Gerdau SA (GGB) 2008 Q1 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 first quarter 2008 results conference call. We would like to inform you that this event is being 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 to 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, EVP and CFO and Director of IR. We would like to turn the conference over to Mr. Andre Gerdau Johannpeter. Please, Sir, go ahead.

Thank you. Good afternoon. Welcome to our first quarter 2008 conference call. It is with a great satisfaction that we will present you with the outstanding performance of our operations during the first three months of 2008. I would like to start with the highlights of the year '08 so far which were the following.

A successful completion of the equity offering. The Company raised approximately R$2.9 billion including procedures from the Greenshoe option. We would like to thank the commitment of our shareholders that have subscribed over 80% of its priority rights. We also would like to thank the commitment and confidence of institution investors from Brazil, Europe and the U.S. that have subscribed an important share of the offering.

Stock dividend proposal from the Board of Directors will be submitted to the Shareholders meeting. The proposal supports 100% stock split for existing shareholders of Gerdau S.A. and Metalurgica Gerdau. And also the third point I'd like to highlight is the relevant capital expenditure at our integrated plant located in Minas Gerais. We will give the details of this investment in Minas later in the presentation.

We also would like to call your attention to the fact that starting first quarter '08 specialty steel segment will be reported separately. With the closing of the MacSteel acquisition last month, we became a global leader in automotive sector with operations in Europe, Brazil, and now in North America. Following the first part of this conference, Osvaldo Schirmer will get into the details about our numbers and financial performance and then we will be available for question and answer session.

For the ones following to the Internet presentation, I will go now to slide number 2 which are the highlights of the first quarter. First quarter performance was the result of the strong demand across global steel markets and superior performance of our operations. Despite a sharp increase in raw materials cost, we were able to expand operating margins and in most of our markets we were also able to increase shipment. In addition, in some of these markets, we achieved record levels of sales.

Our gross sales reached R$10 billion, a growth of almost 24% in comparison with the same period last year. The main reason for this performance was demand growth in the Brazilian market mainly and consolidation of acquisitions completed during the year 2007. Chaparral in the U.S., (inaudible) in Mexico, to name a few of them.

We also experienced solid demand coming from Europe and Latin American markets. Our EBITDA reached R$2 billion, a 30% superior when compared to the same period last year. The EBITDA margin expanded to 22.2% against a 20.8% in the same period a year ago. Our net profit was R$1.1, a slightly lower result when compared to last year R$1.2 billion. This result was driven by increase in financing expenses and foreign exchange effects due to the weak dollar. However, if we compare this result to last quarter, profit increased almost 15%.

Total shipments were 4.9 million tons. This volume was 19% superior to the same period last year. When it comes to acquisitions, we invested $2.3 billion from January to April. The highlights were MacSteel, joint ventures in Mexico and Guatemala, a new country we're going to start operating, and an acquisition of the first coke mining operation in Columbia. We also completed the acquisition of Century Steel in Nevada through PCS, our joint venture, and at the same time we increased our share in PCS to 84%.

We also added a 41% stake to our operation in Columbia. In addition, we are in the final stage of the acquisition of (inaudible), a relevant (inaudible) player headquartered in Barcelona, Spain. The expected investment is $105 million and also includes two distribution centers, one of them in France. This operation ships approximately 70,000 tons a year.

Now I'd like to go to slide number 3 and we'll talk about the steel market. As far as the steel market, global demand for steel products was a very positive surprise in the first quarter of '08. Even though we saw some increase in cost in raw material, create a positive environment for steel producers in all regions of the globe.

The subprime crash in the U.S. maintained some level of uncertainty about the local economy. The potential for a widespread effect is still unknown but we continue to believe that the U.S. economy has a good change to react quickly as we saw in other occasion.

In addition, Asia and Middle East markets are likely to continue to sustain growth and support global commodities price. Other markets like East Europe and Brazil have recently joined Asia and Middle East. This dynamic provides more evidence of the strong level of investment to continue to support growth in infrastructure needed in these regions.

In the steel sector, again, we expect firm demand from the same regions and demand at the (inaudible) is expected to continue to drive and support growth. The world production grew 5.6% when compared to first quarter '07. China again presented a very large growth of 8.6%. As a consequence of this continued growth, widespread increases in raw material costs, equipment, and logistics continue to fuel price increases across all steel products. Looking ahead, the outlook remains very positive. We are going through a strong-- we are seeing a strong demand for our products and expect to maintain a possible increase of profit margins with pressure over raw materials costs to sustain.

