Gerdau SA (GGB) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. At this time, we would like to welcome everyone to Gerdau's third quarter 2007 results conference call.

We would like to inform you that this event is recorded, and all participants will be in a listen-only mode during the Company's presentation. Later, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS)

We would like to draw to your attention the fact that certain assessments that may be made during this conference call with regards to the Gerdau businesses and its perspectives, projections and operating and financial objectives are mere forward-looking statements based on the expectations of management on the Company's future. Although the Company believes that its statements are based on reasonable assumptions, there can be no assurance that future events will not affect their accuracy.

Today with us we have Mr. Andre Gerdau Johannpeter, President and CEO, and Mr. Osvaldo Schirmer, Executive VP and CFO and Director of Investor Relations.

I would now like to turn the conference over to Mr. Andre Gerdau Johannpeter. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen. Welcome to our conference call on Gerdau's third quarter 2007 earnings. It's good to be here again with you all.

You can follow this conference call on the Internet, including a PowerPoint presentation. Information for the quarter is already available in our site at the CVM and the stock exchange. With us today is our Executive Vice President and CFO and Director of Investor Relations, Osvaldo Schirmer. He will be commenting a little later on third quarter earnings.

We would like to mention that as from the third quarter of this year, Gerdau is presenting its consolidated financial statements in compliance with the International Accounting Standard known as International Financial Reporting Standards, or IFRS. So that we can better understand the principal difference between Brazilian accounting practice and IFRS, we have invited Edward Ruiz, a partner at Deloitte, who audits our financial statements, to give us a brief explanation on the subject during the course of this conference call.

After our presentations, we are free to answer any questions you may have. I will now highlight some of the important aspects of the steel sector performance, as well as Gerdau, on the third quarter 2007. Demand for steel products continued to be intense in the international markets, thanks to economic growth worldwide.

World steel production grew 6% in the third quarter, as compared with the same period last year. In China, it grew 15.2%, reaching 126 million tons. Also, government measures to curb exports and avoid domestic shortage have begun to work, and exports are being kept in China.

On production costs, scrap prices fell on the international market during this third quarter, reflecting more plentiful supplies during the period. Nevertheless, price volatility continues. The increase in cost of the leading raw materials and other items -- freight, iron ore, coking, oil, electricity, natural gas and others -- in conjunction with strong international demand for steel, the price of steel products should remain stable, meaning that the metals branch should hold at existing levels.

Coming more specific to talk about Brazil, the steel industry reported a quarter-on-quarter growth of 4.6% in third quarter '07. Demand from all consumer segments continues to be strong, and sector sales for the full year should surpass initial forecasts. This year, Brazil has seen a greater abundance of home mortgage finance, falling interest rates, strong recovery in agricultural machinery and implement sales and a booming automotive sector.

At Gerdau, we have redirected more products to the domestic market to meet this demand, consequently downsizing our export business. In the third quarter, sales to domestic customers increased almost 17% comparing to the same quarter last year. On the other hand, our exports dropped 6.5%. Our export represents 26% of total sales from Brazilian operations between July and September '07.

Sales to our domestic customers for the year should also exceed our early forecasts. At current rates, sales should grow more than 12%, reaching almost 15%. To meet this growth in domestic demand and maintain exports at existing levels, we are investing in the increasing of capacity, the improvement of productivity at several of our plants around Brazil, so that we can keep the domestic market fully supplied.

We are expecting to see good performance at our Brazilian business for the fourth quarter and 2008 as a whole. Demand should remain buoyant due to the current pace of new investment in several sectors of the Brazilian economy and also the outlook for new projects, notably in the infrastructure area.

We shouldn't forget also that in years to come that there will be considerable investments arising from the selection of Brazil to host the Soccer World Cup in 2014. Prices on the domestic market are expected to remain relatively stable.

Coming to North America, more specifically on the U.S. and Canada, the crude steel output was slightly down, 1.3%, on the third quarter '07, compared to the same period '06. In Gerdau's case, quarterly sales were 7.1% higher in volume over the same period.

This was the result of the consolidation of downstream operations acquired in the period, the consolidation of 16 days of the newly acquired Chaparral Company, the acquisition of which was finalized on September 14, and mainly from strong demand for rebars, merchant bars and profiles in the market.

Also in the same quarter, Gerdau Ameristeel concluded new contracts with the United Steelworkers for the group's last two plants, Sand Springs and Calvert City, where agreement with the labor union was still pending. So at this morning we have no more any open contract negotiations.

Due to the seasonal deceleration and also some scheduled downtime for maintenance, sales volumes should slip a little in the fourth quarter. While there are uncertainties as to whether growth in the North American economy will be maintained, for next year investments should proceed at pace. Consequently, we believe steel demand will remain unchanged and, in fact, should maintain a good level of profitability.

Coming to Latin America, which excludes Brazil, the increase in steel production was 2.4% in the third quarter, compared with same period '06. There was healthy demand throughout the region due to economic growth in all the countries where we have operations.

