Gerdau SA (GGB) 2008 Q2 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 second 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. There will be-- 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 and 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 IR Director. I would like now to turn the conference over to Mr. Andre Gerdau Johannpeter. Please, go ahead, Sir.

Thank you. Ladies and gentlemen, good afternoon. It is with great pleasure that we welcome you to Gerdau's second quarter conference call. Osvaldo Schirmer joins me on this call. After my presentation, he will be going into more details about our financials for the second quarter. We will be answering your questions after we conclude our presentation.

For those following through the Internet, I will be covering page two now which is Gerdau highlights. Worldwide steel demand remains very strong and our international growth, with the consolidation of new companies, especially in the US, has assured a good performance for this quarter. We have increased our presence in important markets and in spite of increasing raw materials and other costs, we have improved our margins and increased our sales and production volume.

It is also important to mention that our most recent acquisitions have already started to yield positive results contributing to the good performance of the Company during this quarter. The highlights for the second quarter 2008 were all very positive. Gross revenues reached R$12.3 billion, growth of 46% over second quarter last year. EBITDA reached R$2.7 billion, a growth of 72% compared to the same period last year. And the net income was R$2.1 billion, 85% higher than second quarter 2007.

Our sales reached 5.5 million tonnes, an increase of 32% over the same period last year. Additionally, we have kept pace with the global consolidation process, investing a total of US $3.5 billion during this quarter of which US $3.1 billion were in acquisitions and US $380 million in CapEx.

Now we'll move to page three on the global steel markets. Regarding the world steel industry performance, we have a total output on the second quarter of 2008 of 355 million tonnes. This is almost 6% increase over the same period last year. China, again, is on the lead with 138 million tonnes of output, a 10% increase compared to second quarter last year.

Cost increases have created a strong pressure for steel price corrections in our regions and the outlook what we see for the world steel demand in 2008 is that it will continue to grow around 6% to 7% according to the International Iron & Steel Institute. This will be mostly located in Asia, Middle East, and Latin America.

On page four, I will comment on Gerdau performance on the second quarter in Brazil. Brazilian economy continues a very strong demand with some very positive effects on steel market and on the performance of Gerdau. The steel market has shown a record growth of almost 27% in their apparent steel consumption of long products in this quarter. This was especially related to civil construction, capital goods, and automotive industry. Master shipments for Gerdau grew 34.6% reaching is 1.3 million tonnes. It's important to mention at this time that this shipment excludes Acos (inaudible) and Acos Villares that will be reported later with the Acos Especiais operations, specialty steel.

Priority was given to the domestic markets and we saw a reduction of 12.8% in the exports of long steel. At the same time, exports out of Acominas, mainly billets, slabs and blooms, has increased almost 27%. As a consequence, Gerdau's total exports out of Brazil were 534,000 tonnes, practically the same volume as second quarter '07. Some pressure from raw materials and other costs forced price corrections on long and specialty steel in the period.

Moving to comment on the investment in Brazil, we invested US $232 million in CapEx during the quarter. We would like to highlight the expansion program at Acominas and the construction of the (inaudible) hydro electric plant. Those projects will be concluded by 2010. We are conducting-- we would like to announce now a very important investment at Gerdau Acominas that will increase the steel production capacity from the current 4.5 million tonnes a year to the level of 5 million tonnes a year in 2010. The amount of investment will be US $277 million. We are also continuing to examine other capacity growth opportunities for the Acominas operation.

Also, we are conducting studies in the state of (inaudible) for the construction of a new steel mill targeting the production of rebar. The total amount of the investment required should reach US $400 million for the first phase. And this should start up in 2011.

Looking forward, the outlook for Brazil is very positive. 2008 GDP growth in Brazil should be 4.8%, according to projections by the Brazilian Central Bank despite increase in the interest rates and the steel market should follow this growth.

Now moving to page five, we will comment on the North American operation. Demand in North America remains solid based on the industrial and infrastructure sectors. Steel production in the US and Canada this quarter has increased 1.2% compared to the same period last year. The impact of the weak dollar has a positive effect in our North American operations as imports in the US have been reduced compared to historical levels and export out of the US has increased benefiting the US domestic producers.