Now going to slide number 4, we'll talk about Brazil where the increasing level of employment and the availability of credit made to finance housing is expected to sustain solid demand for steel products for the next few years. Demand for individual farming and agricultural energy and communication industries are also expected to fuel the local economy and provide higher than average demand growth for steel products.

The investment grade status recently announced by SEP for Brazil is a recognition of the state of the local economy. Demand for long steel products during the first quarter increased almost 30% when compared to the same period last year. Our sales (inaudible) is trend with growth of 37% in the domestic market reaching 1.2 million tons. An important (inaudible) is the reduction of 24% of our exports and this is to fulfill the local demand needs instead of exporting steel.

We continue to feel strong pressure from costs and the main items are energy, electrodes, coal, refractories and general equipment needed in expansion and CapEx projects. But the outlook remains very positive for the remainder of 2008. Central Bank of Brazil continues to project GDP growth around 5%. Nevertheless, our expectation is that demand for long steel products in Brazil will grow more than 15%.

Moving to page 5, we talk about Gerdau Acominas where we just finished the feasibility studies that showed that the best option for Gerdau is to install the new heavy plate mill in Acominas, the state of Minas Gerais. These decisions reinforce the upstream operation in Gerdau Acominas.

This is in line with our long term commitment to vertical integration at our operations. Also in line with this strategy is the recently announced 1.8 billion tons of iron ore reserves. In the first stage, we expect to use this reserve to bring our self sufficient level to 80% by 2010. Besides the heavy plate mill which will supply the flat steel sector, we will also be testing a new medium size profile in Acominas. These two initiatives will represent investments of $835 million and will target the Brazilian market. The heavy plate mill will have a capacity of 870,000 tons per year and the medium sized mill capacity will be 650,000 tons per year. In the peak of this construction, these investments will generate around 7,000 temporary jobs. After start up, these mills will create more than 400 jobs.

I'd like also to mention that the equipment recently installed, namely the new blast furnace, the temporary facility, the new continuous caster, are fully operational on a production base of 4.5 million tons per year at Acominas.

Moving to North America on slide number 6, the subprime crisis still affects the U.S. economy which grew only 0.6% on a yearly basis on the last latest quarterly forecast. However, very important to mention that this economic situation defers depending on the sector and the industry. For example, the steel industry production in North America increased 7.8% on the first quarter 2008 versus the same period last year. This was due mainly to reduction in imports and growing exports based on the devaluation of the U.S. dollar and also due to investments on nonresidential construction.

Our North American operations in the first quarter showed an increase of 23% on sales volumes compared to the same period last year reaching 2.2 million tons. These volumes reflect the consolidation of the operations acquired last year, namely Chaparral. Steel prices was realigned during the first quarter showing improvement of 7% when compared to the same period last year. In April, we also saw similar movement from local steel producers following price increase in scrap. Metal spreads, which is the difference from the scrap price and the selling price, were above $450 per ton. This level shows the strength in the sector and robust demand for our products. Chaparral continues to exceed our expectations in terms of the level of integration and achievement of synergies forecast which now we raised the forecast of synergies to $100 million.

The outlook is that the weak U.S. dollar should continue to effect imports of steel into the U.S. with positive effects for the local producers. And also investments in nonresidential construction will remain solid driven by their longer duration. We also expect robust demand coming from infrastructure projects.

Moving to Latin America on page 7, the steel production in Latin America, this excludes Brazil, grew 4.1% in the first quarter '08 compared to the same period last year which was 8.5 million tons. Investments in the region have been favored by stable economic scenario which indicate sustained levels of steel consumption. Besides Brazil, it is worth mention good conditions in Columbia and also in Peru. High prices for commodities have been creating a significant revenue stream for the economies in this region. Here, too, we see raw materials and order input materials with price increases especially iron ore and coke coal.

Sales volumes for Latin American operations were up 39% first quarter '08 compared to the same period reaching 623,000 tons. This increase was led by consolidation of new operations, but also by demand growth throughout the region. Outlook is also very positive. We have seen investments in infrastructure and also on construction, civil construction, which is enjoying sustained levels of growth on the regional economy.