Investments, ongoing infrastructure and a strong showing in the civil construction industry has generated good demand for long steel in the region. In some countries, such as Argentina and Chile, the energy crisis, which endure certain operational difficulties. On a consolidated basis, our sales rose almost 42% in the third quarter, against the same quarter in '06. Not only was this a reflection of what I have already mentioned, but also due to the consolidation of companies acquired during the period.

Coming to the European region, the steel production reached 50 million tons, the same level in the quarter '06 and '07, but demand continues to be robust in the region. Our sales in Europe were up 44% in the period, influenced mainly by the consolidation of a newly acquired GSB Steel, which was done late 2006. Also due to the summer vacation period, the third quarter performance is always weaker than other quarters during the year in Europe.

The operational restructuring which we are undertaking at our Spanish business, rationalization on relocation of production among the industrial plants, optimization of process, acquisition of plants and investment in modernization had an adverse impact on operating margins for the first nine months of '07. However, there will be gains in our business in the region in the middle term perspective. Demand for specialty steel continues to be strong, and costs are relatively stabilized.

Now that I covered our regions, I'd like to point for the ones following on the Internet on page seven on the PowerPoint, talk about the investments.

The total investments on the third quarter this year add to US$4.8 billion, considering fixed assets and the acquisition of companies. If we take in account the whole year, the investment totaled US$5.9 billion. Around $1 billion were invested in fixed assets this year. Most of this was used for Gerdau Acominas' expansion project in Ouro Branco, Minas Gerais, Brazil; the new melt shop in Jacksonville, Florida, U.S., and expansions in capacity in Mexico and Colombia.

At the end of October, Gerdau Acominas set in operation the blast furnace number two, which is part of an investment plan of US$1.5 billion. This increased the plant's annual steel capacity from 3 million metric tons to 4.5 million metric tons of liquid steel. This is the third new blast furnace built in Brazil in 20 years, and the project was completed in only 22 months and meets very well our expectations.

The installation of this equipment is part of the project to expand the mill, which has already out of that in operation the second [centering] and continues casting of blooms and expanded the structural shape rolling mill. This stage should be complete by April 2008 with the commission of the second coke plant.

The expansion of Gerdau Acominas is the largest investment in the history of Gerdau Group in Brazil. With this project, we are getting ready to meet the growing domestic and global demand for steel products. The construction efforts for expanding Acominas follow the highest standards of environmental manage. The number of jobs generated during the building process reached 10,000 openings. When the new industrial sector starts operation, more than 1,500 permanent jobs will be created.

Talking about acquisitions, they totaled $4.9 billion this year, adding new capacities and adding value and service to our customers. Of course, the main acquisition was in North America, which was concluded in September, which is Chaparral Steel, for $4.2 billion.

In Latin America, we just announced Corsa Controladora. We announced a letter of intention of acquiring a 49% stake in the capital stock. The Company owns 100% of the capital stock of Aceros Corsa and its distributors. It is located in the metropolitan region of Mexico City, and Corsa is a mini-mill producer of long steel, mainly light sections, with an installed capacity of 150,000 tons of crude steel and 300,000 tons of rolled product.

Also we announced the intention together to build a new structural mill with the capacity of 700,000 tons of finished products, mainly heavy structurals. In Europe, we announced in October the purchase of Trefusa, which is a cold drawn special steel operation.

On the same talk about investments, our plan from 2007 to the end of 2009 is to invest an estimated of US$4 billion, excluding acquisitions. 60% of these investments will be in Brazil and 40% abroad.

Of the amount to be invested over the next thee years, about 40% will be allocated to maintenance and operational improvements and the remaining for expanding installed capacity. Once these investments have been concluded, we will have the following new capacity -- crude steel, today it's 23.2 million tons, will be increased to 26.4, or a 14% increase in total capacity. On rolled products, today our capacity is 20.5 million tons, and it will be increased by 15% and reach 23.7 million tons by 2009.

On page nine, I would like to talk about Gerdau, the big picture on some of our numbers that Schirmer will go over in more details. Our gross sales revenues reached R$8.6 billion, which is a 17% increase comparing to the third quarter on 2006. Our EBITDA reached R$1.5 billion, which is a decrease of 5% comparing to the same period in '06.

Our net income reached R$1 billion, which is 16% higher compared to the third quarter of '06. And our sales, we shipped 4.2 million tons to our customers, which is a 14% increase comparing to the third quarter. So those were the strong numbers that we achieved on this quarter.

Finally, I would like to mention that the Gerdau Riograndense mill in Sapucaia do Sul, Rio Grande do Sul, Brazil, was one of the winners of the National Quality Prize, the most important award for manage excellence among Brazil organizations. Gerdau one the same prize for the second time, and this was in 2002 when Acos Finos Piratini won this prestigious prize.

With this, I end my participation, and I will be back for the question and answer. And now I would like to turn for Schirmer. Thank you.

Hello, folks. Good afternoon to all. As Andre has mentioned earlier, as from the third quarter, Gerdau is publishing its consolidated financial statement according to the International Accounting Standards, the so-called IFRS. So we have quite a job today to drive you through this migration from Brazilian GAAP into IFRS, which, in fact, is a fairly complicated task.

