speaker 1

Gerdau holds a 33.33% stake in NewWave Energy. This company through its new business division Next concluded the acquisition of the Arena Solar Farm in Minas Gerais from the Votalia Group. The transaction is another important step in the company's strategy of expanding the generation of clean renewable energy seeking greater competitiveness and sustainability in its operations. The future project to be completed by the end of 2024 will have a total investment in construction of around BRL 1,400,000,000. The new solar energy cluster will have an installed generation capacity of approximately 4 20 megawatts and will include a power substation.

Speaker 1

I highlight that the photovoltaic capacity installed at the plant is equivalent to 7% of Gerdau's Annual energy consumption in the country based on 2022 production and provides for an estimated reduction of up to 22,000 tons of CO2 per year. Once fully operational, 30% of the renewable energy produced at the Areno solar farm will be used to manufacture Gerdau Steel in Brazil in the self production mode. This volume of energy accounts for approximately 34 megawatts, equivalent to the use of a steel plant with an annual capacity of approximately 400,000 tonnes. Finally, I would like to point out that for the 2nd year in a row Gerdau won the 14th edition of the Steely Awards 2023 in the Excellence in Communication category. The award ceremony organized by the World Steel Association is the greatest in the global steel industry and acknowledges the contributions of its member companies.

Speaker 1

We won the award of a brand case study that tells the story of our partnership with Rock and Rio Brazil 2022, whose main forum, the world stage, was built with over 200 tons of 100% recycled gold Gerdau Steel. The initiative also shows our journey to transform the image and the global reputation of the steel sector. Well, thank you all for listening to our comments. From now on, we'll be available to answer questions and dive deeper into subjects of interest to you. Thank you.

Speaker 1

Thank you all. So now we will open the Q and A session. As a reminder, if you want to ask questions, please When you are announced, there will be a request to unmute. At this time, please unmute so you can ask your question. Should you need to open your cameras, please let us know so we can enable your camera.

Speaker 1

We kindly ask you are to ask all your questions at once. Let's move on to the first question via the Q and A icon.

Operator

The question comes from Edgar Pinto de Souza, sell side analyst from Itau BBA. My first question refers to capital allocation. We saw the dividend payout from Goao above Gerdau with yield of almost 9% in the quarter versus 2% in GGBR. Looking forward I mean, looking towards the future, could we expect that the Goaals dividend payout should be at a higher level when compared to Gerdau's giving the balance sheet position of the holding? The second question is In relation to the U.

Operator

S. Results, the margin remained very sound, very close to 25% in the quarter. What is the margin level that Gerdau has in mind for the 2024 budget? What do you expect in terms of shipments for the region? Thank you.

Operator

I'll turn now the floor to Gustavo and Jean Pierre. Hi, Edgar. In terms of Gerdau's and Metallurgica's dividends dividend payout, I would like to remind you that Metallurgica Gerdau in the Q3 of last year, Gerdau ESA had a dividend payout way above the other quarters, BRL 3,600,000,000 and back then, the Metalurgica Gerdau paid out BRL 663,000,000, meaning that it retained an important amount of the dividends in its cash. But throughout the year and throughout the quarters, taking into account the macroeconomic landscape and the potential tax reforms and the current interest levels, we look at the situation and now routinely we allocate capital. And at the time, we thought that it was are good to pay out an important part of our dividends, which will now be paid in the 3rd quarter.

Operator

In terms of the future perspectives, as Metalluska Gerdau has one single asset we charge Gerdau S. Y. Shares. We don't think that there is a lot of room in the long run for Metalurgica to pay out dividends above the levels of Gerdau Sia. Of course, it still has a good amount of cash.

Operator

It is not distributing all of it, but this is not something that there will be very frequent throughout the years. And now Gustavo will talk about the outlook going forward. Hi, Edgar. It's a pleasure to talk to you. In relation to our North America operation, we remain very optimistic because we will still experienced a very sound business environment in 2024.

Operator

Our North American BD involves also Osikol, the U. S. And Canada and more specifically in the U. S. When we look at the business environment, not only now at the end of 2023, but also 2024 and going forward, we look at this scenario in a very positive way.