Moving to specialty steel on page 8, I'll start commenting on ANFAVEA which is the Brazilian automotive association. They report numbers that automotive sales were up 19.3% in the first quarter of '08 compared to first quarter same period last year. In Europe, markets remain stable and good margins. Price increase in raw materials and order inputs were offset by selling price increases which maintain our margins.

Our specialty steel segment supplies mainly the automotive industry but also the oil, energy, and machinery industries worldwide. Our operations are comprised of (inaudible) in Brazil, and more recently we concluded the acquisition of MacSteel in the U.S. MacSteel will be reported from the next quarter on.

Sales volume were 539,000 tons, a 4.5% increase compared to same period last year. The outlook is very positive for Brazil with automotive production keep growing. Europe we're seeing automotive stable but some segments like energy will keep growing and we foresee increase for steel demand in Brazil and Europe.

In the U.S. we see some slowdown in automotive due to reduced credit availability but at the same time, all segments show an increasing consumption of special steel, namely the oil and machinery industries. With this I finish my presentation and now Osvaldo Schirmer will guide you through the financial performance of our operations in the first quarter. I will be available at the end for questions and answers. Thank you very much.

Thank you, Andre. I will now address the comparison between Q1 2008 and the same period of 2007 and I will do it by business sector. Starting this quarter, Gerdau will report separately the specialty steel segment with operations in Brazil, Spain, and in the U.S. This reflects the importance of this segment in our overall operations. Information about the other segments will be reported as usual.

This first slide, number 9, shows the Brazilian operations where net revenues in Q1 reached R$2.9 billion, an increase of 36% over the same period last year. On this amount 2.4 billion were domestic sales and R$521 million were exports. The breakdown of these numbers show that due to the high demand in the Brazilian market, internal sales went up 42%, strongly supported by a reduction of 16.5% in exports from Brazil. We only consider exports what we export out of Brazil so far.

Gross margins have an improvement, moving from 31% to 33% based on price increases that more than offset the increase in raw materials during the period. EBITDA in Q1 was R$821 million, an increase of 47% when compared to last year. EBITDA margins in Brazil also went up reaching 28% versus 24% in the same period last year.

Moving to slide number 10, I'll address the major events in North America. In North America, net revenues for Q1 increased 24% compared to the same period in 2007 reflecting to a large extent the acquisition of Chaparral in September of 2007. Sales volumes also went up by 23%. EBITDA in Q1 was R$683 million, an increase of 31% compared to the same period last year. In terms of margin, EBITDA margins also went up increasing from 18% to 19.4% compared to the same period in 2007. This reflected the consolidation of Chaparral which brings higher margins to the North American operations.

Another important factor was the improvement on metallic spread year over year going from $374 per ton in Q1 2007 to more than $459 per ton this quarter which means a 22% increase in spread. Gerdau Ameristeel was also able to pass through price increases that more than offset the increase in prices of scrap.

On page 11, you see the Latin American picture. Now I'll take a look at the operations in Latin America which include Mexico and excludes Brazil. In this region, net revenues in this particular segment, geographic segment also increased 38% from R$687 million to more than R$950 million. This increase reflects the consolidation of companies acquired in '07, namely Sizuca, Venezuela, and (inaudible) in Mexico.

Latin America's net revenues represented in Q1 more than 10% of our total net revenues. EBITDA in the same period increased 27% from 123 million to 156 million. EBITDA margins had a small reduction from 17% to 16.4%, reflecting the increase in raw materials but especially the inclusion of recent acquisitions.

Specialty Steel. In this page number 12, we show the performance of our Specialty Steel segment which we started to report separately as of this quarter. Q1 reflects our operations in Brazil, namely (inaudible) and Europe where we have the Corpoacion (inaudible) operation. The recently concluded acquisition of MacSteel will be included in our numbers starting next quarter.

Demand in this segment remains very robust. The automotive industry in Brazil and the oil, machinery, and energy industries in Europe are presenting very strong growth. Prices at the beginning of '08 were up on average 8% if you take Brazil as a reference and 4% in Europe. Net revenues for the first quarter of '08 reached R$1.6 billion compared to R$1.5 in the same period last year. Despite higher costs of raw materials and energy, both in Brazil and Europe, EBITDA for the specialty steel segment remains strong at R$325 million in Q1 compared to R$319 million the same period last year. EBITDA margins in the segment also remain strong around 21% as you can see in the chart on page 12.

