Gerdau SA (GGB) 2004 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the audio conference call of Gerdau. Thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions to participants will be given at this time. If you should require assistance during the call, please press the “*” key followed by “0”. I will now like to turn the conference over to Mr. Schirmer, Executive Vice President and Investor Relations Director. Please go ahead, sir.

Good afternoon ladies and gentlemen. Welcome to our second quarter conference call. The quarter's press release is already available at our website and was filed with the CVM and BOVESPA this morning.

We would like to remind you that as consistent with the first quarter, the Company has also released its quarterly results according to US GAAP. These are available at our website.

This conference call is based on data presented according to Brazilian corporate law, Brazilian GAAP.

Let’s start. Brazil. This second quarter has confirmed the recovery trend for the Brazilian steel markets along with the maintenance of favorable conditions in international markets as announced on our first quarter conference call.

The Brazilian economy is in a growth mode and gives strong indications that the GDP gross may, in fact, reach 3.5% - or maybe more -, as estimated by the Brazilian Government for this year. In the industrial sector, exporters continue to demand steel products. In the civil construction sector, an important steel customer, there is evidence of a consistent pick up in demand in the last months. Sales of rebars increased 15% in June, compared to the same period in 2003. The steel sector is reducing exports in order to service the increasing domestic demand, in spite of the fact that international prices are more attractive than domestic prices. The reason is that our main focus continues to be satisfying the domestic market.

Gerdau's businesses in Brazil are in line with good performance of the sector in the quarter. Domestic sales show an increase of 15% compared to the first three months of the previous year. For the year-to-date, domestic sales increased 18.9%, indicating that our 12% growth estimate for 2004, as announced on our previous conference call, may be well surpassed. The flip side to domestic growth has been the reduction in exports, down 13% in the quarter. Still, exports totaled 632,000 metric tons in the second quarter. It generated revenues of $290 million compared to 220 million in the first quarter. Even with volumes falling, the financial results of exports increased by 325% as a consequence of increases in international prices of steel products.

When the topic is exports and international markets, the word that comes to mind is China, the largest steel producer in the world and great steel products and raw materials importer. The influence China has had on steel markets has changed the dynamics of business in the sector. The Chinese economy has been growing at full speed. Aware of the implications of this growth, China has decided to slowdown the pace of investments and try to balance back the economy. Nonetheless, in spite of the measures adopted by the Government, restrictions on credit and the power generation deficit, their steel industry continues to grow and has put pressure back on international markets for iron ore and steel scrap.

The impact of the decision to slowdown ended up generating exports from China throughout the quarter as they quickly worked to reduce steel inventories accumulated in previous months. With this reaction and the reduction in volumes imported in the second quarter, prices of steel products suffered a slight decrease in the period. The quick depletion of inventories, however, caused an almost immediate resumption in imports and, as a consequence, prices went up again. It is worthwhile mentioning that, given the short-lived price fluctuations, products exported by the Ouro Branco - Gerdau Açominas unit to that particular region of the world did not suffer the impact of this price decline.

North America. The resumption of economic growth in the US, the almost 25% increase in prices in the second quarter compared to the first one and the reduction of the cost of steel scrap, allowed for a significant margin recovery in the region. Additionally, we must highlight the effort put in by the Company to increase efficiencies in its operations and in utilization of close to full capacity levels of its installed capacity. With that we were able to reduce per unit cost. Even though shipments fell 4% in the second quarter compared to the first, partially explained by the program purchases in order to avoid the program price increases in April and May. With all that or even though, net revenues increased by 26% in the quarter. More important than the increase in net revenues is the recovery of operating margins in the period. EBITDA margin reached the mark of 24% this second quarter, compared to the 10% in the first. The combination of market sectors mentioned before and the greater control over the operation make us to believe that the average results obtained may well be sustained at the present levels through the end of the year.

South Zone. Operations in Chile, Uruguay, and Argentina continues to present very positive results with increases in output, Sales and improved margins. Crude steel output in these countries increased by 24% in the second quarter when compared to the first. And gross margins and EBITDA margin continue to increase throughout the quarter. Economic growth in these countries and the high prices for steel products in the international markets are factors that have made it possible to reach these marks.

Results. In consolidated terms, net revenues reached 5.3 billion in the second quarter, 20% greater than in the first quarter. This growth can be explained by the greater revenue obtained from exports and from the North American operations, as a reflex of price increases of steel products in those markets. Another contributor was the 15% growth in shipments to Brazilian domestic customers. 69% of net revenues came from abroad this quarter, companies outside Brazil and Brazilian exports, and 31% from sales came from the domestic market.