Gerdau's performance so far has sustained the reducing bite from the crisis in the North America financial markets. If you look to shipments in the second quarter, here also important to mention, excluding MacSteel, which will be reported under the specialty steel operations, for the second quarter shipments were 2.5 million short tonnes, a growth of 47% over the same period last year. A strong component in this growth was the consolidation of Chaparral, acquired in September '07.

Also, G&A exported to Central America, Mexico, the Caribbean, Asia, Europe and South America. Good demand in (inaudible) second quarter '08 leads us to believe that exports in 2008 will reach around 500,000 short tonnes. On prices, we saw them follow the increases in raw materials and other costs, especially on scrap, allowing us to maintain and in some case increase margin. Metal scrap was up 20% compared to the same period last year reaching US $499 per short tonne. These numbers confirm the solid conditions in the North American steel markets.

Our investments in CapEx were US $33 million during the second quarter. We had three acquisitions in the period, we invested US $82 million to increase our equity participation in PCS, surgical steel, to 84%. Acquisition of Century Steel for US $148 million and Hearon Steel for US $15 million. All three companies specialize in steel fabrication. Additionally, Pacific Coast Steel and Century Steel also install the fabricated steel on the construction sites.

We also announced in this quarter a new investment at the Jacksonville mill in Florida, a melt shop and rolling new capacity will reach 1 million tonnes when this work will be concluded.

The outlook for North America, we keep monitoring very closely the US economy, but we are optimistic in relation to the next few months. Steel imports should remain at current levels, only we'd like to mention that in the third quarter the steel production will be slightly reduced due to schedule maintenance in steel mills which is typical this time of the year.

On page six I would like to comment now on Latin America operations which exclude Brazil. The economy has been positively impacted by commodity markets which have sustained domestic markets in the low for increased levels of investment in production in Latin America. The region has been less (inaudible) to the international economic scenario and has maintained an attractive outlook for the region so far. Similar to what's happened in other regions, cost increases, especially for bigger scrap coking coal in August, have generated steel products price corrections. In our Latin American operations which excludes Brazil, we achieved steel production of 6.9% higher compared to the same period and the shipments were up 8.9% reaching 634,000 tonnes. This is mainly due to the consolidation of new acquisitions and the good demand levels of the market in the region.

During this quarter, investments in CapEx were US $53 million. It is worth mentioning the investment of $68 million this year industrial facility in Columbia, namely for the installation of the (inaudible) melt shop. We also had some acquisitions in the region, first in Columbia with the acquisition of additional stake in Diaco, taking our participation to almost 99% for an amount of US $107 million. We also acquired 50.9% of Cleary Holdings for a total of US $59 million.

In Mexico we concluded the acquisition of 49% participation in Corsa in an amount of US $111 million. In Guatemala we concluded a strategic partnership with Corporacion Centroamericana del Acero with a participation of 30%. Gerdau has invested US $108 million in this company.

In Chile, we have acquisition of two companies. Barracas Janssen focused mainly on the sale and distribution of steel products, for US $5.6 million, and Trefilados Bonati, a producer of wires and nails. This was done for the amount of US $7.5 million.

On the outlook for Latin America, we will keep monitoring the markets and inflation pressures in the region, but the Latin America economy should present growth in the near term helped by the strength of civil construction and infrastructure.

Now moving to our specialty steel operation, on page 7, automotive industry in Brazil presented a growth of 24% in the second quarter 2008 compared to the same period from last year. In Europe, the automotive market is stable, with maintenance of margins. Costs increase and consistent demand levels have generated upward steel products price corrections. In Spain, Gerdau was able to renegotiate the union labor contracts for the operations in (inaudible - heavily accented) and main office. These contracts are for the period of January, 2008 until December, 2012.