Joint ventures and associated companies. In this page 13 we give you a snapshot of our joint ventures and associate companies. You will find five different names there in the U.S. and Central America, Mexico, and so on which in total go to up to more than 1 million tons and more than 1.2 million tons in terms of rolled capacity. According to IFR accounting standards, joint ventures, or companies in which we share control with other partners, are not fully consolidated in our results being reported by the equity method. These companies include Gallatin Steel 50% joint venture in U.S., and our participation in Corporation Centroamericana del Acero Guatemala, Corsa in Mexico, Inca in the Dominican Republic, and SJK Steel in Asia. These companies were responsible for net revenues of R$453 million and income of R$56 million in the first quarter of '08.

On page 14, or slide 14, the Gerdau on a consolidated basis, I have a picture of the P&L and some asset allocation. When it comes to our consolidated figures, net revenues increased approximately 22% in the first quarter when compared to the first quarter of '07. Growth was mainly driven by strong demand across all markets especially in Brazil. Sales figures were increased with the addition of operations acquired during 2007. Gross margins remained strong at 24% and EBITDA margins, the main indication of our cash flow generation increased a couple of percentage points to 22%.

Net profit was slightly down 7.5% when you compare first quarter of '07 which added up to 1.1 billion. The main reasons for the lower net profit were higher interest expenses and foreign exchange impact driven by the weak dollar. The dollar devaluated approximately 15% when we compare to first quarter of '07. Despite all these factors, net profit margin was 12.2% in the first quarter of 2008. If we break down the net profit performance by region, Brazil's contribution was 48% followed by the U.S. with 28%, specialty steel was 15%, and Latin American operations was 9%.

Indebtedness, page 15. Gross debt as of March 2008 accounted for R$15.5 billion down 500 million when compared to year end '07. Our level ratios were either maintained or improved during the first quarter despite of the continued acquisition activities during this period. Net debt to EBITDA was 1.7 times and net debt to capitalization was at 40%. The average duration also showed a positive trend with a slight increase to seven years after payments of some short term debt. The average cost of debt as of March 31 was 6.8%.

Total cash and cash equivalents amounted to R$4.1 billion of which R$3.5 billion were denominated in U.S. Dollars. Average return on invested cash was around 6% in the period. This past Friday, we accepted the capital market to a reopening of the one billion October, 2007 ten year bonds. During the hours of our syndication effort, we were able to raise an additional $500 million at 6-7/8 which we consider a very successful transaction especially in this market condition. The proceeds of these bonds will be used to prepay bridge loans raised to pay for the MacSteel acquisition concluded in April.

Dividend and stock split. Dividends. Dividends will be payable on June 3 to shareholders of record at the close of business on May 21. Metalurgica Gerdau will pay R$0.64 per share equivalent to R$130 million and Gerdau S.A. will pay R$0.41 per share totaling R$291 million. Together, the company will offer a stock split. The company decided to implement the stock split of two to one with the objective of increasing liquidity and allow easier access to investors to the reduction of the price of the share.

A few words on the equity offering. The company successfully completed an equity offering last April. On April 24, we priced the offering at $36 per share for the ADR, R$60.30 for Gerdau S.A. shares and R$78.35 for Metalurgica Gerdau shares including the overall, sorry, the overall allotment which gave us a total of 48 million and 19 million shares of Gerdau S.A. and Metalurgica respectively. Pricing was made at an average premium of 7% in the Gerdau and 3% premium for Metalurgica when you compare it the quotes at the date of filing on March the 3.

The road show accessed markets in three main regions. Europe, U.S. and Brazil. Management met over 100 institutional investors in this road show with the final location of orders showing strong interest across all regions. Another important measure of success was the fact that more than 80% of shareholders have exercised their priority rights during the offering. In terms of user proceeds, we will balance the capital structure and solidify our credit rating, provide additional funds for our investment program, and restore our strategic liquidity to support our acquisitions growth strategy.

With all that said, I join Andre and I open the floor for questions. Thank you.

(Operator Instructions). Our first question comes from Mr. Raphael Biderman from [BBVA Bancomer]. Excuse me, Mr. Raphael Biderman, your line is open.

Hello, I'm sorry. Okay, I'm here. Can you hear me?

Yes, perfectly.