In July of this year, the Brazilian SEC published instructions which got the number 457, established that the Brazilian-listed companies will be required to publish their consolidated financial statements from fiscal year 2010 onward according to this new accounting standard. For Gerdau, the adoption of this new accounting practice is totally in line with the Gerdau vision of itself, in other words, a company that desires to be global and wants to be perceived as global and perhaps trying to be more accessible to investors on a global basis. So transparency, reliability, is for us the target that we'll be pursuing when we decided to change into IFRS.

In adopting the IFRS as its new accounting standard, Gerdau has established a dateline base as of January 1, 2006, for its opening balance sheet. As of this date, various adjustments were introduced in the conversion from Brazilian GAAP to IFRS. However, it's important to remember that the financial statements of individual group companies, the companies non-consolidated, will continue to be shown in accordance with the Brazilian corporate law and generally accepted by Brazilian accounting principles.

These accounting statements will also continue to be the basis for paying dividends or interest on shareholders' equity. In addition, sorry, to the consolidated financial statement in IFRS format, included in our quarter releases, we are including the same quarterly information from the third quarter '06 in our website.

Before I begin to look at our results in detail, I would like to invite our guest today, Mr. Edward Ruiz, as Andre mentioned, who is a partner at the Deloitte to provide a brief explanation on the subject. We assume that this will contribute to a better understanding of the key differences between Brazilian accounting standards and IFRS and their principal impacts on our financial statements.

With that said, I will turn to Mr. Ruiz to give his contribution to this objective today.

Thank you, Schirmer, and good afternoon to all. I will make some brief comments on the regulatory framework in Brazil in connection with IFRS and some general comments on the expected differences between Brazilian GAAP and IFRS.

As Schirmer mentioned, on July 13, 2007, the CVM, which is the Brazilian Securities and Exchange Commission, issued a standard that establishes the timeline for the eventual adoption of IFRS as the body of accounting that will be applied by Brazilian public companies in the preparation of their consolidated financial statements. The standard requires adoption of IFRS for the year ended December 31, 2010, with January 1, 2009, being the date of the first IFRS opening balance sheet, so that comparative financial information can be presented.

The standard also gives public companies the option to present IFRS-compliant financial information for the period of 2007 to 2009. Some of the drivers for the standard include convergence of international accounting standards -- that is, U.S. GAAP and IFRS, Brazil's expectation to achieve investment grade rating within the next 12 months, resulting in an increase in foreign investor interest, increased IPO activity and growth of Bovespa, the Sao Paulo stock exchange, a need to provide comparable financial information, consistent with international accounting standards to meet the perceived needs of foreign investors, exchanges and regulators and, finally, globalization of the capital markets

The standard is a culmination of a decade long of reforms and proposals to move accounting standards outside the realm of politics and legislation. Currently, accounting rules are established by the Brazilian General Corporate Law, which was issued back in 1976 and interpreted by the CVM and the Brazilian Institute of Independent Auditors.

There is current legislation circulating in the Brazilian Congress that will reform the sections of the General Corporate Law dealing with accounting standards. The effective dates of the standard are also significant in that they coincide with the year established by the International Accounting Standards Board for the effective date of new standards or the reformulation of existing standards to enable first-time adoption to have a stable referential base, which is 2009.

2009 is also the year that the FASB and IHB have targeted as the convergence date for U.S. GAAP and IFRS. Finally, 2010 is important in Brazil because it also coincides with the date established by the Brazilian Central Bank for all financial institutions to fully adopt IFRS by December 31, 2010.

Currently, there are certain significant differences between Brazilian accounting practices and IFRS, as can be seen on the slide on page 12 of the presentation. The Brazilian Accounting Principles Board is working to converge Brazilian standards with IFRS in order to eliminate these differences by 2010.

Thank you, Schirmer.

Thank you, Ruiz. Well, I believe that with this clarification, it's going to be slightly easier to understand our financial statements from now on. I would like to go into some details on the performance of our business, covering each region of where we operate, as we usually do.

Beginning with Brazil, I would say -- and you'll see that on page 13 or slide 13, for those following the PowerPoint, that net sales reached $3.4 billion in the third quarter of '07. By the way, Brazil contributed with 45% of consolidated sales of the group. And in the previous year, we had $3 billion of net sales revenue. This represents a growth of almost 16%.

This is also a clear indication of how strong the demand is in Brazil coming from the civil construction sector, also coming from the industry. A word on the exports, they do account or they were responsible for $520 million of this $3.4 billion in revenues.

Net sales revenues per ton in the third quarter were almost $2,000 per ton, as opposed to $1,800 in the third quarter of '06. This means an increase of 5.3% in net sales per ton. If you read that in dollar terms -- and of course, we should have to discount the impact of the real against the dollar -- but anyway, in dollar terms this per-ton price increase of -- was about 25%.

With increase in the average purchasing price of scrap, iron ore and other key inputs for the production process during the year, the gross margin fell from 38.9% in the third quarter of '06 to 34% in the third quarter of '07. However, if you take the third quarter of '07 and compare it against the second quarter of '07, we will see growth in margin, going from 31% to almost 34% in the third quarter, pure indication that there is a recovery on the way.