Gross margins surpassed the 24% mark achieved in the first quarter, reaching 35.2% in the second quarter, and EBITDA, up from 21% to 32.4%.

EBITDA increased 94.2% in the second quarter reaching 1.7 billion reals in the period. The North American operations made an important contribution to this growth jumping from 200 million reals in the first quarter to more than 600 million reals in the second.

Consolidated net income in the quarter was 873 million reals, 104% greater than that of the first quarter, when it reached 427 million reals. Net margin in the second quarter increased to 16.5%, up from 10%, in the first quarter.

Based on the results of the quarter, the two Brazilian publicly traded companies, Metalúrgica Gerdau and Gerdau S.A. will distribute 89 million reals and 192 million reals respectively, in the form of interest on capital stock and dividends. Shareholders of Metalúrgica will receive on August 17th, 1.08 reals per share, and Gerdau shareholders 0.65 real per share.

Important remark on interest on capital stock, as an anticipation of 2004 third quarter results the Boards of Metalurgica and Gerdau S.A. decided to approve the payment of interest on capital stock to shareholders. The shareholders of Metalurgica Gerdau will receive 66 million reals, 80 cents of real per share and those of Gerdau S.A. will be entitled to 136 million real, 46 cents of real per share. These amounts are to be paid on November the 17th, based on the shares held in each company on August the 13. With a perspective of greater demand for steel products in Brazil, Gerdau will have to accelerate its investments in meltshops and rolling mills in order to expand its existing capacities.

Its investment schedule extends through 2009 and envisions a capacity increase of about 4.4 million metric tons. This will require approximately $1.7 billion, still to be approved. Highlights are investments at the Gerdau Açominas Ouro Branco and it projects a capacity expansion from the current 3 million tons per year to 4.5 million through 2007; and to 7 million tons through 2009. At the Piratini facility, Cosigua and Cearense there will also be capacity increments in the rolling mills of greater than 300,000 tons a year.

Investments in fixed assets in the second quarter totaled $100 million. Brazilian-based units received 83% of this total and the units abroad 17% of that. Adding up the amounts to be invested through the end of the fiscal year, Gerdau should wrap up the year with total investments of approximately $350 million.

The Group's net indebtedness today stands at approximately $5 billion reals, a reduction of 6% from the level of indebtedness in December 2003. This reduction was made possible by the current cash generation by operations. Of the total gross debt of 6.4 billion in June 2003, 66% were long term debt.

Before we go to the Q&A part, we would like to pass on to you our perception of our business in Brazil and abroad for the second half of 2004.

North America, prices and volumes: the steel industry foresees increases in prices based on strong demand and as a means to compensate for cost pressures, mainly steel scrap.

Imports; still incipient due to the fact that international prices are still in line with domestic prices. There are no forecasts of significant tonnage being introduced into the region.

Operating costs; improvements introduced at steel mills and the utilization of mills at close to full capacity should offset the pressures felt by increasing steel scrap costs.

In Brazil, domestic market demand: GDP should grow by 3.5 or 4%. Demand is strong and there are indications that the year may end with a full recovery of the volume reduction from last year. Our estimate of a 12% growth, announced last quarter, may be greatly surpassed.

Exports. Although with prices above of domestic ones, exports shipments have fallen in order to supply the ever growing domestic market. Even with smaller volumes shipped, exports continue to strongly contribute to positive results.

Input prices. With the increase in international market prices for inputs there should be pressure for price hikes in Brazil too, especially for steel scrap and pig-iron.

Foreign variation. We expect to see it in-line with the inflation targets set by the government. Interest rates, stable, but still too high.

Prices, are out of line with those of the international markets and the main raw materials.

South Cone, Argentina, Uruguay and Chile continue to present perspectives of GDP growth. Demand in these countries should remain at current semester levels, but with better and higher operating margins.

We now open the floor for the Q&A session.

Ladies and gentlemen we will now begin the question-and-answer session. If you have a question please press the "*" key followed by the "1" key on your touchtone phone now. Our first question comes from Andres Perez of Morgan Stanley. Please state your question.

Hi, good afternoon. Two quick questions just on the North American subsidiaries. First I saw article where you said that approximately a third of the increase in profits is mainly due to efficiency improvements. I was wondering how much more do think you can get out of your existing operations just by you know, improve capacity levels within the U.S? And my second was I was --

I will right answer that, twice as much.

I'm sorry.

Twice as much. How much are you expecting? At least twice as much.

So you can double your efficiency gains you have already gotten?

Absolutely.