Good morning, Andre. Good morning, Schirmer. My first question is related to prices. If you could give some details on what was the price increases the day and more or less the month and the size of the price increase granted in the U.S. and in Brazil and what, just to confirm with the numbers I have, and what is the outlook for further prices increases going forward? And also related to cost, what is the evolution of scrap prices in the U.S. and in Brazil? Obviously in Brazil it's a different trend, but if you are seeing any kind of pressures of scrap prices in Brazil. And also if you could mention a little-- I was making a small calculation on the results, it's not something really (inaudible) but in terms of EBITDA performance , the Latin American operations excluding Brazil had very low EBITDA performance in relation not only to Brazil but also to the U.S. If you guys believe that there are cost reductions that you can do, turn around you can do in Latin American operations to improve that.

Okay, I'm going to split here. I'll take the first part of your question which is related to price to give you a guidance what sort of price movements we have experienced in the first quarter. I think I'd like to say to the audience that we are taking questions as they come. Brazilian speakers can address their questions in Portuguese, we'll translate them into English, and reply in English. For those asking in English, we're going to reply directly in English.

So going back to your question, you mentioned about the prices. We have had, and by the way we are having as we speak, the second price adjustment in Brazil. In the first quarter we had a 50% more or less, or up to 50% price correction upward Of course that will depend pretty much on the different families of products. Not everybody and not everything was corrected in the same fashion. But on average 12 to 13%. At the same magnitude, the industry has been able in the second, the beginning of the second quarter, to introduce another price adjustment, again, up to 15% depending on the family of products.

In the U.S., on average, we experienced a 7% price appreciation or correction if you will allow me, in the period. And throughout Latin America related to price, I could comment that in some regions such as the Latin American countries, South American countries, we're basically in line. Not many-- we are not able to find major variations going from country to country. Mexico was behind schedule until a month ago and now it's pretty much in line with the rest of Latin America. And you continue rather optimistic that this scenario will maintain strong because demand is strong in different countries. The industry has been able to pass onto customers the volatility on raw materials, mainly scrap and in the case of integrated metals around the world and so on and coal. But this is the scenario and the outlook, as Andre pointed out, is rather positive for the next quarter. Viv-a-vis the EBITDA performance that you mentioned, I think Andre would like to take that part.

Yes, I understand the question was mainly on the Latin America EBITDA performance and the difference from Brazil and North America. This is an average of all the countries in Latin America, so you have old, stable operations with some of the new operations. So that's why sometimes you've got the effect. Markets are pretty strong, demand are there, so the more stable operations or the older ones are doing pretty good on EBITDA performance and some of the new we're having still doing the turnaround in investments like in Peru or Venezuela or Mexico which are new, less than a year that we've been running. We still do investment and for sure we're going to pick up the same level of the orders. Specifically, Mexico for example had down, the operation down for a major revamp in January which affected the result. And this is part of some of the orders operations. So we remain optimistic for the future that Latin America will be very similar to the other regions.

Okay. On price, if you can give-- do you guys believe there could be another price rise in the third quarter in Brazil and the U.S.? And also a follow on on this Latin America situation. I was thinking of not only the turnaround of the recent acquired companies, but also on the companies you have for a long time and countries for a long time such as Argentina or Uruguay or Chile, if there is more that can be done. Like for instance, one thing that makes the margin in Brazil so much better than the margins that belongs to industry everywhere else in the world is that after you consolidated the markets in Brazil you were able to work better margins and prices and things like that. As Latin America is also getting consolidated as in Brazil and the other countries are getting very consolidated industries in long steel finally, if you guys believe you can also work on the margins there?

I'll start with the second part which is Latin America. We replicate the same business model that we have in Brazil when we go upstream on (inaudible) scrap. So this takes time, but we will achieve the cap in scrap like we have in Brazil and other regions and also we go downstream which means investment on some (inaudible) which adds value to the product. So these new operations are not there yet, but it's just a matter of time until you get the very similar business model. Profitability is a matter of market, but the business model will be very similar.

On price, this is very hard to say where are they going. Prices of metal and demand and demand is as strong in the world today and also pressure comes from the pressure on costs. So it is possible that we see more increases as the demand is very strong in the world. And Schirmer would like to make a comment.

I'd like to add this two more lines on that answer. Basically as Andre indicated, you cannot dominate external variables. But Gerdau as usual has been working very hard to face those volatilities on scrap, on iron ore and so on. On scrap, we keep buying scrap processors, shredders here and there. So increasing our capital collection of scrap and processes where we can save a couple of dollars in each one of those stages. In terms of iron ore, we have invested in buying mines, we are processing them already. We think we have a very let's say ambitious program to increase our self sufficiency in terms of growing out our own iron ore reserves. And more recently we bought a coal mine, sorry a coal mine plus a coking coal processing unit in Columbia where we also can save a couple of dollars by producing ourselves and supply our own operations, especially in Peru. So we are doing what is possible to be done inside the walls because the external forces are much bigger than us. But in our case we are doing it.