MacSteel, which was consolidated starting in April, has diversified its customer order book in sectors like energy, agricultural equipment, and distributors a And this was to compensate the slowdown in automotive. Shipments for the specialty steel operations in the second quarter were 785,000 tonnes, a 47.6% increase. Investment in CapEx this quarter were US $62 million. On the acquisitions, I'll start with Brazil where we did an acquisition of an additional 28.9% stake in Acos Villares for a total of R$1.3 billion. With this acquisition, Gerdau, including the (inaudible) participation has 87.3% participation in Acos Villares.

In Spain we did two acquisitions, Rectificadora del Valles and Vicenta Gabilondo e Hijos. Those two are drawing operations. And in the US we concluded the acquisition of MacSteel.

On new projects, in Spain we are conducting studies for the implementation of a steel mill in a site to be defined with a capacity up to 1 million tonnes of rebar. We see a very positive outlook for Brazil as the growing production of automotive in 2008. The forecast is to reach over 3 million units according to (inaudible).

In Europe we see stable levels of automotive production and other segments of the industry with [potential] for increase in costs. In the US we see a good outlook for the oil industry as well with equipment and material with the exception of the automotive industry which is in fact declining.

To finalize, I would like to mention the significant results gained by Gerdau in the Reputation Institute Rankings, one of the world's most important center regarding reputation studies where the company achieved second place in Brazil and 24th place globally. With this I conclude my presentation and now turn it over to Osvaldo Schirmer to comment on our financial results. Thank you.

Thank you, Andre. Good afternoon, everyone. Following the same procedure of giving you guidance and information on the segmentation and the way we manage our business, we are going to go over Brazil, North America, Latin America, specialty steel, and so on. Let's start with Brazil which is page eight or slide number eight of your presentation for those following to the net.

In Brazil, net sales in the second quarter reached R$3.6 billion. When compared to R$2.4 billion second quarter '07, means a 47% increase. It's important to say that 77% of net sales came from domestic markets and 23% from exports. Growth is due basically to the physical sales increase already mentioned by Andre and price recovery. It's important to point out that the raw material and input costs in general has increased and has been pressuring our cost structure. Iron ore has gone up 75% in April, scrap, pig iron, and alloy have also gone up in price. Energy, another important component of our costs, has also experienced price increases of at least 50% in the last 12 months. We anticipate additional cost increases in the second half of this year.

Coke and coal for example may go up close to 200%. Energy and other inputs very surely will also increase prices throughout the year. EBITDA in the upper right side of your slide, in second quarter reached R$1.2 billion which means an increase of 97% over the same period last year. Increased sales volumes helped to dilute costs. Cost of goods sold represented 60% of sales this quarter, against 66% in the same period last year.

Export prices increased more than costs due to the strong international demand. In our case, export prices increased 63% in dollar terms. SG&A accounted for 11% of net sales when in '07 it used to be 14%. EBITDA margin in Brazil was 34% the second quarter compared to 25% in the second quarter of '07. It has been improving each quarter I would say. The second quarter of '08 we also saw some benefits in the margin basically due to the realignment in prices as well as from cost dilution due to the increase in orders.

On slide number nine, let's address the North American performance in the second quarter. Net sales for North America the second quarter reached R$4.2 billion, an increase of 59% compared to '07. This performance was driven by the physical sales increase as mentioned before and also due to the Chaparral consolidation. Production costs also went up as a result of inflation pressures on alloys and energy as well as the scrap costs which were 65% higher in '08 when compared to '07.

The combination of these factors yielded a positive balance with [metal] spread 20% up when compared to the same period last year. EBITDA the second quarter of '08 reached R$875 million, an increase of 87% when compared to '07 reflecting the solid performance of the Company.

EBITDA margins in '08 were 21% which compares to only 17% in second quarter of '07. One can observe improvements every quarter since the third quarter of '07. Lower costs also were related to the increase in our captive scrap collection. We feed our mills today under the captive scrap program, about 40% of our needs.

Latin America, slide number 10. In our Latin American operations, net sales in second quarter were R$1.1 billion, a 32% increase when compared to '07. Physical sales were up almost 9% as already mentioned by Andre. EBITDA reached R$289 million second quarter, a 56% increase when compared to '07. This is basically due to the increase in shipment volumes which by the way helped a lot to dilute fixed costs.