Okay. My second question is, I was looking over your investment plans for the next several years and I noticed that you weren't looking for -- looking to do anything within the U.S. What would it take to cause you to look to expand your facilities within North America?

I -- we think that it is easier to buy rather than expanding existing ones. So we are working on remodeling, increasing efficiency, revisiting -- say the majority of the processes, increasing our scrap collection, but not necessarily expanding or adding capacity to the existing units. We are monitoring the market, searching for good acquisition opportunities and that’s what we are doing.

The acquisition opportunity you'd be considering, is that within the current area we already operating on the east coast or would you look to go nationwide within North America?

Not too far from where we are.

Okay. Thank you.

And our next question comes from Jorge Beristain from Deutsche.

Hi Osvaldo, excellent quarter. I just had two question as well, one was could you give us a revised guidance for CapEx for 2004 now in US dollar terms?

In total its going to be 350 million that was the number I decline in my speech. I also mentioned in previous conference call that we have plan for short term, in order to increase our own stock capacity or adding 2 million tons to our stock capacity in Brazil at the expense of a total CapEx of $450 million. I am talking about Acominas, I am talking about expending the rolling mill capacity Acos Finos Piratini, additional capacity in Cosigua, Riograndense, and Cearense.

I am sorry, the total number I should be putting in the model for 2004 would that be the sum of these two or it's --

No this is two years. Please take at least half of that for each year.

Okay so about a base level of 550.

Right.

Okay. And my second question was regarding the sustainability of the overall EBITDA result for the company, which obviously were hugely impressive quarter-over-quarter, would you say that this is sustainable in to the second half of the year?

Part by part the Brazilian numbers are sustainable. The North American numbers as we can foresee at the end of the first half is that at least the next quarters could be very strong and I try to say in my speech that on an average the second quarter will repeat the first half. I mean, the second half will repeat on average the first half. I am not saying that the next quarter is going to be as of strong as the second one, but on an average they will tend to repeat.

Okay. Thank you.

And our next question comes from Daniel Altman from Bear Sterns.

Hi, Osvaldo, congratulations on the pretty amazing results. Just two questions, one is again going back to the CapEx. Can you give the number for next year, for 2005 and if you could split that out between expansion CapEx and maintenance CapEx. The second question is if you could provide segment EBITDA under U.S GAAP? Thanks.

I mentioned that in the next two years it is going to be adding 2 million times capacity at the expense of 550 million. It’s not the precise number because one of them included expansion at [inaudible], I couldn’t say this is going to be a split just half and half. But let’s assume for the model purposes that it is possible to split them in 2 years, very likely the remaining portion is going to be paid out in 2006. But this is only for expansion. The regular CapEx of the group is going to be in the neighborhood of $300 million, which is around depreciation level also. We have depreciation level around 240-250 million. Did you follow?

Okay. I am trying to -- the 550 you said will be spread out over the next two years. Are you including the second half of 2004 or do you mean to --

No, no. Starting 2005 and 2006, what I said is out of this 550, may be a [tail], in terms of disbursements going to go through even perhaps 2007. What I am trying to say that, on top of that, we are going to continue to invest close to the depreciation, sometimes higher than the depreciation and I indicated to you that our depreciation level is around $240-250 million a year. So that brings our regular number of $300 million a year to the usual CapEx program.

It can still be the 250 of depreciation roughly plus 550 divided by 2.

Exactly.

Yeah I got it now, thanks. Yeah the second question was just press release you provide EBITDA under Brazilian GAAP by divided by Brazil, North America and South America, I wonder if you have a similar breakdown for US GAAP.

It's the same number according to my accountants here.

The EBITDA number is obviously different between Brazilian and US GAAP, just for the treatment of the --

I was told that according to the different -- two different approaches there is more major difference in terms of the absolute number.

Okay may be we can go through this later on. Thanks very much.

Our next question comes from Mr. Paolo Di Sora with Banco Itau.

Congratulations on the results, I have to two questions. One is regarding stock liquidity, we have seen very, not very weak but weak liquidity on your ADR level, are the company planning something in order to improve liquidity on the ADR and my second question in this to regarding acquisitions in U.S., should we expect the Company to make some big movements like one involved [cost of steel] couple of years ago or should we expect just minor acquisitions going forward?