Operator

At the moment, we are seeing a slight slowdown in our order backlog. I think this is something I've been mentioning in other quarters, but it's according to expected. Our backlog remains sound. Spread is still at high levels. We haven't yet used all of the incentive packages in terms of steel consumption provided by the federal government.

Operator

Infrastructure packages have been a cause of constant review and our order number will increase. Our Mexico operation, as I said before, is demonstrating very good performance. This I mean, reshoring and near shoring are now being translated into a higher demand for with rebars and profiles with good penetration. So therefore, North America right now, it is not in our it's not part of our concern. We remain with a very strong operation in that geography.

Operator

Thank you, Gustavo. Our next question comes from Leonardo Correa, sell side analyst from BTG Pactual. Please allow him to use his camera. Hi, guys. Can you hear me?

Operator

Yes, Liao. We can hear and see you very well. Hello, Vernaki, Japura and Renata. My first question I'm sorry for being so insistent, but given that this is a hot subject, I will go back to the capital allocation and leverage levels. In terms of Metalurgica Gerdau, I think this is pretty much in line with what we had in mind.

Operator

There is an extraordinary cash in the company that was distributed. I mean, you had an excessive cash and could be distributed in the form of extraordinary payout. In terms of GGB, we had the feeling, we had the impression that the company's leverage would be around BRL 6 for BRL7 billion, I mean, net debt, which would give about BRL12 1,000,000,000 of gross debt and about BRL6 1,000,000,000 of cash. Therefore, we thought about BRL 6,000,000,000 to BRL 7,000,000,000, and maybe you could calibrate dividends according to that target. Now this quarter, you announced an additional deleveraging, and your net debt remained at BRL 5,500,000,000 and this was like a negative surprise of the dividends paid by GGB, which was 50% below what we thought it would be.

Operator

So I would just like to hear from you what led you to make such a conservative decision in terms of dividend payout. And a lot of people are asking, I mean, given the fact that there is no M and A in that calculation and your CapEx, it's quite predictable and very well outlined by you. You even said that in your stakeholder day. The only thing that I can think is that you've been very cautious in terms of the current landscape. And in a way, the current landscape is bad.

Operator

But I would just like to learn more about your decision making process and why you decided to be more conservative? Has there been any changes in your target? And I think this has been the main focal point in terms of the analysts in general. The second point, Bernanke, I think the message of the company has been very clear in terms of all of this incredible I mean, this excessive volume of imported steel and the deceleration that we are seeing in many chains. Looking at the Brazil results and the margin of Brazil, I think that this is one of the main are points of attention for the company.

Operator

And that's why, I mean, that also includes increase in tariffs. And profitability, if I look at of the past 10 to 15 years, Brazil's profitability is at Dilma's level, I mean recession level. So what do you have that you could utilize to somehow resume profitability in Brazil or go back to your profitability levels in Brazil. Do you have any measures related to cost reduction? Or is there anything that you can tell us that you've been doing to somehow on the micro side, somehow you could try to compensate for this more challenging landscape.

Operator

Well, thank you, Lael. Thank you for all of your comments and questions. I mean, Jean Paul answered the part on dividends, and then I will talk a little bit about the Brazil side. I think your second question, it's quite timely, and that gives me the opportunity to tell you something about your first question. I mean, we are a Brazilian company that pays dividends in Brazil, and therefore, this depends on our capacity to generate cash denominated NPLs to pay the dividends.

Operator

But when we see moments like the one today, whereas our Brazilian operation is performing. I mean, in addition to everything that is happening with so with a large volume of imported products. And our investment portfolio in terms of CapEx comes from Brazil, I mean of CNY 9,000,000,000 of CapEx. So this is a very important amount for our Brazil operation. But we depend on bringing money from the U.

Operator

S. Or maybe from other subsidiaries of the company to pay out dividends. But this is not necessarily good for financial and tax reasons. Well, certainly, we should highlight that the year is not over yet. We still have another quarter, and so we have room to revisit and rediscuss the dividend payout for the coming quarters.