As far as cash generation measured by EBITDA, we changed the way we have been doing the calculation to align with international accounting standards. In the past, the very recent past, we used to base our calculation in the gross profit, and now we're going to start from the net profit and add depreciation, financial expenses and so on.

In the third quarter of this year, EBITDA amounted R$841 million, in fact, 55% of the total EBITDA generated by the group, against R$853 million for the same period '06, so minus 1.5%. In terms of margin, the third quarter EBITDA margin was 24.5% against 28% in the third quarter of '06.

This reduction has the same explanation of the lower gross margin. However, once again, in the third quarter, when compared with the second quarter, reveals an improvement in margin from 23% to 24.5%, basically 1.2 percentage points better.

An increase in cost of sales proportionately greater than the net sales resulted in EBITDA per ton posting a reduction of 10.3% in the third quarter, compared to '06. Last year, it was $500 per ton -- I'm sorry, R$533 per ton, and this year R$478.

If you read this in dollars again, the same comparison shows an increase of 3% in the dollar per ton, $245 EBITDA per ton in '06, as opposed to $252 in '07. By all means, $250 per ton, or EBITDA per ton, is a very good number in any economy.

North America. On slide 14, you can follow me on my comments saying that in North America, to be more precise, in the U.S. and Canada, net sales revenue were R$2.7 billion in the third quarter of '07. This represents 35% of the group's consolidated net sales. It represents also a growth of 6.4% when compared to '06.

In addition to this comment of growth, I could say that it's strongly sponsored by the strong demand for rebars, merchant bars and profiles in the period and also contemplate 16 days of Chaparral's operation. Net sales revenue per ton was about $900 per ton in the third quarter of '0'7, against $757 in '06. It means an increase of 17% in dollar terms on the net sales revenue per ton.

The price hike per ton -- sorry, the price hike per ton sold reflects the strong demand in the period, as well as greater sales volume and also higher value-added products due to the acquisition of downstream operations that we didn't stop to acquire and to add to our network of operations.

Despite the fact that the price of steel products sold has seen a considerable increase in dollar terms, gross margin fell from 19.3% in the third quarter to 17% in the third quarter of '07. This is basically due to the increase in the average cost of scrap charge, which increased about 8%, and also due to some adjustments made for the consolidation of Chaparral. We have to immediately exercise the purchase methods on Chaparral, adjusting inventory and other things as usually companies have to do.

And on top of everything, because reading the numbers, using the -- sorry, the IFRS system, and compared to numbers that Ameristeel just published yesterday, where over there you saw net income increasing by 35%, EBITDA increasing by 20% and so on, when converted into the IFRS, we have to make the adjustment that the numbers look so different.

In absolute terms, EBITDA was R$400 million in the third quarter, and the EBITDA generated by the North American operations accounts for 27% of the total EBITDA generated by the group.

Latin America, slide number 15. Latin America for us does not include Brazil. In Latin America, we reported net sales revenue of R$890 million in the third quarter of '07. This represents almost 12% of our consolidated net sales in the group and also represents a growth of almost 30% when compared to the previous year.

Remember here that net sales revenue in '07 reflects consolidation of companies acquired during the year, such as the Mexican ones and the one in Venezuela. Net sales revenue per ton in the third quarter was $779 per ton, again, $717 in the third quarter of '06. It means an increase of about 9% in U.S. dollar terms.

Falling prices and the increase in production costs, the same happened to them in Latin America. Scrap went up. Electricity went up. Natural gas has been a problem. This affected the operating margins for the period. Gross margins dropped from 25% in the third quarter of '06 to roughly 20.1% in the third quarter of '07. And the EBITDA margin fell from 23% to 17.4%.

In absolute terms, in Latin America, the EBITDA reached R$154 million in the third quarter, and the EBITDA generated by Latin America accounts for 10% of the total EBITDA generated by the group. We are, in Latin America, acquiring companies one after the other, many of them not in the state-of-the-art, as you can imagine. We are making investments, changing the managerial procedures and so on, of course, making investments to improve their situation.

And we are absolutely confident that margins and other results will be the natural outcome of that, and we are optimistic to see Latin America enjoying the same levels of margins and results that we find in the Brazilian operation.

Europe, chart 16. Our focus in Europe is the production of specialty long steel. Net sales revenue for this area recorded R$661 million in the third quarter of this year and accounts for almost 9% of net consolidated revenues for the group. It represents also a 50%, 55% increase in the period. Here again, it's worth noticing that revenues for 2007 incorporated the consolidation of [PSAB], GSB Aceros, which were acquired in December of last year.

Net sales revenue per ton in the third quarter were almost $1,900 per ton, against $1,400 in the third quarter of '06. This represents an almost 30% price increase in the operations of specialty steel in Europe.

While we have seen prices increase, the expenses involved with the operational restructuring, we are undertaking some sort of restructuring in the Spanish operation. We are transferring the operation, the production of one mill into the other, specialized in the mills, and this caused a reduction on margins at the beginning, but very likely will result in a better management of the operation, in a better specialization of the mills and, of course, gains and synergies in logistics and all of that.