Okay. We have no plans to do anything artificial or not regular course of business to increase liquidity in the U.S. of GGP. We also have stocks at Toronto Stock Exchange of GNA, but I understood that your question was related to GGP in the U.S. We have witnessed a substantial increase on the daily liquidity of those shares. What we are trading today almost $10 million a day, so which was a substantial increase and being the ADRs accounted for $3-3.5 million a day, but to answer your question, no we are not planning in anything special and that’s all. As far as acquisitions you are saying that which type of acquisition we may be monitoring because I used the expression monitoring the market and analyzing and evaluating potential acquisitions. If you sit one day in our office in North America, we receive hundreds offers, different sizes, different markets, different regions, different types of industry. So I couldn’t answer a straight forward as I would like to say to you, so you are going to following or pursuing a sizable acquisition or a couple of a small ones when the day of acquiring companies will come. We have a plan of them and we haven’t made any decision so far, but could be either one, could be small plan that make sense that, that bring some synergy from which we could track some synergy when operating together with our mills and there are some also opportunities of bigger companies more than one plant. But that will depend pretty much on pricing; that will depend pretty much on timing, so for the time being I don't have a specific [request], but we are monitoring both case, both scenarios, smaller units and even bigger LS.

Okay. Thank you.

Thank you for your question Mr. Di Sora. The next question comes from Mr. Lafayel Peterman (ph) from BBBA.

Hello Schirmer, congratulations for the good results. Basically my question is regarding to prices in the domestic market I mean if you could - what can you open for us in terms of how much prices have increased on the second quarter and what is the guidance for the fourth quarter and for the rest of the year end of domestic market. Then also in terms of a cost of scrap in Brazil and especially in North America you had some relief in terms of scrap costs in the second quarter, I mean can you expect this relief in the third and fourth quarter or I mean scrap prices are already are pressuring your margins again?

That time was a relaxed one. Scrap price in North America, as June we are in the price of our charts scrap was around 167-168, but we were in the $150 per ton versus $170 in March quarter. Don’t forget one year ago it was $113. And prices are picking up again. I hope the industry will be able to maintain the spread adjusting upward the prices of final [product] as well. But, yes we are witnessing pressures on scrap again starting in the month of July. The first part of your question was --

Prices in Brazil.

Yeah, prices in Brazil. Well, I’ll try to give some guidelines vis-à-vis prices. We have a situation in Brazil where domestic prices are around $80-100 cheaper than international prices was. All of the environment introduced some price collections upward. We have no program or planned price adjustments for the time being or even for the short track. Nevertheless, we are feeling pressure on alloys, we are feeling pressure on pig iron, costs and so on. And there is this differential between international prices and local price, but we are not programming or planning any price collections shortly. I can tell you that year-over-year, we adjust our prices in around 12%, but your specific question was on the quarter and throughout the year was around 12%.

Throughout the year was 12%.

Correct.

Okay. And do you think like scrap costs in Brazil should also start recovering again, you turned up the [law to] them, you scrap them, should it recover again?

Could be. Brazil is not in direct communication with the rest of the world because Brazil does on export and Brazil does not import scrap, but there is always a price reference coming from international market for scrap. We witness that throughout the first half of this year and also we benefit from the reduction on prices. But the point I'll try to make that Gerdau has a very solid positions as a scrap purchaser. We have different alternatives to supply or to compensate the potential prices increases on scraps, we produce pig-iron. We have a [dryer] facility. We also have a production of Acominas directly from [iron ore]. So, we are less subject to pressures on scrap due to this metric of input output. But going straight to your point, yes, scrap could increase a little bit more in the domestic market and may be not as fast and not in the same intensity that may go up in the North American market for instance.

Schirmer, if I can ask one very last question very shortly, in terms of your project of Aracariguama your expansion in San Paolo, how is it evolving? I mean do you have any near time table for it?

It's kind of embarrassing because we have been announcing that in the short run we've publicly disclosing it and informing the resuming of the project you haven't been able to do so and we are in the same situation again. We are still depending on final details to go ahead with that project, but -- in the middle run it’s a sure thing. But right now I still not in a position to tell you when.

Okay. Thank you so much Schirmer.

Ladies and gentlemen as a reminder if you would like to pose a question please press the "*" key followed by the "1" key on your touchtone phone now. And our next question comes from Jorge Beristain from Deutsche.

Hi. If I could just have a follow-up, you guys are obviously generating now a lot of free cash flow, may be 200 million excess per quarter. Is there any expected change in your dividend policy over the next few quarters? Or would the intention, Gerdau be simply to amass cash for potential acquisition down the road?

Second option is the situation, this question in fact raised in the Portuguese version of this conference call and I will reply in the same way. We are not contemplating changing our dividend policy which is 30% of net adjusted profit. And yes we may use the excess cash flow to even further reduce debt perhaps or for potential acquisition.

Okay, thank you.

Our next question comes from Mr. Hoberto Matzo (ph) from Garce Investimetos (ph).