Operator

But today, taking into account the current perspective in the Brazilian market with this excessive amount of imported goods, I mean, 23% penetration of imported in September. And we do not see any going trend of this number coming down. And we have an important portfolio of projects, but yet a lot of uncertainties related to Brazilian economy because the apparent consumption for domestic of goods, I mean, is uncertain. That's why we are more cautious in terms of paying dividends starting in Brazil. But now, Lael, let me tell you a little bit about Brazil.

Operator

We are still very quick in adapting to the current scenarios. Our capacity to deliver good profitability. And proof of what I'm saying is our Special Steel operations. When you look at the results, despite a very complex landscape, as you put it yourself, in Brazil, with the decline in the demand for light in Heavy Vehicles. Despite all that, we were able to quickly adjust our fixed cost in our steel operations and adjust that to the current moment of our business.

Operator

This is just a message that indicates that we are still very alert and very quick to prepare the company to navigate in different scenarios. In terms of flat and long steels operation, that was a bit different because in the past few months, we thought that we could find opportunities to continue to export from Brazil. And that we thought that we would have the penetration of imported steel coming from Asia, especially from China, are much lower than, in fact, the reality showed. And in the past few weeks, we went to China, and we came out of that country very convinced that this current export level will continue in the next coming months. After almost 13 years, we may see again a high level of Asian exports, absolutely high.

Operator

I think there will be 100,000,000 exports coming from China, and they are looking so we are looking for they're looking for geographies and countries that have not yet adopted measures to contain all of this subsidized still that comes into the country in a very unfair and predatory way. We've been Well, given that, we are now trying to remove capacity to reduce fixed costs as we did with Special Steels because it's important that we can navigate in a scenario that will still be prevalent in the next coming months. So in addition to the reduction in fixed costs and the removal of capacity, it's important that the federal government comes up with measures that can bring a more competitive field. This is affecting the entire steel industry in Brazil, and we have to fight that predatory import very quickly. We've been talking about this tariff of 25%, and this will come as a means to level the playing field in terms of competitiveness.

Operator

We said first in several occasions that our competitiveness is quite high. We compete on equal footing with any large steel producer. But when we see the penetration of steel that comes to Brazil at a cost that is lower than the production cost, this really indicates unfair competition. We've been constantly talking to people at a federal government, And what we see is that they are now being convinced that something has to be done. We are already removing capacity from our operations in Serra and Rio Grande do Sul.

Operator

And unfortunately, in the last few weeks, we had to let go almost 700 direct workers. And in terms of of wealth generation in Brazil. This is a very complex issue. Therefore, something has to be done, and it has to be done urgently. It's important that competition goes back to something are fair in Brazil.

Operator

So this is our claim today. In addition to that, we are reducing capacity. We are making some strides towards reducing our fixed cost because it's important that we recover our domestic market levels. In terms of exports, we see that the market is closed to us right now. I know that 22% of our installed capacity in Brazil has been traditionally vocation for experts.

Operator

But with this flood of Chinese still, we don't see any opportunities to export at margins that will be attractive to us. Therefore, this is bad for the consolidated margins that we've had in our Brazil operations. But I know that this was a very detailed answer, but it was just to explain to you that in fact, this unprecedented a flood of imported products from China is bringing about serious problems to the entire steel market in Brazil. Well, Gustavo, talking about imports, when we look at the traditional prices from March to March, there was a drop of between 5% and 7%. On the other hand, negatively speaking about our exports from Brazil, our exchange rate from March to now, and it changed.

Operator

I mean, there was the appreciation of the Brazilian BRL. So there was a gap between 10% to 15% of competitive competition losses. So after this flood of steel coming from China and also in view of the exchange rate, it's very difficult to be competitive and to generate cash and have good results if you think about exports from Brazil. That was great. Thank you, Jean Paul.

Operator

Thank you very much. Thank you, Leo, for joining us today.

Speaker 1

Next question, Lucas Laghi, Good afternoon. Can you hear me now? Hi, Lucas. We can hear you very well. Thank you, Vernaki.

Speaker 1

I was just are connecting. Good afternoon, everyone. Thank you for taking my question. I have two questions that I would like to dive deeper with you. First, a follow-up question on the previous one.