Cost of goods sold as a percentage of net sales fell from 75% in '07 to 72% in '08. Additionally, with improvements in the operational costs, EBITDA margin second quarter was 26% when compared to 21.9% second quarter of '07.

Specialty steel, slide number 11. Net sales of our specialty steel operations reached R$2.2 billion in '08, an increase of 36% when compared to the same period of last year. Contributing to this increase was the consolidation of MacSteel and the higher demand of specialty steel mainly in Brazil. EBITDA in '08 reached R$375 million, a 13% increase when compared to '07. Cost of goods sold as a percentage of net sales was up the second quarter of '08 compared to '07 reflecting the inflationary pressures in our costs, namely scrap, alloy, and energy.

EBITDA margin the second quarter of '08 was 16.7% when compared to 20.1% in '07. That reflects the consolidation of MacSteel which operates with a margin range lower than the sisters in Brazil and in April faced a nonrecurring purchase price adjustment of US $28 million upfront to adjust for inventory price levels. Even though MacSteel already presents solid results with synergies and operational enhancements to be achieved in the next quarters, we expect to obtain margin improvements on this operation.

Joint ventures and associated companies, slide number 12. According to the IFRS accounting standards, joint ventures for companies in which we share control with other partners, are not fully consolidated in our results, being reported by the equity method. In that slide you will see that in total, our JVs reached more than 1 million tonnes of installed capacity. These companies include our Gallatin Steel which is a 50/50 joint venture in US, our participation in Corporacion Centralamericana del Acero in Guatemala, Corsa in Mexico, Inca in the Dominican Republic, and SJK Steel in India.

The referred companies, take into consideration the corresponding participation, shipped more than 300,000 tonnes of steel products in second quarter of '08 which resulted in net sales of more than R$560 million. And the net income, via equity pick up, of R$82 million.

Slide number 13, in a picture, the consolidated performance. Net sales of second quarter of '08 were R$11.1 billion, a 47% increase over the same period of '07. This increase can be attributed to factors already mentioned by Andre, namely the acquisition and consolidation of new companies and higher shipments in our existing operations. The good performance is also reflected on the improved margins. Gross margins went from 25.1% in '07 to 26.8% in '08. EBITDA margins also improved with 24.7% in '08 compared to only 21% in the same period last year. It's important to mention that this improvement in margins happened in an environment of raising costs of raw materials and inputs in general. Iron ore prices have gone up. The same happening with scrap, energy, and alloy. Coke and coal prices are also facing strong upward adjustment and this is a global trend. The main thing is the improvement of our margins are due to the fact that global steel demands remain strong, allowing steel producers to realign their prices accordingly.

EBITDA for the second quarter of '08 reached R$2.7 billion, a growth of 72% over '07. As for net income, which reached R$2.1 billion this quarter, it's important to mention that this number is positively affected by R$349 million by the exchange rate variation in the period, appreciation of the Real vis-à-vis the US dollar. Adjusting for the exchange rate effect, net income for the second quarter would have been R$1.8 billion which would be compared to roughly R$1 billion in '07 even though this is a fantastic improvement in that income, about 81% if you do not consider the exchange rate variation in that.

Indebtedness. Net debt totaled US $6.9 billion or R$10.9 billion as of June '08, basically the same level as December '07. Gross debt reached R$16.5 billion or the equivalent to US $10.4 billion. 81% of that indebtedness was long term, only 19% short term. The debt was composed as follows. 19% local currency, 16% foreign currency incurred by the Brazilian company, and 65% in foreign currency incurred by the companies abroad.

Cash availability and financial investment. In total they were US$3.5 billion or R$5.6 billion as of June '08. 45% of it was the indexed to foreign currency and 55% was indexed [against the dollar] in reais. A picture on the health. Debt indicators as of June 30, '08. Gross debt over total capitalization reached 44%, used to be 49% in December. Gross debt to EBITDA, 2.1 times, used to be 2.5 in December. Net debt to EBITDA, 1.4 times, used to be 1.7 in December. It's important to point out the strength of the company's balance sheet and capital structure. Total capitalization, which means gross debt less shareholders equity, was US $37.6 billion in June, an 85% increase compared to the position in December. At the same time, debt over total capitalization was reduced to 44% from 49% in '06. The average term of the average debt profile in June was 6.5 years.