Hello, Schirmer. Regarding your efficiency gains you mentioned that efficiency gains should there be going forward I was wondering if you could give us a timeframe to see this efficiency gains being materialized?

When you deal with people, when you deal with methodology, when you deal with culture, it's difficult to put everything into a time schedule and a timeframe. I was -- when I gave this 30% contribution given by the improvement in the facilities was a kind of answer to question asking how much was due to price, how much was due to your internal effort that was my 30%. And when the first come this afternoon they said, we could get even twice as much as we already got. We are working on reaching that may be in the next 12-18 months but there is always be something else to be done after that.

Okay. Thank you. And, my second question is regarding the holding structure by which Metalurgica Gerdau controls Gerdau, is there any news regarding a possible merger between the both companies? It is known that investments [clips] held by the controlling shareholders have been increasing their stakes in the company.

No there is no idea, no plan whatsoever in terms of change in that structure.

Okay. Thank you.

Our next question comes from Mr. Marcelo Aguiar with Merrill Lynch.

Hi, Schirmer, congratulations on the results. I apologize I just joined the conference, if I can ask question that you have already answered, so my question --

You were in the Portuguese's one also, weren't you?

Yeah, yeah as usual. Tell me

You're checking on my answers, if I am consistent. Okay.

No, I'm just asking -- I would like to ask you if you could give a guidance, I mean, we are already in the mid of the third quarter and probably you already booked all the exports for the third quarter. So I would like just to know if you could give -- provide a guidance regarding the prices in the third compared to the second quarter? This is the first question.

We are -- this question was raised before -- this point was raised before. We are working with the possibility of maintaining prices at the level they are or even enjoying some positional increases in the remaining portion of the quarter and beginning of the following quarter. That’s the sought of horizon we are working with.

Okay. And -- so the question would be a regarding domestic sales, I mean we are -- we discussed this previously, very strong first half and we know civil constructions picking up, and industrial continuing to be strong. Going forward I mean looking to the third quarter compared with the second quarter, do you believe we could see domestic sales increasing quarter-over-quarter, I mean looking for the third compared to second?

Yes. I won’t be able to be specific of by how much we are counting on our stronger third quarter on top of second quarter.

Okay. Fantastic. That’s all. Thank you.

Our next question comes from Mr. Paolo Di Sora from Banco Itau.

Okay Schirmer two easy questions for you know.

The previous one was the toughest.

Okay. The first question is regarding competition in Brazil, would we know that Arcelor is moving towards consolidation its operations in Brazil. Are you expecting any change in competitive environment with you and Bilbao (ph) going forward or no?

Well, we are both fighting for every inch in this market and we are going to continue fighting. They are bigger than us. If you assume that a bigger body beats the smaller body, they are going to beat us, but they gone to keep fighting as long as we have doing to last for 30-40 years. Depending on us nothing will change, on the contrary we may try to increase our market share but nothing different from that.

Okay, and the second question, I've been asked -- investors regarding 2005, is -- there are many people asking in 2005 you were -- reduce your results considering the -- the eventual drop in U.S. operation. But my [assume] is that in your Brazilian operations has been approved to be -- to increase more than the eventual drop in U.S. operation. What's your selling considering your experience in the business, what's your feeling regarding 2005 vis-à-vis 2004?

I would say for projection purposes, we are going through a situation maybe never seen in the recent past, I am talking recent past in less 20, 30 years of markets that are changing so dramatically in such a sort span of time. We are not counting forever with this enjoyable situation we are having in North America but that's why you are working so hard to change structurally our operation and now depending so much of external factors to keep producing good results in the North American operation. But looking into 2005 we may see some changes in the spread levels in the terms of cost of scrap and so on, and I hope that you will be prepared by having done our homework in our mills to face that situation. Honestly, I cannot predict how much worst it's going to be, how much down we are going to go in terms of results but very likely this absolute scenario of huge spread that we are enjoying right now are not going to continue forever.

But, and if you look to Brazil and you see this strong demand you are facing, potential price increase don't you think that this should more than compensate in the eventual dropping U.S.?

I hope God is on duty listening to you.

Okay. But the spread now is minus 25% that’s correct, $100 per ton and your average price is $350 per tons. So --

That spread between the two-markets, you are kind of variety?

Yeah. Okay. Okay. Thank you.

All right.

Ladies and gentlemen, as a reminder if you would like to pose a question, please press "*" key followed by the "1" key on your touchtone phone.

Okay. Assuming that there are no more questions, I would like to thank you for the time and interest for our conference call. We look to have you with us again next quarter. Thank you very much. Good afternoon to all of you. Bye, bye.