Speaker 1

It's about the Brazil operation, particularly about profitability. There was a slight contraction on a quarterly basis. If we think about lower prices on Q3 compared to Q2, Vernaki already mentioned the imports of Chinese and Asian steel in Brazil. So I'd like to better understand if we think about Q4 still about cost but particularly variable cost, Particularly when it comes to coal and iron ore price dynamics and the timing visavis how these components are accounted for as cost over Q4 and Q1 of 24. I know there is a time mismatch, but it would be important to know the cost dynamics could By the end of the day, it'd be beneficial in a contest of lower prices with these challenges in Brazil.

Speaker 1

It can also have an impact for not only flat but also long steel. Second question is about specialty steel. Could you give us an update about the impacts created by strikes in the automotive sector in the U. S? 1 month 10 days already.

Speaker 1

So I'd like to better understand what you see as impact. And also take into account Hi. About light and heavy in the U. S, maybe the impact of the strikes, so it would be nice to have an update about the impacts for Q4 when it comes to strike in the specialty steel operation. So these are my two points.

Speaker 1

Thank you, Lucas. Thank you for being with us. Japut is also going to help me answer the question. Yes, maybe I can talk about Brazil And also call Anne Arianor. So breaking down your question, Lucas, let's talk about Brazil first.

Speaker 1

It's important to remember in our cost structure typically in the Brazil operation we have 25% to 28% of fixed costs and the rest is variable cost. In times like now when we have a predatory invasion of important material shifting our sales, domestic sales, our parent sales, sometimes we lose the operational leverage This quarter, when it comes to variable costs that we expect to see in Q4, call as you mentioned well has a very specific lead time. Between the time we check the price on the screen of this call and until we convert into results, it takes around 180 days. Oftentimes makes it very challenging for us to set the impacts because we don't work with FIFO but with average costs. So price dynamics is hard to follow-up very sharply.

Speaker 1

But today, as we can see in the international market, we have a hike of coal prices may be reverting in the low that we saw between the 1st and second quarters. In the 3rd and 4th quarter, Owing to these excess production in China, we could have higher pressure on international coal prices. We imagine this might have an impact early next year on our variable costs. Lucas, when it comes to our specialty steel operations, like I said before, Our capacity was very fast to be adapted to new demand levels, particularly in Brazil. If we check on Favio's figures, a drop was expected, particularly in heavy vehicle production, are pretty much driven by current market conditions and also advanced purchases related to the technology of Euro 6.

Speaker 1

Current levels of profitability are evidence of our fast adaptation. In North America, slightly different from here, The market was following at a very stable level of demand both for light and heavy vehicles. We began to suffer as of November This month, the impact of the strike that Lucas mentioned, the strike that has been going on right now for 5 or 6 weeks, Particularly for the 6 big OGM's in OEMs in the U. S, didn't impact our results on Q3, but the extension of the strike may begin to have impact starting October November. We are making measures to be promptly adapting in our fixed costs there.

Speaker 1

But unlike here, As soon as the strike is over, this demand or orders that were not delivered over the weeks, maybe they can convert into higher deliveries down the road. So it's only a matter of postponing results. But now since you asked this question, let me highlight the investments that we've made in our North America BO in recent years. We concluded an investment cycle that is very key, particularly in Monroe, Michigan. This mill is are absolutely state of the art up to date when it comes to specialty steel production fully ready to meet the needs of hybrid And growing segment of electrical vehicles.

Speaker 1

So over the coming quarters, not only we will benefit from increased demand in North America and the sound and solid market, but also higher competition in our operation in North America. Our plan is state of the art like I said and the cost level is lower compared to what we saw in the last 2 years. It's clear, Vernak and Japour, thank you. Next question? Gabriel Simois, Good afternoon.

Speaker 1

Thank you for taking my questions. I have two questions. First question is about your CapEx. You gave us more details in Investor Day and Jean Paul also made brief comments for CapEx for the coming year. So considering the CapEx below what we expected this quarter, Considering this scenario where we have normal EBITDA is slightly lower than we saw in previous years, I would like to understand if it to make sense in our mindset this CapEx close to BRL6 1,000,000,000 per year or if there is any chance of a slightly Lower CapEx down the road.