In June, the average cost of debt was 9.3% of our investment in reais. 66.2% plus exchange variation for the debt in foreign currency when borrowed by the Brazilian company and 4.7% when borrowed by the companies abroad.

Slide number 15, dividends, second quarter Dividends will be payable on August 27 to shareholders of record at the close of business on August 15. Metalurgica Gerdau will pay R$243.8, equivalent to R$0.60 per share. Gerdau S.A. will pay R$511 million, equivalent to R$0.36 per share. Metalurgica Gerdau has accumulated R$374 million in the first semester in dividends yielding to the shareholders 2.7%. Gerdau S.A. accrued R$800 million yielding 2.2% to its shareholders. It should be pointed out that such dividends are being paid, or sorry, are being paid based on the Company's net income adjusted to international accounting standards, known as IFRS.

Holding, slide number 16, holding discount. As of this quarter, we'll start showing the discount in those by the markets on Metalurgica Gerdau, on Metalurgica Gerdau's value regarding linking connection to the value of Gerdau S.A. in the market as well. The discount used to be 24% in December '05. As of June, '08, it came down to 14%. Capital markets normally attribute a discount for holding companies. We can see the reduction in the Metalurgica discount over the past few years to be a very positive trend and in our opinion a change in the market perception about Gerdau S.A.

We have come to an end of our presentation. Andre and myself will be more than pleased to take your questions from now on. Thank you very much.

(Operator Instructions) Our first question comes from Mr. Marcel Brizak from Etol Securities.

Good afternoon and congratulations on the results. Just a quick question regarding the markets themselves. We've been seeing some signs of weakness in a particular market, namely Europe a little bit around Turkey, that region. So just wondering if you see those signs, too, if this is more a temporary state considering the (inaudible - technical difficulty). I'd appreciate it. Thank you.

Okay. Good afternoon, Marcel. So far what we're seeing is that for the remainder of the year, the next quarter, July quarter, we should see the remaining demand strong. There is a question mark because there is some export prices that have dropped (inaudible) dollars or something but it's hard to know because it's summer, as you mentioned, and some regions, mainly the US, there is some slowdown in some sectors. But on the other hand, there are strong sectors like nonresidential (inaudible) strong, infrastructure, energy. Middle East still continues to grow, Asia. So there is mixed signs out there as to where the economy is going. Our forecast for the near term is that it will continue and it's very hard to forecast 2009.

Okay, thank you.

Our next question comes from Mr. (inaudible).

Hi, Schirmer. The first question is regarding Acominas. If you could explain how much, how was the ramp up at Acominas, the big expansion in the second half of last year? How much was the-- how was the ramp of the expansion-- there was an increase in production in Acominas quarter over quarter and where is this additional production of Acominas going to? Is it going to the US? Is it going internally? That's my first question.

My second question is related to prices. If you can tell us, what was the price increases granted in Brazil? I've heard from [the street] that there were three price increases going to be in the year that's almost 50%. I'd like to confirm that. And if you could also tell the price increases you guys made in the US by how much and when in this year.

The Acominas story is the following. The ramp up came from the expansion to 4.5 million tonnes (inaudible) absolutely correct that we are (inaudible) learning curve is surprising us very well. We are reaching better figures every day. The ramp up on Acominas was basically given and provided, thank God, by international supply. Acominas is still exporting 60% of its output. 40% is sold domestic to (inaudible) as you know. But the major help really came from increased volumes, let's say a successful learning curve on the new furnace, and sustainable 60% in terms of export.

I'm going to share this question with Andre who would like to comment on the prices on the remaining prices in Brazil as you referred to.

On prices, we did have some correction of prices on the first half of the year and at this point we are not forecasting any move for the third quarter of second half.

Can you say how much was the price increases granted in Brazil and when? And if you could also say if Acominas is exporting to the US and by how much the export is going to the US?