That's why the EBITDA margin fell from 25.8% in the third quarter of '06 when compared to third quarter of '06, which it came down to 18%, from 25% to 18%. In the area of EBITDA generated in the third quarter reached R$117 million, and again, the European operation accounts for almost 8% of the consolidated EBITDA of the group.

On page 17 is the fire test. You have the Gerdau's performance under the IFRS system when you compare third quarter against third quarter of '06 and nine months of '07 against nine months of '06. In consolidated terms, net sales revenue rose 16% in the third quarter when compared to '06.

This is a result of an increase of almost 14% in sales volumes, as indicated in many of our observations so far, and also an increase of 2% in the average prices for the comparable periods. As we have mentioned earlier, we have consolidated several overseas companies over the past 12 months, while in Brazil in particular we have seen a substantial growth in demand for steel products.

Since the cost of sales rose more than the net sales revenue, 22% against 16%, gross margin declined from 28.7% in '06 to 25% in '07, in the third quarter. EBITDA margin followed the same trend, falling from 24% to almost 20% in the third quarter of '07.

In absolute terms, the third quarter of '07 EBITDA was R$1.5 billion. Net financial results is another interesting line on that comparison, resulted in a positive R$51.57 million in the third quarter. Of course, this includes revenues from foreign exchange variation, which, in effect, is a kind of a gain and represented R$154 million in exchange variation.

For the same period of last year, the financial result was a negative one, was R$101 million, which included, again, expenses from foreign exchange variation losses at that time of R$28 million. The equity pickup, finally, reflects results of non-consolidated companies in the period, such as Gallatin in the U.S., where we have 50%, Dona Francisca in Brazil, the hydroelectric power plant where we have basically 58%, Multisteel in the Dominican Republic, where we have 49%, and [Arma] Acero in Chile with the retail arm, we have a joint venture where we have a 50% stake.

In the previous presentation, we have a chart number 18 which we eliminated now because it generated some sort of confusion when taking the EBITDA under the Brazilian GAAP using as a base the June numbers and comparing to the September numbers, which made some of the analysts on the line to make a new calculation and arriving at a number which does not reflect the reality, according to those analysts. The calculation was driving them to 11% EBITDA margin, but it's not correct.

In fact, if you do the proper calculation -- we misled the audience to that calculation in the way we created a kind of a bridge analysis. So we'll be providing you on the Internet, meaning on our site and also through an email, the proper calculation showing that, the EBITDA margin, even though going into the IFRS system is the same. So we will be maintaining our 17%, 18% EBITDA margin after this transition to IFRS.

I apologize for removing that slide in the second presentation because in the first one generated that sort of interpretation.

A few words on the financial health of the Company. On page 19, slide 19, you have a snapshot of our balance sheet. As of September 30, our net debt totaled R$11.3 billion, basically US$6 billion. And this value already contemplates all the money that we need -- we raised for the acquisition of Chaparral. The gross debt was R$16.4 billion, as you can see on the top of the page, roughly $9 billion.

Interesting to notice that we maintain our long-term debt profile in such a way that more than 74% of our debt is long term. If you break down the gross debt, you will realize that 19% of that is domestic currency, 22% is in foreign currency but raised in Brazil, from Brazil. 60% of that is in a basket of currencies raised by our companies abroad.

After making that effort to acquire Chaparral and other acquisitions throughout the year, Gerdau is still able to present a 2.7 billion liquidity. Out of that, 52% is indexed, or is invested, in foreign currency instruments.

If you take our debt indicators to measure, to gauge the health, if you take net debt against our total net capitalization, it's about 41%. If you take our total debt and compare it to our cash generation, using EBITDA for that, we have a multiple of 2.7 times. If you take net debt to EBITDA, it's only 1.9 times. And the average maturity, as indicated at the beginning, is more than seven years.

I mentioned about Chaparral two or three times already, and I'd like to make a comment that Gerdau, as initially announced, was able to put in place a quite -- a rather sophisticated plan to raise the necessary funds to acquire Chaparral. So we have to put a term loan facility together for 2.7 billion, via two international syndicated operations, maturing in five and six years at a cost equivalent to LIBOR plus 1% in one tranche and LIBOR plus 1.25% in another tranche.

We also put together a bridge loan facility for 90 days. We need that time to allow the transaction, amounting 1.1 billion at the cost of LIBOR plus 0.8%. And also we went over the Gerdau Ameristeel liquidity and used 300 million out of there.

The fourth leg of this structure was an equity offer that we announced that Ameristeel would do. We offered 110 million tons -- I'm sorry, 110 million shares. Also, at the beginning we anticipated that that could trigger an over-allotment, a [green shoe] of 15%. And I'm very proud to say that today the 110 million and the over-allotment was fully exercised. So Gerdau Ameristeel was able to raise $1.5 billion selling its shares at $12.25 per share.

Gerdau will be subscribing its percentage in order to maintain the stake equivalent to 66.5% in the Company and at a cost of roughly $1 billion. For this $1 billion capital injection in G&A to pay the bridge loan, we issued a bond in the international market. It was a $1 billion bond, maturing in 2017 at the cost of 7.25. The coupon is 7.25 on semiannual installments.