Speaker 1

We'd like to understand how much of the CapEx you mentioned is already And how much room for the future? Second question is about working capital. There was a good reduction this quarter, are still lower compared to what we expected. So could you give us more color about this? We expect to see a drop in Q4.

Speaker 1

I know it's complicated, but we'd like to have an order of magnitude expectations for the future. Does it make sense to have the same level of working capital as historical levels around 80 days just to understand what you work in house And also the drivers to bring working capital back to this lower level. Thank you. Thank you, Gabriel. Just allow me to talk about normal results that you said and then Jean Paul is going to answer your questions.

Speaker 1

We've been discussing over the last quarters. Maybe normal results is an expression that no longer fits In geopolitical and economic status today, volatility has been even higher today. As a reminder, despite these reduced results that we saw along 2022, the company is at a different level, a different that is to keep on generating very solid results when we compare to years 2019 and before. So all our efforts in every front strategy, culture, digital transformation Gerdau over 2023 and going forward, The level of result generation is way above what we had last year. So the earnings in 2021 2022 were outliers will reach levels over BRL20 1,000,000,000 as generation of results.

Speaker 1

But when we consider the results expected for year 2023 and the future, The level of financial results is way above what we had in the past. So we cannot compare this moment of 2023 with what we had Prior to 2019, I just wanted to give you some context, not mentioning normalization, but we should bear in mind That this is a very different moment, better the company is more solid and well prepared to tackle these challenges compared to the past. Having said that, I turn it over to Japour so he can talk about CapEx and also issues related to working capital for the coming quarters. Hi, Gabriel. Let me begin with CapEx.

Speaker 1

With this burst year to date 72% of the guidance that we gave in February, disbursement around R5 1,000,000,000, this quarter R1.5 billion. We believe we are in a good pace to deliver and perform what we expected early in the year, taking into account the projects that we have. When it comes to the pace of long term disbursement, Gustavo highlighted this before. Our intention is not to stop and interrupt The projects that we approve and discuss, our scrutiny at Gerdau in order to approve projects are going for competition purposes, bringing higher sales, cost reduction and profitability. These projects are very strict.

Speaker 1

They go through a number of committees, multidisciplinary committees involving supplies, engineering, Commercial teams, financial teams, so they are exhaustively discussed before being approved. And once they are approved, we consider them to be robust. Sometimes the economic cycle in our business and cash generation may be slightly below what we expected, we believe we should not just invest because it's are convenient for us. It takes capital allocation to unleash value and bring us continues and perennial business into the future. This is why we understand that even if results are lower, We have no intention to cancel any projects.

Speaker 1

There is always room to postpone one initiative or another. But when you think about material investments, they are really driving forces in our capacity to generate value and profitability. We don't expect to postpone or cancel any projects. Moving now to working capital, Gabriel. This quarter more specifically, please note there was an increase in our cash conversion cycles in terms of sales days.

Speaker 1

Take into account not only 360 days but the last 90 days. So this is a little bit more sensitive to fluctuations in our level of revenue. So we had a negative impact and increased our cash conversion cycle in days despite a reduction in work of capital around R500 1,000,000. For the coming quarters, if we take into account What we've seen already in terms of reduction in accounts payable and inventory levels, we expect Continue reducing working capital, trying to go back to normal, take into account Or assuming we won't have any material changes in sales. Why am I talking about accounts payable and inventories?

Speaker 1

Because there is an important difference in our inventory terms close to 70 or 80 days and our account payable, which is close to 30 days. So what we are decreasing today as accounts payable, there is some mismatch 30 or 40 days compared to what will be converted into lower COGS down the road via lower inventory levels. So when we deliver a recurring reduction of inventory levels and Let me add to what Jean Paul said about CapEx. I would like to highlight something that I recently underscored during the Stakeholders Day. But it's okay to be redundant.