I don't know how much, but there is some export to the US. I don't know the exact number but more Europe, Asia and even Latin America would be (inaudible). On the price, I cannot give you one clear number because the correction was done in different moments and different prices. It depends on the quantity, the quality, the service, (inaudible), so I don't have a number.

Can you just say qualitative exports to the US is a significant number or just a marginal number? Because I want to figure out if you guys were rolling Acominas in the operations you've got in the United States. That's what I want to get at.

We are exporting, but it's not a large part.

Okay.

Our next question comes from Mr. Marcos Assumpcao from Merrill Lynch.

Hi, good afternoon, Andre. Good afternoon, Schirmer. First question is regarding the operations in Brazil. Actually congratulations for the results, they were very strong. Could you explain a little bit better the cost performance mostly in Brazil which I think was the main driver for the EBITDA margin improvement in the second quarter? And if you could, just provide a little bit of outlook for the third quarter. My view is actually that there are still some price increases to pick up during third quarter. And also probably these price increases should more than offset some impact on increasing costs mostly on scrap increases by the end of the quarter that should have a lower effect in the third quarter. But probably the trend for the margin in my view is upwards in Brazil and I would like you to comment on that. Thank you.

Basically in Brazil we had this almost phenomena of staying almost two years results in prices and then having to absorb incremental costs in our input. Of course we could, as the rest of the industry could, realign prices to '08 and the last months of '07 in such a way that we rebuild our operating margins in general as I described in my speech. Looking forward to the rest of the year, as I anticipated also, we are still contemplating increases in scrap, increases in coal, basically these two elements are going to be pressuring. And the demand is very hot, no doubt about it. Brazil is even getting demand from outside, but in our case, the particular case of Gerdau, we are concentrating supply to domestic clients because it is always our most (inaudible) to supply the local market avoiding any shortage in the local market. So basically you want to know if there will be room for additional price increases the second half. As we speak, we don't have anything to anticipate on that. But I can tell the demand is very hot.

And just to finish in terms of cost, we did suffer a lot of pressure. Energy, as I said, (inaudible) went up almost 50% from June last year. Natural gas also 40%, so the pressure has been high, it has been high. So basically as an industry and we in particular were able to do transfer that to (inaudible).

Okay. Second question regarding the US, you mentioned that a positive driver for results were nonresidential construction demand which was quite good in the second quarter. What is your expectation for nonresidential going forward? And if you could provide a little bit of guidance on metal spread as well for the third quarter and for the second half if you would?

For nonresidential we still see that it should sustain the demand similar as what we saw in the first half. There is infrastructure investments, too, in nonresidential that continue, so we see the next quarter or the next six month staying at the same pace. But on spread, it's hard to tell because there are signs that scrap dropped in August and we don't know to what extent this will affect price or demand throughout the summer which is normal to drop. So it's very hard to predict the spread going forward. And demand sustained and we believe spread should sustain, too.

Just to color on that, nonresidential for us means power generation and other utilization of steel, especially the structural steel. We are very optimistic and you will hear our colleagues following us, reemphasizing that the US is pretty much involved in developing alternative energy generation using alternative fuel facilities also. So all of that is consuming steel and we are betting on that as well.

Great. Last question here on the strategy. Could we see Gerdau a little bit more focused on acquisitions right now in the second half of the year given that we saw very weak performance of steel companies (inaudible) throughout the world. And actually when we look to your debt position, if we were to make a calculation you would be actually one times net debt to EBITDA if you were to annualize the second quarter EBITDA. So you're in a much better debt situation and the assets throughout the world seems to be a little bit more cheap right now. Will we see Gerdau coming back to the M&A a little bit more stronger in the second half?

We continue to look at opportunities. There is a change on the price of companies because of the drop in market cap, but that doesn't mean we jump because of the price. I mean, they have to fit our strategy, be the right moment, and you're right, we have a more comfortable financial position now. But also we have to be wise how to use and then we continue to monitor opportunities in North America, South America and other regions.

Okay, thank you very much.