It was also placed, as, by the way, the loan facility, by ABN Amro, HSBC and JPMorgan. And so, basically, we put together the entire package, as announced, to acquire Chaparral. Chaparral, as always said by us, it was a great complement because it's going to help us a lot in terms of reducing costs, the synergy in terms of scrap purchases and other things, plus supplementing our line of products with a product with a much better margin than we used to have.

So basically that's all I have to comment. Andre and myself will be more than pleased to answer your questions should you have them. Thank you.

(OPERATOR INSTRUCTIONS)

Your first question is coming from Raphael Biderman with Bradesco.

Hi, Schirmer, and hi, Andre. It's me again. You guys just made a comment on debt, and I wanted to go on this detail again because it's quite important for me and I'm not interesting.

If I get the EBITDA you released in the nine months on the presentation in Portuguese and if I exclude from that -- on the Brazilian GAAP, okay? -- if I exclude from that the six months figures, I get it an EBITDA for the third quarter of just close to R$700 million, which is a drop of 50% in relation to the previous quarters, which sounds a little absurd.

And I have asked you the EBITDA of the third quarter. You said you didn't have it, and I'm suspecting it's an issue of the accounting adjustments you made in Ameristeel. And I'd like to know if you have this number, how much were the accounting adjustments of Ameristeel, or if you could help me try to understand what is the EBITDA of the third quarter in Brazilian GAAP?

Okay, as I said during my short speech, I said we would be providing the market, the investors, with a better clarification because that intention of creating a bridge to understand the migration from Brazilian GAAP into IFRS created some sort of confusion. So I also made a statement that at the end of that you'll realize the EBITDA margins before and after and also the margins in the third quarter, which is your major concern, is going to be around the 17%, 18%.

Basically, I think it would be -- and this is going to be in the web, so everybody will have access to that calculation. Even those saying -- it's not our intention to keep providing Brazilian GAAP information from now on. To eliminate that sort of doubt, we'll be providing an -- as it should be if we are still presenting our numbers for the quarter, for the third quarter under the Brazilian GAAP. And then you will see the margin, the EBITDA margin, was not even close to the 11% that you came throughout your calculations. It's going to be the 17%, 18%.

So I think we should avoid going into this calculation over the phone, and this is going to be available at the end of this conference to you on our website and also through e-mail.

Do you have just the size of the accounting changes in Ameristeel because of Chaparral, because of the acquisition of Chaparral?

No. No, we don't.

Okay, thank you all. That's all my questions.

Thank you. Our next question is coming from Felipe Reis of Santander.

Hi, good afternoon (inaudible) American operations on a quarter-on-quarter basis, with the consolidation of Chaparral do all the accounting adjustments that you were forced to make announced when you acquired the company? My question is what is the size of this incorporation effect, or in other words, what would be your [down] of America EBITDA without these non-recurring effects in the third quarter? And also complementing, looking forward, considering Chaparral's impact in the third quarter, what would be a reasonable EBITDA margin which you expect in next quarters in North America?

We have to go through the purchase method this month. So it's distorted a lot and it's going to be clear from now on. The EBITDA margin of Chaparral on an ongoing concern is over 21%, right? 28%? All right, okay.

No, no, my colleagues --

Is that clear, my question?

Yes, I'm answering your question, trying to. [Renec's] correcting me that the average normal EBITDA margin for Chaparral is 28%, for Ameristeel is around 17%, 18%. So the number for going forward, if you are -- if you allow me to take these adjustments that were necessary to be done in the beginning, the real number is going to be around 18% and 28%, so very likely towards the 23%, 22% mark, maybe.

So these would be, let's say, the normal, reasonable EBITDA margin level?

On a full year, assuming the level that Chaparral was being able to present on the last quarter, which was a good quarter. It's not a forecast. Don't take me wrong. Chaparral is going to contribute with 2.4, 2.5 million tons, and Ameristeel produces over 10 million, so it's 25% of the total production contributing to the better EBITDA margin. So my intuition was to say somewhere between 21%, 22%.

Excellent. And in calculation you are not considering any synergies, right?

Let me see. In other words, the synergies I am using in that are the ones announced. We began this process of Chaparral announcing to the market that we were expecting to get about $55 million per year in synergies. We revised publicly that number to $75 million. And as you go deeper in analyzing and operating the Company, we are optimistic the number is going to increase also substantially. So please take the official number so far for that projection that I intuitively meet -- sorry, intuitively made -- about $75 million only.

But with a very strong upside risk, right?

Absolutely.

Okay, thank you very much.

Thank you. Our next question is coming from Marcos Assumpcao of Merrill Lynch.

Good afternoon, gentlemen, also [excuse me]. My first question is regarding the U.S. operation. There is a clear consensus when I talk to clients that the most [turn] on Gerdau is their exposure to the U.S. economy and also to the steel market in the U.S. Could you please provide an overall breakdown of sales volumes for Gerdau Ameristeel between residential and non-residential. And also if you could give us a guidance or an outlook for how are you expecting demand to grow on these two segments for 2008?