Speaker 1

It's important to mention the importance of our investments in Mining In our Ouro Branco Mill, Ouro Branco for the next 40 years will turn into an absolutely competitive platform to meet the Brazilian domestic market. The former ASO MENAS, which is Ouro Branco Mill today, was designed at the time to be a platform to produce semi finished goods blocks slabs of And over the years, we've been converting Ouro Branco Mill into a very efficient platform to meet the local market with Highly added value products. Investments in mining therefore will bring us high quality iron ore are concentrated 70% iron. The mine is just 12 or 13 kilometers only. And we have evidence that we have resources and funds for the next 40 years.

Speaker 1

Our forecast for next year 2024 is to start up a second phase of our investments in coiled hot rolled strips. We have a broad network of Commercial Gerdau with plenty of possibilities to meet our customers' need with this Additional capacity and investments for future years, expanding our production of Structural profiles and other plans for Ouro Branco so it becomes absolutely competitive. So rest assured, Rest assured how assertive we are in our investments, sustainable mining, no dams, Very low environmental impact. So more specifically about this investment in mining and Ouro Branco, That's why I want to highlight it again, understand the possibility in the coming years to benefit of results, Big results and profitability of our BO in Brazil stemming from this platform, which like I said is going to be one of the most effective and competitive steel plans for finished goods in Brazil. Thank you.

Speaker 1

Maybe just a brief follow-up about CapEx. When I mentioned about a slightly lower execution in the math, The idea was to talk about NEXX. So when we think about JPY5 1,000,000,000, like Japut said, you're very much on track. The investment in NEX was slightly lower than expected at first, close to CNY100 1,000,000 over the year When your guidance was DKK500 1,000,000 to DKK800 1,000,000. So the idea is to understand in this front, if we expect to see a slowdown of CapEx, known as of CapEx, but this investment in NEX for the coming quarter And if you maintain the idea at the same level for next year.

Speaker 1

Just to give you some concepts, Gabriel, we have no urgency to invest In new business at Gerdau Next. Gerdau Next is a platform of new business. Some of them, we believe they are not promising. So we quickly remove them from our portfolio and businesses that are becoming more material are as robust to the future, so our investments in Gerdau Lacks will be very down to earth. From the moment we feel more confident that these businesses are growing and bringing adequate results, will keep on doing, but we have no urgency to allocate capital in Gerdau Next.

Speaker 1

We'll be promoting growth of these businesses as we become more confident over the coming years. So I just wanted to, Well, rest assured, at Gerdau Next, we have no need, no urgency to invest as we've been doing in other Gerdau business, More specifically, in Minas Gerais with Mining in Ouro Branco. Japur? Sure. It's so confusing when we think about earnings release and quarterly statements.

Speaker 1

I was trying to recap exactly the date of our advisory to the market. On October 10, We released an advisory, a notice to the market about the acquisition. Part of NewWave In Ergia, we hold 33.33 percent of Arino Solar Farm. And we totaled part of the requirements of our investment agreement with NewWave Capital in order to complete the portion of around R500 million, which will happen over Q4. Like we said in the beginning of the year, between allocations at Gerdau Next, we would consider over 2023 between BRL500 1,000,000 and BRL800 1,000,000 depending on the conditions of the business.

Speaker 1

If we think about inflow for heavy vehicles at Handong Where we have the commitment to invest BRL125 1,000,000 and now we are concluding this full share of of capital which is already subscribed at NewWave Energia amounting to BRL 500,000,000 perfect.

Operator

Thank you, Gabriel. Our next question from Ricardo Monigalla, sell side analyst from Safra. He's got 2 questions for us. The first question, The company should invest BRL 8,900,000 between 2021 and 2026, and initiatives that, if I'm not mistaken, should generate an incremental EBITDA of BRL 4,000,000,000 in 2,031. I would like to understand what initiatives should pay more contributions to EBITDA and whether the EBITDA increase is linear or not.