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

Yes, good afternoon, gentlemen. My question is regarding the EBITDA margin outlook for Latin America. We saw a very strong recovery in the first part of the second quarter. And I want to see if you see these levels of 26% a sustainable-- if we could see probably an average (inaudible) in those numbers. And my second question would be regarding the EBITDA margin for MacSteel (inaudible). It was mentioned that (inaudible) specialty part of steel. I'd just like to see if you can comment on specific (inaudible) EBITDA margin for MacSteel. Thank you.

Latin America I think is pretty much sustainable. Andre gave you pretty good information about the sort of GDP growth you are witnessing in that region even through there is some indication of higher inflation in some countries. But we have a very positive outlook for Latin America. So this sort of EBITDA margin, at least for one quarter more, is absolutely sustainable.

As far as specialty steel and basically MacSteel, we tried to say during our presentation, MacSteel is doing a few things. First of all, MacSteel is performing better than in the previous administration to start with. They used to have operating margins around 12%, 11%, now it's approaching the 20%, 19% margin which is lower in comparison to the sisters in Brazil, the specialty steel operations in Brazil. But this is particular to market conditions.

MacSteel has everything to be absolutely in line with the Spanish operation (inaudible) which also operations on the 19%, 20% EBITDA margin. And we understand this can be sustainable moving ahead. And MacSteel also contributed one month, MacSteel joined the group starting April. We suffered the upfront fee of the PPA as I already described, so now the current event of the outlook for MacSteel is very positive going forward throughout the year. So in general, the specialty steel business which accounts for 20% of our business, has many motivation to be a sustainable and profitable operation for the group.

And then my final question is, we have seen a drop in prices in Asia, and I'm wondering if you can comment on that and particularly any price pressures during the third quarter or fourth quarter at that same time that you would see cost of goods going up due to the cost pressures that you mentioned in your presentation.

Yes, as I mentioned, there is some price throughout, but I see them more as an adjustment as they were growing for the first six months very fast based on adjustment. We also think is related to the summer which also has an impact this time. And as I mentioned, the markets are so connected, scrap dropped $50 in the US (inaudible). Important is to keep the spread. So we are not so concerned that it has dropped, as scrap has dropped, too. We would have a better view coming end of August, September, when summer is over and we could evaluate better whether it's going to keep dropping or not. But at this moment, we're not so concerned about it.

Thank you.

Our next question comes from Mr. Rodolfo De Angele from JPMorgan.

Good afternoon, Andre and Schirmer. I have a few questions on Acominas. I was wondering if you could just explain what is the investment that you're going to increase capacity at Acominas. Also if there are further plans of increased capacity there. And finally, if there are plans to start reporting the Company's results as a separate segment given its size and its input.

Okay, it's Andre. The investment is the total amount is US $277 million. It will take the steel capacity from 4.5 million to 5 million tonnes a year. It will be mainly on the melt shop, to increase the melt shop capacity so we can get more output of steel. The steel will be used for billets, blooms, or wire lot or structural so there's many uses. And the market is demanding and this inclusion will be very welcome for us to make. On the reporting, we have no plans to (inaudible) we consider the Brazilian operations together. There's lots of products related the way we see the market and that's why we want to continue reports. Does that cover your three question?

Yes. If I may just follow up on a different subject. The message in the investing community, (inaudible).

Rodolfo, increase a little bit the volume, we can barely hear you.

Okay, so my question is regarding medium term outlook. We're seeing a severe drop in steel stocks, in other commodity stocks and the message I guess we're getting from investors is, more larger concern on global growth, on what's going to happen in China, and I just wanted to hear opinion from you as industry insiders as to what are your thoughts on the medium term outlook. Do you feel a crisis or is there anything you see already that confirms this concern we see in the market?

At this point we do not see a crisis. There is some price adjustments as I mentioned. (Inaudible) very early some adjustments because of going too fast the price increases and the market took time to adjust. The signs on the economy mainly in the US, I mean there's problems on the financial side, crisis banks and credit. But there is also some signs like in steel that results were good in this quarter. And other (inaudible) producers oil and energy related, there is good signs from the Middle East that continues to grow. Even in China, now there's the Olympics, maybe there is some slowdown with summer. But the fundamentals are there to continue to grow. So we don't see this crisis coming. There might be some slowdowns in some regions, but overall we are optimistic.