I'm going to respond to your question with an initial comment, and Andre very likely would like to supplement that. Basically, as we have said, and I believe Mario said yesterday throughout his conference, the construction sector represents less than 10% of our shipments directly. So the non-residential is the bulk of our business, and Chaparral is going to contribute a lot on that sense. So this basically gives you a sense of how dependent or how exposed are we to the house construction sector.

Andre would like to make an additional comment on that.

I'd like to point three factors. In '07, what we saw was very strong shipments in the first quarter, and then the whole chain -- well, the inventories were high. And during the year, shipments started dropping to the point that we are now that the whole distribution will have to replenish all the inventories. So we should see demand to pick up from that side.

Also what we're seeing is that because of the weak dollar, there's less and less imports of steel in the U.S. So is of equipment or products that use steel. So the fact that the domestic mills are going to supply more steel than they used to because of this drop in imports. And also the U.S. industry, manufacturing, is getting stronger. And even we hear from exports of steel and steel products related now because of this exchange. So those factors is what make us see that the outlook for next year should be good or similar to what we saw this year.

Okay, great. The second question, moving to the operation in Brazil, just wondering if you could give us a number of how much is your current utilization capacity in your mills in Brazil, so that if you see a strong demand next year, potentially you would be able to increase this spare capacity in the first moment.

Okay, we are running around 85% of capacity utilization, and we see for next year a similar demand of maybe even higher than we saw this year. We're talking about 12%, 15% growth on the shipments. And we also -- it's important to mention that we export 30% to 35% of our production in Brazil. So we have room to redirect the exports to the domestic.

And we also are investing in an expansion on capacity on new equipment and also adding more shifts to the existing production. So we're more than able to support increasing demand in Brazil.

Okay, great. And last question, regarding Acominas expansion, if you just could provide further details on how is the operation going in the very beginning right now in October? What is the capacity that you are expecting to bring to the market in the fourth quarter and also in '08, and what's the mix for this capacity as well?

Well, the operation started in October very well. It's meeting our expectations on the quality and the standards we expect. So we're very happy with the whole project for the blast furnace.

It's hard to give you a number for the fourth quarter because there's a learning curve. But it's meeting our schedule daily, and this is an every day increase. But for '08, it should increase almost the 1.5 million tons that it's able to produce.

And this is close to 75% to the export market?

A little lower than that. I would say more 65% now.

Okay, great, thank you very much.

Thank you.

Thank you. Our next question is coming from Luiz Spinola of Rasley.

I would like to address to Andre, what is Gerdau's approach to the management of the number of companies it acquired over the recent past, over the several continents?

Okay, one of our priorities now is to do the integration of those companies acquired, to the Gerdau management way, which we call Gerdau Business System. So for each one of these new business systems, we have people that go and help improve the operations there, take our best practice and share with these operations so that we can speed up the improving of the operations.

We also learn from these new operations and bring it back to the others. So this is mainly how we approach each new one. We do send some people, sometimes more or less, it depends on the existing management of each company. Some cases, like Chaparral, we find every good management, so some people are coming to the head office, and so on.

In other situations, we don't find that management. So we send people from Gerdau from other operations. So this is kind of what we do.

You don't see this quite as a risk factor?

Can you repeat the risk factor, sorry?

You do not assess this item of human resources and management as a risk factor, due to the speed you are increasing the network of companies?

Well, so far it's working well because we do have enough people to send to these operations, and a lot when you do like in North America, we already have the management team. Mexico was the same. The latest one is the joint venture, but we already have an operation. So, so far it's working well.

Okay, thank you.

Thank you.

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Our next question is coming from David Martin of Deutsche Bank.

Yes, thank you. Just a couple of things. First of all, do you plan on providing a full quarterly cash flow under IFRS for each of the quarters this year?

According to our accountants here, the plan is only to provide accumulated cash flows.

Okay, then can you at least give me what the depreciation and amortization was in the quarters, or at least the third quarter?

The total depreciation for the year is around 600 million. And for the quarter, can I easily [squeeze] that by [about four], 150 per quarter from now on.

Take this number --

Just divide by three?

Yes. Now that is for the year, right? So this year accumulated? So it's about three. He's right, 200 per quarter.

Okay, okay, and then secondly on scrap prices, Ameristeel yesterday had said that in the U.S. they expect scrap prices to fall maybe $10 per ton in the month of November and stay pretty flat in the month of December. Can you give us a little perspective on your outlook for scrap prices in the coming months in Brazil?

We are working with a rather stable scenario for scrap in the coming months. And if the country continues to grow, we may even count on additional scrap being offered to the market. Give the market a time lag of four to five months, you'll see more scrap around.

Okay, and what's the source of that scrap?

All kinds -- obsolescence, industrial, basically industrial.

Okay, and then lastly, I'm just curious, given the lack of imports in the U.S. and currency movements recently, are you seeing any threat of more imports into the Brazilian market?

Not meaningfully, I would say. The market is so well supplied by the local producers with the logistics and so on. It's not impossible, but we see this as rather additional levels of difficulties.

Okay, thank you. Good luck.

I'd like to make a correction because I think I misunderstood my colleagues here. The 600 million, as I said, it's for the year, not for the three months. So divided by four.