Operator

My second question refers to exploiting the drop of sales in the domestic market in the third of 2023 versus the general industry using ABR data. This discrepancy is due to the mix or the commercial strategy of the company. Could we expect a better performance, I mean, better than industry in the Q4 of this

Speaker 1

year. Ricardo,

Operator

thank you for your questions. Let me In terms of CapEx, in the presentation during our stakeholder day, it became very clear. On the Left hand side of this slide, we have the CapEx disbursements that total the strategic CapEx for this window of 2021 to 2026, and that involves several initiatives. The main initiatives that will generate resources refer to investments in our Brazil BD and our sustainable mining operation as we detailed during the presentation. But in that presentation, I'm sure you will find more details.

Operator

And also in our reference form, you also have the breakdown per initiative and how much we understand will be our EBITDA contribution throughout the year. Along the same lines, when we talk about the potential EBITDA that could be generated, this is not something that will happen instantaneously. There is a disclaimer until 2,031 as a potential value generation because even with these investments, there is a ramp up curve. And that's when we add the volumes of these productive capacity until we can really release all the potential of all of these initiatives. And then you answered the part about Brazil?

Operator

Okay. About Brazil, Ricardo, This has to do with the mix. It's just normal that throughout the quarter, there are some variations between the numbers that you look at, the ABR numbers and the numbers that you look when you take a look at our quarterly results. So it is usually a mix. Also, the apparent steel consumption remains very sound.

Operator

From January to September of 2023, approximately 1% visavis 2022, but the demand in the domestic market is quite sound when compared to the previous years. The main issue today, as I said before, already referring to this drop in sales to the domestic market is related to this absurd increase in the penetration of imported steel. When we look at our main markets and now looking at the closing of 2023 and going towards 2024, we remain optimistic that the demand or steel consumption in Brazil will continue to stay at the current levels. We recently heard something. Just as an example, the Ministry of the cities expressed a desire to expand the Milla Casa Milla Vida program to the middle class.

Operator

And So there are many new orders, especially coming from our cut and vent units. And there is an expectation that with the reduction in interest rates, the retail market could also resume demand. And the Industrial segment, even though it went through a more difficult half year with the penetration of imported machinery. It's a sector of the economy that is beginning to react. Therefore, the apparent demand remains are sound.

Operator

Therefore, I reiterate the importance of the federal government that in the shortest possible time should introduce efficient measures to fight the penetration coming from the this unfair of import. We will certainly resume our capacity. We will put new capacities into operation. So in the short run, there is no other effective mechanism for us to resume our shipments to the domestic market, there's nothing better than this the new measures taken by the Brazilian government to fight this predatory flood of imports coming from China. Still speaking about China, I don't know exactly what is your calculation in terms of our market share in different areas, but I'm assuming that you are using information from the Brazil Stio Institute that they publish information at the end of every month.

Operator

So there are 2 important aspects here. The first one has to do with what Gustavo said, which is in relation to imports. Whenever we think about Gerdau's shipments visavis the apparent consumption of steel in Brazil, we went from 11%, 12% penetration last year. And in September, this number went from 11% to 12% to 23% of imports that penetrated in the country. So not only Gerdau, but the entire industry is suffering because we saw the influx of import materials coming here at cost below the cost price.

Operator

The numbers from the Brazil Steel Institute, within long steels, we also have other categories, one of them being special deals. Given the nature of each segment and also giving the different industries like heavy vehicles and agricultural machinery has different uses for long steels. And sometimes, it makes us difficult to understand the actual numbers. You have to look at the type of product and you have to look at every line and every product to arrive at more precise numbers. We also received 2 other questions related to CapEx.

Operator

Some other questions have been answered, but Eco Geges, a sell side analyst from Jinyao, asked the following question. I would like to understand what level of trust you have in that BRL 5,000,000,000 CapEx guidance? And how do you see the dynamics of increased investments of the company considering a lower EBITDA and less room to generate cash. And Camilla, the sell side analyst from Bradesco, also has a question on CapEx. And she talks about the KRW8.6 billion in CapEx to be invested by 2026, whether we could expect a higher concentration of investments in 2024 or whether it will be something more spread through of the years.

Operator

Thank you, both of you. In terms of that guidance of BRL 5,000,000,000 a year, 5,000,000 a year, we think that we will be able to execute all of the disbursements. We already have a good percentage of the total. Therefore, we still have some room going forward, especially in the Q4 because typically given seasonality in North America and Brazil because of the holidays at the end of the year, we reduce our production activities. Now speaking about the strategic CapEx and now uniting both questions, the question from Igor Ghedge's and Camilo's question.