Thank you very much.

Our next question comes from Mr. David Martin from Deutsche Bank.

Thank you. And congratulations on the results. I had three primary questions. The first one was I wanted to come back to your comments about the expectation that your scrap price would increase in the second half of the year despite trends, particularly in the northern hemisphere, currently following scrap prices. And I think even in Brazil we've seen some weakness in pig iron prices. Is this just a function of Brazil scrap prices lagging? Is it a function of you're having some scrap inventory? If you could just give me a little more color on that, that would be helpful.

Secondly, I was wondering if you could give me an update on your mining expansion. I think there's been some pressure more recently about your expansion plans being halted for various reasons. And then lastly, I just had a question on the share count from an accounting point of view. I was a little confused by the share count in the second quarter and if you could just give us some guidance on what share count will be for the third quarter, that would be helpful.

Okay, David, let me start with the mining and give you an update. We have two main mine operations close to Acominas in the state of [Munajeri]. One is (inaudible), the other is (inaudible). And the (inaudible) is the one we had the license hold to operate so at this moment we are not operating the mine. We are working with the authorities because we haven't the license to operate. We are in conformity with regulation and the environment and we do not agree to what is going on and we are positioning ourselves to get cleared and start operating. We are optimistic with the talks we have that we very soon start running the mine again.

Osvaldo Schirmer is going to go to your other question.

There is one technicality about the profit per share which might answer part of your question. Since we are reporting on IFRS, the IFRS requires that the profit per share being calculated over the weighted average of the shares outstanding in the period including (inaudible) stock split that we had. At the controlling company level and meaning that it's related to the (inaudible) GAAP, it is calculated on the number of shares at the end of the period. So basically the two counts are correct. If your concern is about dividend, I already indicated the number that we're going to be paying in August and this is related to IFRS. I believe that's your question.

Going back to scrap, you asked if the remaining part of the year we're expecting additional volatility and price movement on scrap in all markets. The US is pretty much dependent on international markets. As you probably have been following the US' increasing demand to the amount of exports, (inaudible) maybe 60 million tonnes a year ago or 20 million tonnes today and that's basically pressure by China. So this situation may not change dramatically in the second quarter. We may not see anything changing. On the other hand, what we have done so far and this is already in our speech, is increase our scrap collection. We are supplying ourselves around 40% of our needs in the North American markets just to give us some protection, not against prices, but about certainty of getting the scrap of the quality and in the region that we operate.

In Brazil we have already an outstanding position of the scrap collectors, scrap processors, and so on and this gives us additional protection, vis-à-vis the volatility in the price. So volatility will happen in all markets and especially in the US it's more difficult to predict because it's pretty much related to what's going to be coming from external markets.

In Brazil, basically there is no export of scrap. There is some, but not really, not meaningful. And in the other regions, such as Latin America, we also are very important in scrap iron and try to monitor those positions very closely. So basically I think we touched your three segments of the question. And I hope we have answered what you had in mind. Thank you.

Our next question comes from Mr. (inaudible)

Hi, congratulations on the good results. My question is regarding AKK Steel. There are some rumors that there is a bidding process taking place there. I would like to know if you are taking part of this process, if you are interested on this kind of assets of the size and long term strategy.

We are always on duty. We are always monitoring all of the opportunities. We have been following the AKK for a long period. But is not on our radar screen so that's all I can tell you. You are not going to see us bidding for that.

Okay, 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 and Mr. Osvaldo Schirmer for any closing remarks.

I will start. Thank you again for your patience, for your understanding, and basically for your interest in our Company. I hope you have enjoyed the results as we enjoyed and I look forward to see you and to hear you the next time. Andre?

Yes, thank you for your participation and interest in Gerdau results and looking forward to see you in our November call. And if you have further questions, our Investor Relations will be more than welcome to ask them. Thank you, everybody, and have a good day.

Thank you. This does conclude today's presentation. Thank you for connecting and have a good day.