Okay, thanks.

Thank you.

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Our next question is coming from Juliana Chu of BES Securities.

Hi, good afternoon, gentlemen. I would like to know if you can comment on your strategy on acquisition and growth strategy. I would like to know if you have net debt acceleration that you consider comfortable to go into a more aggressive acquisition process. And also I would like to know if the Company is considering a trend of doing partnerships acquisition like we saw in Mexico and India with further expansion with partnerships of the controllers, with the Company.

Okay, well, our strategy and priority at this moment remains more on the integration of the existing companies we acquired, with 11 companies from different sizes. So our focus for the next month, it's really to do the good integration, operational improvements, CapEx and so on. But we are not stopping from looking at acquisitions. I don't have you a rating or number or anything to give you, but we are open to evaluate new acquisitions.

On the partnership, India is a typical partnership because it's a new country on Asia, far away, different culture. So the partner was very important to help us do business in that country. Mexico was an opportunity for us and for our partner there. So I wouldn't say it's a trend, but as the opportunities arise, we'll look at it carefully.

Okay, thank you very much.

Thank you.

Thank you. Our next question is coming from Victoria Santaella of Santander.

Hi, Mr. Schirmer. I have a big picture question. We've seen an impressive growth in volumes. However, we continue to see margins, especially EBITDA margins, not being able to recover levels that we have seen in the past. Now I understand part of this comes from all the acquisitions and probably expenses that are not going to be recurrent.

Going forward and talking more about 2008, how much would you think that there are extraordinary expenses related with all these acquisitions and consolidations that we are not going to be seeing next year? That's question number one.

And number two, does the Company have any plan in order to reduce cost on an active basis? We're starting to hear a lot of procurement. We're starting to hear a lot about interaction with energy and shipping and transportation in other companies. Does Gerdau have something like that in order to stop the erosion in margins across the board?

Okay, the first part of your question is pretty much related to margins in the future. As I said throughout my initial speech, we have acquired many medium and small-sized companies, not all of them state-of-the-art. It doesn't necessarily mean that we have to make CapEx investments to fix it. It has a lot to do with managerial skills. It has a lot to do with system and methods to run them. Andre mentioned that our Gerdau Business System model has been replicated throughout operations.

It takes some time, but it's more man time, man hours, and dedication than necessarily CapEx. And we expect to see those results being produced I would say rather shortly than long term. This is for the margins, and especially in Latin America we made our recent acquisitions. The Chaparral case is the opposite. Chaparral even enjoys better margins than us.

As far as expanding our operation, as you mentioned, because freights are expensive, because energy is becoming expensive and so on, one source that we have invested some time, energy and money was to increase our supply of iron ore, as I mentioned before. We are today sitting on more than [1 billion] tons of iron ore reserves. Roughly 300,000 of that are already fully tested. We already supply ourselves in excess of 25% of our needs and our intention is to move fast to increase that self-sufficiency up to the level of perhaps 55% or even 60% a few years down the road. That we have done.

As far as energy is concerned, which is another source that you mentioned, we have invested in hydroelectric power plants. We have been licensed to operate other small -- called here PCHs, or small hydroelectric power plants throughout the country, where you generate the energy, you sell to the grid and you get the energy where you need it.

We have a firm plan to be self-sufficient in our energy demands up to 50%, maybe in two and a half or three years. As far as freight, it's not our intention at all to grow in that direction. It's not our vocation to pursue them, but there's two others I think we can add. Maybe Andre would like to add something.

I'd just like to [stand to] scrap, which is our key raw material, and that we do have a strategy to be more active on not only the purchasing but the processing of scrap, which we do in Brazil in North America and we also expand into Latin American operations, which is to get into the processing, like shredders, bailers, shears and so on. And that's a good way that we see to reduce cost on scrap, which is our key raw material.

Excellent, thank you so much.

Thank you.

Thank you. Our final question comes from Luiz Spinola of Rasley.

Andre, is there any plan to make Acominas to produce flat steel in the future?

What we have is to produce slabs next year. I'm not sure that's considered flat products, but for slabs we're going to go. And at this moment, we don't have any plans or any announcements to make. But Acominas is a very good asset with a huge potential, today produces 4.5 million tons. It for sure can grow a lot on these tons, and we look what are the best products to produce there.

Okay, thank you.

Thank you. This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. Andre Gerdau Johannpeter for any closing remarks.

Okay, I'm going to start as usual -- Schirmer speaking -- to thank you all for your interest and patience in trying to understand, and also I hope you appreciate in due time that this move into the IFRS is something that you are doing also I think in terms of the benefit to the market, the benefit of the investors to read us better. And I hope to be with you in the next quarter with good results again.

Thank you very much. Andre would like to say the last word.

Yes, thank you for your participation, your questions and your patience. This is a major change on the way we announce and we show the results. And if we could not answer all your questions, our team would be ready to follow up on the questions, as usual. Thank you again and see you in the next quarter, and everybody have a good day. Bye.

Thank you. This does conclude today's presentation. You may disconnect your lines at this time, and have a wonderful day.