Operator

I think both of us, Gustavo and I, already talked about our perspective and long term view for our CapEx investments. And given everything that has been approved by our Board, we know that these are not opportunistic investments. These are all investments that are intrinsically related to our long term strategic view to ensure the continuity and sustainability of our business. That's why our cash conversion cycle or the cycle of the industry is not so favorable as we experienced in the past few years, but we know that these are investments that are absolutely are essential and transformational. Now in relation to the pace of the disbursement of that 2 thirds that we have yet to execute considering the total amount of the portfolio by 2026.

Operator

We understand that it will be prudent for us to phase it out, phase it throughout time, given the pace of every project. In Brazil, we see many engineering companies with difficulties to find people, difficulties to execute some of the investments that were approved in the past few years and also concerning infrastructure works from previous administrations. Everything we saw when you look at the supply chain in the last few years, we understand that it is prudent, be it in terms of our the financial discipline of our balance sheet and our execution capacity, it would be important to phase it throughout time in a more synchronized way. And certainly, variations either up or down will certainly occur. I think you already said it all, Jean Pierre.

Operator

I would like to thank Igor and Camilla for their questions. Camilla already sent us a second question, and she talks about the following thing. Gerdau made a series of divestments in the past. Considering political uncertainties in some Latin American countries like Peru and Argentina, in particular, would you consider T and I in particular, would you consider divesting in these regions so that you could turn your focus to the U. S.

Operator

And Brazil? Right now, we extensively reviewed our asset portfolio between 2014, 2015 and 2019. Therefore, we are very are pleased with the current assets portfolio that we have. We understand that we are a much better company today when compared to what we were 3 to 4 years ago. Therefore, right now, we are not contemplating any divestments.

Speaker 1

Perfect, Gustavo Wang, HSBC Analyst. He asked 2 questions, but maybe they were already answered. He wants to know about costs in the Brazilian operation, Take into account the drop in the quarter and how could we consider profitability. He also wants to know about the strike in North America And potential impacts on our results. And if we expect to see an end to this strike, Would you like to comment anything else?

Speaker 1

Or maybe we can give the floor back to Gustavo. I think it was already addressed. And OXin, sell side analyst or buy side Analyst at Trigno, he wants to know about dynamics for scrap prices considering the main markets in the future, U. S. And Brazil.

Speaker 1

To some extent, the price of scrap in the main markets where we are, the U. S. And Brazil, Prices are stable. Seasonality appears now in North America. With winter time, we know transportation and logistics with scrap is more challenging from November to March.

Speaker 1

So we might see a slight change in prices owing to seasonality. It's also important to know that in North America, It's important to see how purchase will happen with Turkey. Turkey's level of export For this conflict area, particularly Israel, this is very high. Turkey exports around 1,000,000 tons of rebar to Israel per year. So let us see what Turkey's decision will be about this capacity.

Speaker 1

If we keep on buying scrap And producing rebar to export or if it will lower its production capacity putting less pressure on scrap in North America. And in Brazil, as we speak, with a lower production capacity, chances are scrap prices will remain stable with a downward trend. So this is not our most important concern right now. Like Japur said before, Especially for coal, which is a significant raw material, we have no control, no manufacturer in Brazil has control over prices. And we have to be very cautious about the behavior of this raw material in the coming months.

Speaker 1

Thank you, Gustavo. For the benefit of time and respecting your agenda, We've been on for 1 hour and 15 minutes. This concludes the Q and A section. Questions Which were not answered during our session will be answered to you. Our Investor Relations team will talk And now I give the floor back to Gustavo for the final remarks.

Speaker 1

Thank you, Renata. So once again, I want to thank you all for joining us today. As always, it was a great pleasure talking to you. I'd like to invite you to join our next earnings conference call for the Q4 of 2023, Which will be held on February 21. So on behalf of Japour, Renata, the whole Gerdau team,

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Earnings Conference Call
Gerdau Q3 2023
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