Okay. Thank you very much.

Our next question comes from Mr. [Marcel Brizak] from [Etol] Securities.

Good afternoon, gentlemen and congratulations on the results. I have two questions. The first one is related to the iron ore mine. Can you give us an idea of how much it costs to buy iron ore versus to produce your own iron ore there? Just for us to have an idea of the size of the cost savings by increasing your iron ore self sufficiency. And just as a follow up, why 80% and not a100%? As far as I understand, you only use iron ore (inaudible) really by demand, so why not 100% of substitution?

And the second one would be on MacSteel. I'm just trying to get an idea of how it's going to impact the specialty steel segment. What should we expect for the second quarter? Wider or narrower margins. And because you've been talking a lot about the strength of the U.S. (inaudible) lot of demand (inaudible). However, we've been hearing from industry sources that the automotive industry in particular has been very resistant to price increases so I'd like to better understand that. Thank you.

Okay. We'll play doubles again here. I'll take care of the iron ore question and Andre will take your specialty steel question. And by the way, I'd like to recommend to people in the audience, I have heard that we have almost 100 people in the audience. When you address your question, try not to make two, or three, or four questions because the others are on the line if you don't mind. And also there is a translation issue. Sorry for that observation.

But going back to your question on the iron ore, the rationale behind increasing our own or better utilization of iron ore is quite obviously. We really do have some benefits in using our own. And you asked about the (inaudible). Depending on the mine, depending on the process and so on, you can benefit up to $30 per ton differential both external iron ore costs to the company somewhere between $60 to $70. And when we produce from our own reserves, it goes from maybe $25 to $35 per ton. So there is a significant difference in the production cost. Of course this is not, cannot be maintained indefinitely. I'm talking about the levels we are thinking in terms of replacing outside acquisition versus internal utilization.

And you also were concerned bout why we are saying 80% and not 100% in two or three years. Historically, the Acominas operation has always enjoyed a strong support from small or medium sized operators that are not too far from the mill that continues to extract, process, and sell it. And sometimes some of them do not have scale to become an exporter or a fighter in the international market. So for them it's convenient to supply the demand surrounding their operation which is the specific case of Acominas. And we do not intend to discontinue that sort of relationship. That's why when we say three years down the road, we'll be supplying maybe 80% of our needs, it's because we intend to maintain them. That's basically the reason for the 80% versus the 100%.

You talked about MacSteel and specialty steel, the outlook for that in the following quarters, Andre will take that.

It's important to mention that we closed the deal with Quanex, the owner of MacSteel, at the end of April, around 25th of April, I recall. So we're just taking over it and we have had some conversations, some exchange, but we're really going to take over from now on. But so far what we see in the market is that there is some slow down in the automotive sales, but also it's important to understand that a lot is related to the traditional big three automotive companies that are losing more market share. But there are some that are growing like the transplants, Nissan, Toyota, Hyundai, and others that are taking some markets. So although there is some slowdown there is a change on who is selling also out of mills in the U.S. and Canada.

Also, because of the weak dollar, there is less imports. So there is room to sell to distributors and other markets that were importing specialty steel in the past and now are buying more domestic. Also another sector that consumes specialty steel is the energy sector which is doing very well and it's growing. So we see that we should keep similar margins for the next quarters and so on and I would say a stable forecast. Not growing but not slowing so much.

Okay. Thank you very much.

Our next question comes from Mr. [Carlos Zelaya] from Morgan Stanley.

Good afternoon. Two questions very quickly. Is there any guidance in terms of volumes for the company, maybe Brazil and North America in particular? And second thing, any guidance on how do you see the spread, metallic spread evolving in Brazil and in North America? Thank you.

Basically the guidance on spread, the industry has been able very successfully to (inaudible) on volatility of spread especially in North America. So the outlook for the quarter is that spreads may suffer a bit, but it's going to be still healthy and robust as they have been in the recent quarter. You had two question, one on spreads, and the other one?

Volume.

Volume, sorry, volume. As far as volumes are concerned, Andre in his speech also mentioned that the outlook for the company is in Brazil that demand is going to grow maybe 15% on top of '07. We are even a little bit more optimistic than the industry on average. And for the U.S., we are working internally at least with stable volumes, not major reduction. And Chaparral is coming to supplement that part And our belief comes strongly from the fact, as Andre mentioned, that the weak dollar and the high cost of freights in international markets are really inhibiting additional imports in U.S. If you look at the U.S. statistics you see that every month the import scores are reducing. The import permission, sorry, are reduced. So basically this is the outlook.

Thank you.

Our next question comes from Mr. Marcel Aguiar from Goldman Sachs.

Hi, Schirmer, it's Marcelo Aguiar from Goldman Sachs. Two questions. The first one, I jumped on the call late, I'm not sure if you already answered that, but I think it's an important one. You mentioned about the long steel price increase in January I think up to 50%. When I look at your gross margin quarter on quarter, your gross margin didn't change in the fourth quarter compared to first quarter. And when I looked at breakdown for business, I mean Brazil consolidated and still the gross margin, in fact the gross margin fell by 340 bips. Can you elaborate a little bit why we didn't see gross margin grow with the Brazilian business in the first quarter? That's the first question.

Sorry, I was checking with our accountant. He gave me the specific question because there was no major reason for maintaining the spread. But an adjustment on pension funds liabilities, that's-- versus the pension fund assets that requires (inaudible). That's basically the major reason for maintaining the margins, the gross margins the level they are when they should be improving slightly because if the business were better and the operation results were better in the period.

Okay, so this was-- just to understand, this was booked under cost of goods sold line?

Yes, it was booked as cost of goods sold, correct.

Okay, great. The second one is related to the scrap. (Inaudible) between scrap prices in Brazil and to abroad, I mean again, we're talking about 60%, I mean price in Brazil for scrap is 60% below the international market. And we never see that deviation in scrap prices-- remember the past it was between 30 to 40% below which is already a lot. So my question to you is, I think half of the scrap that the Brazilian long steel companies buy comes from the industry and the other half comes from small collectors, your day to day business. So is that sustainable? The deviation between the international price and local prices? And what's going to happen with the industry when they sell scrap to you? Are you already seeing pressure from scrap prices from the industry?

There, sometimes there are a lot of misguiding or misleading factors. We have the dollar deviation which brings some lack of understanding on the behavior of the prices, the dollar depreciation against the Real and so on. There is an important part played by the local industry because Brazil does not export its scrap. And Brazil also plays with pig iron. Sometimes pig iron is a good replacement. If you talk about (inaudible) furnaces, you can feed them with a much higher proportion so you can go up to 40% of your charge using pig iron for instance. And in the case of Gerdau in particular, you can even produce steel using DRI which is exactly what we do in the northeast part of the country where you have less scrap.

So the way we go around buying, processing, and inspecting scrap in Brazil is completely different from what we do in North America. Not to mention that Gerdau for instance is able to collect up to 80% more or less of its needs directly. So it's at the cutting edge when you compare it to other markets. And especially you also addressed the point of the industry. Of course we do collect stats from the industry as well. But the industry is also producing more. So there is no major pressure from the industry. The reason for maintaining the price with this differential is the way of collecting and processing in the way we do.

Okay, Schirmer, can I do a third one? So the question is, on the competition on the local market, the (inaudible) is growing 1 million tons I think through next year, beginning of 2010. And CSM, they say they will grow 0.6 million through next year. Do you think this could have any effect on the raw material prices in Brazil? I mean scrap, pig iron, (inaudible) but more scrap?

By definition, yes. When you have more demand come from different producers, the obvious would be yes, there will be pressure. But if you go over those numbers that you just declined, (inaudible) is not going to start operating one million tons tomorrow. It's going to be gradual, there's a learning phase. CSM also is in the game but not really pressuring the scrap and the ability of the industry to protect against this new (inaudible) has been moving around for many, many years. So of course there will be some pressure, but not to the point of getting desperate.

Thank you very much.

Ladies and gentlemen, 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. Please, Sir, go ahead.

I'm going to start, Schirmer speaking, to thank you all for your interest and the quality of your questions and Andre will say the last word. I hope to meet you next quarter with good news again. Thank you.

Yes. Thank you for all attending and your interest in Gerdau and we'll have our next call in July and you are all welcome to come back. Have a good day. Thank you.

Thank you. That does conclude today's presentation. Have a good afternoon. Thank you.